Venture Capital states that it is a type of private value and a kind of financing that investor give to new businesses and independent companies that are accepted to have long haul development potential.
Entrepreneurs with extraordinary thoughts make capital. They neither approach capital business sectors nor banks consequently they contact people or assets for financing their thought.
Since speculations are illiquid and require the all-inclusive time span to gather, financial investors are relied upon to complete itemized due steadiness before venture.
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Financial speculators likewise are relied upon to sustain the organizations wherein they contribute, so as to improve the probability of arriving at an IPO stage when valuations are ideal. Investors normally help at four phases in the organization’s development.
In my experience there are several things which I learned over time that surprised me and were very valuable – they group into two:
The “Market Size” Discussion
As a founder the most frustrating and important discussions are always around market size. This is with good reason since it is clearly a massive component of success (see on almost any Venture Capital blog posts as the #1 indicator). However as a entrepreneur the narrative is almost always:
- “Isn’t it obvious that this market is huge?” (blank stares)
- (a while later – market explodes) – “yes – huge market, oh you guys are still around?”
In particular the “is it a $1B market?” is an annoying question to hear over and over again. It seems illogical since company most of your life is spent (rightly) fighting in the trenches, going from $1000/month revenue to $10,000, then $100,000 etc.
Understanding and explaining your market though is the single most important thing you need to do, closely followed by how you can reach it. However there are two “secrets”:
- Bottom up market analysis is way better than top down. Top down always gets you the number (we address 5% of this huge market here) – but nobody believes it. Bottom up means, taking sales you have or can reasonably show you could have and showing how exactly those demographics scale up (how many people are there with exactly that need). Feel free to add some top down sugar – but it’s almost useless.
- (this is the real killer): when a (top at least) VC asks the question “is this a $1B market”, they do not mean (as I always assumed) “will it be a $1B market in 5 years?” they mean is the total addressable market today a $1B opportunity. This is a crucial difference – it is a different question to ask.
Why is #2 so important? It is because the startup advantage is speed – if the amazing market you are in will be large (check) but will take 5 years to be large, the investor knows that even if you take big market share early it will be while the market is nascent. Then, as the market grows, there is a huge danger you run out of cash or, worse, large players now have the opportunity on their radar and come in heavy.
The market being huge now could be “people are already buying” – this is unlikely since this means large players are already there: in these cases you must have the means to aggressively disrupt additional players (Uber did this for example), or the “huge” market needs to be latent. I.e. it is something which is a clear and present need but to date there was been little awareness or there has been no solution. In this case the product needs to be something people can use immediately. In this latent need scenario, the investors knows that with money you can go on a tear and wrap up a large customer base fast – before anybody else can react. That gives you a great shot at winning.
So the $1B market question is very frustrating but it is very real – the key is to figure out the size of the market opportunity right now (not in 5 years). You want your limiters to be money, product, staffing – not the size of the market to grow into.
It seems a subtle distinction but it was lost on me for a long while and I only ever heard it stated once by A VC in an offhand comment. (I won’t name them but I owe them a debt of gratitude!).
As an entrepreneur when out pitching it is very easy to get a false sense of progress when you have meetings and people are engaged, friendly and even follow up. There is steady progress in a relationship. This seems like it may ultimately get you to a term sheet. Unfortunately many of these engagements, even if they go well, can end up dragging on and after 3-4 meetings fade out – there’s never a real “No”, but there is no “Yes”. What this means is:
- You are doing something reasonable enough, your team is somewhat interesting and there is “something” the investor feels they ought to track: they don’t want to say “No”. They’d hate to say they missed it if it got hot.
- But, you’re not close to being an investment – there are too many indicators missing and they know they are not going to get you through a partner meeting. They also know it’s unlikely you’ll get funded by anybody else.
Some investors are excellent at feigning enthusiasm – they will also often want to stay engaged and see how you do 6 months later. (Often they will tell you they are unsure of the market).
As an entrepreneur you rationalize these situations by saying that you only need one investor, so you just need to keep trying until you hit the right one. In the back of your mind you also hear that the investors all talk to each other – so that as time passes, some kind of “group think” sets in against or for you.
