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Startup business is different from corporate business. Startup finance is not the same as big business finance. It's a pretty darn fun place to be, though. It's worth understanding the differences.
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STARTUP INVESTINGNicole Gravagna, Ph.D.
Coauthor of Venture Capital for Dummies !
Tweet this: @NicoleGravagna
VENTURE CAPITAL• Introduced in the 1940’s
• Funding structure that allows for new companies to develop intense technologies that take years to mature into a product
• Recent trend is to invest earlier
• VC investing will keep evolving with changing economic pressures
TECHNOLOGIES• Oil&Gas
• LifeScience/Biotech
• Clean Energy
• Social Media/Apps
• Consumer goods/wearables/internet of things
• Financial/transactions/lending
VC INVESTMENT PROFILE
• Upfront investment
• Technology risk
• Market risk
• Execution risk
• ROI possibilities in the multiples
BECOME A STARTUP EXPERTthis is not corporate business at all
–Steve Blank
“A startup is a company designed to search for a repeatable and scalable business model.”
THE VC GAMEIt’s not what you think
VC SKILLS NEEDED
• Strong stage-appropriate business knowledge
• Finance head
• Deep understanding of the technology
• Personal trust from the LPs
VC ECONOMICSDependent on stage of company
DIFFERENT ECONOMIC PRESSURES
Stage of companyearly late
$$$$
$
100k100 companies
8 companies25M
10M Fund200M Fund
DIFFERENT ECONOMIC PRESSURES
Stage of companyearly late
$$$$
$
100k100 companies
8 companies25M
10M Fund200M Fund
Spray and pray!
More chances to win More management
More chaos More failure
DIFFERENT ECONOMIC PRESSURES
Stage of companyearly late
$$$$
$
100k100 companies
8 companies25M
10M Fund200M Fund
Conservative
Big fund to raise Less management later companies Less risk in each
Fewer chances to win
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Create the mission, vision, entity, and marketing materials to sell the dream. Start raising money.
Year 0
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Keep raising money, begin sourcing deals
Also Year 0
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Close the fund, source deals, become very visible to entrepreneurs. Maybe invest in 1 or 2.
Year 1
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Source more deals, vet lots of deals, invest in another 1 or 2. Manage the companies from the prior year.
Year 2
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Vet lots of deals, invest in another 1 or 2, maybe 3. Manage portfolio companies
Year 3
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Vet lots of deals, invest in another 1 or 2, maybe 3. Manage portfolio companies.
Year 4
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Vet lots of deals, invest in the last deals. Manage portfolio companies.
Year 5
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Manage portfolio companies.
Year 6
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Manage portfolio companies.
Year 7
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Start selling off portfolio companies.
Year 8
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Sell off portfolio companies.
Year 9
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Sell off portfolio companies.
Year 10
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Sell off the last portfolio companies that you argued to keep for extra time.
Year 10+
VENTURE CAPITAL
101 +2 3 4 5 6 7 8 90 0
Lifecycle of a fund
Fund creation
Portfolio Management
Sourcing, Vetting, Investing Liquidation
FUND CREATION
• Setting the rules of investment
• Defining the legal structure
• Selling the LPs
101 +2 3 4 5 6 7 8 90 0
SOURCING, VETTING, AND INVESTING
• Getting entrepreneurs interested in your VC firm
• High deal flow means better deals
• Investing the right deals
101 +2 3 4 5 6 7 8 90 0
LIQUIDATION AND RETURN
• Managing the companies in the portfolio
• Selling the companies the portfolio
• Wrapping up the fund and distributing the capital
101 +2 3 4 5 6 7 8 90 0
THE GOAL IS EXIT
•Merger •Acquisition •Acquihire •IPO •Liquidation
FUND GOALReturn more money than
initially invested.
THE UNICORNS
• Investment to exits are 10:1
• 0.7% of VC-backed companies have had >$1B exits
• 4 unicorns born per year
• consumer ecommerce, consumer audience, saas, and enterprise software
Data published last year by Aileen Lee , founder of
Cowboy Ventures
VENTURE CAPITAL COMPANY MODEL
Step 1: Test it
Step 2: Scale it
Step 3: Sell it
THINGS CHANGE OVER TIME
Mini Co
Year 1
THINGS CHANGE OVER TIME
Mini Co
Year 2
THINGS CHANGE OVER TIME
Mini Co
Year 3
THINGS CHANGE OVER TIME
Mini Co
Year 4
THINGS CHANGE OVER TIME
Big Co
THINGS CHANGE OVER TIME
Big Co
Mini Co
Mini Co
Mini Co
Mini Co
Mini Co
ACQUISITION BY BIG CO
Big Co
Mini Co
Mini Co
Mini Co
Mini Co
Mini Co
THINGS CHANGE OVER TIME
Big Co
Mini Co
Mini Co
Mini Co
Mini Co
Mini Co
MERGER OF LITTLE CO
Big Co
Mini Co
Mini Co
Mini Co
Mini Co
Mini Co
THE CULTURE OF STARTUP
CasualCreative
Technical
Nimble
Fast moving
ChangeablePersonal
Informal
Passion-based
Life/Work BlendIntimate
Intimate
Ill-defined
Insecure
Exciting
Fun
HardHubrisTemporary
Quick and dirty
VETTING DEALSLearn to measure value in early stage companies
INTANGIBLE ASSETS
• Caliber of advisors on boards
• IP: patents and trademarks
• Traction
• PR, news exposure
• Users email addresses
PICKING WINNERS
• See hundreds of deals
• Learn to gut-feel founders
• Hone your intuition
• Build your network of resources
BECOME A VC
1. Work for a VC as an associate
2. Build a reputation for picking winners
3. Gain trust of LPs
4. Raise your own fund
5. Don’t screw it up
OTHER VC-LIKE OPTIONS
• Private Equity (PE)
• M&A
• Angel investing
• Startup Banking/Lending
MORE INFORMATION
• Feld Thoughts - feld.com (Brad Feld, Foundry, TechStars)
• AVC.com (Fred Wilson, Union Square)
• thisisgoingtobebig.com (Charlie O’Donnell, Brooklyn Bridge Ventures)
• bothsidesofthetable.com (Mark Suster, Salesforce, Upfront Ventures)
NICOLE GRAVAGNA, PHDBlog: NicoleGravagna.com
Follow tweets @NicoleGravagna