To some extent both of these are true, but here comes the secret. If you want to close an investment quickly with a good firm:
- Having a pretty good meeting first time, a slightly better the next week etc. is almost certainly going to fail. You will have to chase for meetings, they will span out over weeks and often end up going dead.
- What you need is that the first meeting is so good that the folks in the room leave knowing they absolutely must invest – it has to be a slam dunk. After that, they will regroup and run more meetings in order to see if there are reasons to disprove their thesis that they should invest. They will be fast, they will be engaged, they will put you high on their list.
The reason is very simple – Venture Capital actually don’t need to talk: in any many cases when a company has an excellent first meetings they recognize a number of absolutely key factors/indicators which make you a no-brainer investment for somebody.
I.e. there are factors which make it obvious to the people in the room that you will raise money very soon from another firm if they do not do the deal first. The effect is immediate and there is no need for communication with other investors, since the indicators (in large) part are similar across firms. As soon as one fund sees “this team will raise money very soon from someone”, and if it is a fit for their area, they are by nature on red alert.
If you are on the slow meeting road of death it means you have not obviously shown enough of the indicators – they know they can safely pass and wait to see what happens. If you ever get a term sheet you’ll probably call them anyway (it’s amazing the effect another term sheet has – same reasons). Also even if you don’t it’s probably not one of the top 10 deals of the year.
What are the factors? – a VC can answer better than me but:
- Clearly leading team in the space.
- Traction is very clear.
- Very clearly articulated market.
- Excellent shot of being the winner in the market.
This is not to say you cannot raise funds by having multiple meetings with the same firms over time – in fact this can be excellent to build up a relationship. However, usually this happens over years. If you have a specific time window to raise money and you are not knocking it out of the park in first meetings you are likely dead in the water.
It’s better not to iterate slowly on a deck/story which is “doing ok”, but throw it out completely and try a totally different angle.
Of course there are many cases where an outlier VC does a deal no-one else is hot about. We all dream about that and it’s fantastic when it works. However, the reality is that if you can knock it out the park in meeting one you give yourself the chance of a totally different dynamic.
So I have no doubt that VCs do talk amongst themselves but they effectively don’t need to. Everybody sees the signs of a company that will raise a round as clear as day from the company’s own pitch. When they do talk – they’ll likely spend more time talking about those which they think are going to be on more people’s radar.
Note to VCs: telling company’s early and honestly that you’re not that into them (and why) is incredibly valuable – and props to the investors that do – it helped us a great deal.
Venture Capitalists can’t fund whatever they want.
VCs manage other people’s money. Sometimes that money comes from individuals and sometimes it comes from company-held investments. The venture capitalist writes up a contract with these people (called Limited Partners or LPs). The contract defines the kinds of investments that they’ll make with the money. If your company or deal doesn’t fit into their pre-defined investment type, there’s not a lot they can do to fund you.
Venture Capital -backed companies must exit within 2-10 years.
VCs don’t make money when your company does well. They make money when your company is sold to a new owner. A venture capitalist invests, helps your company grow, then begins to look for a buyer pretty much immediately. If you take VC money, expect to sell your company in a few years.
Venture Capital get their money back before the founder gets paid.
Venture capitalists invest in “preferred” stock. This is defined in the term sheet, and generally means that when the company is sold the money is doled out in a certain order. The order doesn’t matter when the sale results in a big payout. The order matters a lot when there’s a meager pile of cash. It’s possible, under lean conditions, that the VC will get her money back and the founder gets nothing.
Venture Capitals would rather give you a lot of money.
In the way that the economics works out, it’s smarter for VCs to make a few large investments than to make many little ones. Equate this to raising children and you’ll pick up the notion quickly. A few well-funded companies in the portfolio is easier and safer to manage than a cadre of starving portfolio deals. This means that VCs often have a minimum spend and it might be a higher investment amount than you want to take.
Venture Capital expect more than half of their investments to fail.
Good portfolio strategy accounts for more than half of the investments to outright fail. A few of the investments are expected to get their money back at a firesale liquidation. Only one or two of the investments in the whole fund is expected to carry the return of the entire fund. This means, if you are the company that does very well (10x ROI or more), you are the golden child of that fund. Your VCs will love you forever.