Things early-stage startups need to know for an efficient pitching

With early-stage startups, what you already have may not be enough for investors to linger longer to “find out” your potential. So, show your team’s potential in the most impressive way at your PD. The article will give a simple guideline as well as some tips from a VC perspective to help teams have the most effective PD and pitching.

1. COVER

  • Introduce the product with a brief, impressive summary
  • Contact of CEO, founder

2. MARKET AND PAIN POINT

Key question: Is the market you selected big enough and has enough room for you?

  • Market: Briefly describe the market you choose
  • Market size: The size of the market with specific figures, demonstrating its potential
  • Key metrics: TAM (Total Addressable Market), SAM (Serviceable Available Marke), SOM (Serviceable Obtainable Market)

Pain points:

  • What is the size of the customer group that is having this problem?
  • What are they doing to deal with not using your product?
  • Why is the current solution of the customer group not optimal?

3. SOLUTIONS

Key question: How does your product solve the pain point of the market?

  • Summarize the solution that your product brings in the most understandable way.
  • Specify how your product solves the pain point.
  • Highlight the optimization of your solution. Is this optimization worth the money customers spend?

4. BUSINESS MODEL

Key question: How does your product make money?

  • How will the cashflows in/out of your product?
  • Clarify break-even point as well as expected profit growth of the product

5. COMPETITION

Key question: How do you outperform your competitors (directly and indirectly)?

  • A panoramic, objective view of your competitors and yourself in the market.
  • What is your competitive advantage over your competitors? Does this advantage make customers choose you over your competitors?
  • If there is a new player entering the market with a product similar to yours, what is your competitive advantage?

6. TRACTION AND FINANCIAL INDICATORS

Key question: How is your product performing?

  • Traction (Product performance): The indicators depend on your product. However, for early-stage startups, the most important metrics revolve around users: number, growth rate, return rate, paid rate:
    • Total user, MAU, DAU, PU
    • Growth rate:
    • Retention rate:
  • Financial indicators:
    • Profit and Loss in total and per user
    • Cost allocation: Operation cost, Acquisition Cost, etc.
    • Financial assumptions

7. GROWTH STRATEGY AND KEY MILESTONES

Key question: How do you develop strategies and specific plans to realize them?

Business expansion strategies typically include:

  • Product development strategy: develop, improve what features?
  • Customer strategy: How do you attract new customers and retain old customers?
  • HR strategy: Plan to develop personnel (in terms of skills, capabilities) or recruit more, etc. when the business expands.
  • Market expansion strategy: does the team plan to expand into another geographical area, another field?… However, with an early-stage startup, you should seriously consider including this factor. or not to avoid being judged that “standing in this mountain and looking at that mountain”, “distracted”. Mention this strategy when you can really convince the listener/reader.

Put the strategy into an Action plan with specific timelines and actions the team takes to realize it.

8. TEAM

Key question: Why should investors believe that you will do what you say?

This is one of the most important factors, because in the early stage, all the numbers are not certain and clear enough. At that time, a quality and enthusiastic team will be an extremely important factor for investors to believe.

  • Academic background and Past experience of key members: Presenting the most outstanding, most relevant, and special experiences of the founder, CEO, and CTO.
  • Team structure: Should list no more than 5 people in the founding team, should choose the most prominent and relevant experienced members to introduce.
  • Briefly share the team’s story (if any). It can be the inspiration, goal, vision that makes your team more cohesive, more determined to win this game.

9. FUNDING

Key question: How would you recommend investment cooperation?

  • Current cap table
  • Use of proceeds: How much do you want to call? With what form? Purpose of use of that money

Startup valuation: How to valuation and the back of it

Startup Valuation: Estimating the value and performance of a startup, is an important part of the fundraising process because it helps founders determine how much money should be offered to investors.

It is also a measure by which investors estimate future profits. So it’s not possible to come up with a random number and claim that’s your company’s valuation. It takes math and all the data to come up with a fair and acceptable valuation.

But valuation is NOT an exact figure, as a company’s true value cannot be known, and a lot of startups are yet to generate revenue and profits. Therefore, valuations are mostly conjectures agreed upon between the founder and the investor. The only thing it shows is how much the market is willing to pay for a startup and how willing the founders are to accept that number.

And since valuation is often determined when transactions like investments or acquisitions take place, much of the value also depends on how the founder and investor negotiate. And founders should be wary when a transaction appears to be undervalued or overvalued.

Being overvalued will make the next round of fundraising more difficult. So in case no one tells you this, just remember: If your startup is unbelievably overvalued, you might want to consider asking for less. “Meaning negotiate down?” “Yeah” “Can do that?” “YES”.

Still undervalued will be diluted in the previous rounds, but overall, this is a minor issue if the company is doing well. At the next stage, you can raise at a better valuation with less dilution later on.

Valuation is one of many indicators of success, not the only one. Getting caught up in business valuation will distract the founder from running a good business. Entrepreneurs need to focus on creating value. Focusing on business development will not lack investors. Above all, investment deals should not be seen as merely an opportunity to earn additional capital. Investor can also act as a mentor and advisor to the founder. There are many cases when founders and investors get stuck discussing valuation and forget that a potential partnership between them would be more profitable for the parties involved.

Finally, it’s important to remember that we’re in the long haul and there will be times when you’ll make mistakes and the company is going through a tough time. At that point, you’ll want to build a sufficient trust base with shareholders that they’ll be willing to bang the table for you before their IC committee or their fund because of their faith in you.

So no matter if it’s a VC or a startup founder, take a really long-term view of negotiating terms and pricing rather than pushing every penny, for money or those fringe terms, Honestly, it won’t work in the long run. But the relationship you build with your shareholders will be more helpful and impactful.

SOME METHOD OF STARTUP VALUATION:

1. Discounted Cash Flow (DCF): This method calculates a startup’s valuation based on the present value of expected future cash flows.

This method often focuses on the company’s numbers, without taking into account market factors such as investor enthusiasm, meaning that using this method can ignore market considerations. important. This model requires accurate figures for revenue and expense projections (recommended for startups in series D or higher, early stage startups will have a hard time predicting exact numbers).

2. Relative method: compare key business/financial metrics of the business with other companies in the industry. This method provides comparison and checkpoint for founders and investors, as it uses other companies in the industry as a benchmark.

However, it is susceptible to market hype, meaning the number could be overvalued or undervalued, depending on investor sentiment towards the industry in question.

3. Valuation Multiples Method: this method is the most favorite because it can be applied to almost any startup, any stage or industry. The first thing to do is determine the multiples.

Some common ways (The numerator is the inherent value of the company, and the denominator is the main business/financial metric):

  • Enterprise value/Revenue
  • Enterprise Value/EBITA
  • Price/Earnings

Once the multiples have been determined, the next step is to find the points of comparison. To do this, make a list of comparable companies (“comps”). Must be companies in the same industry, ideally at the same size and maturity level as your business. Compare with public companies, because they will make the data public. If you want to compare with other startups, check the latest funding rounds to get the right number.

If you’re valuing a startup’s next 12 months of revenue, you’ll also need to compare it to revenue next 12 months. Based on that, you can calculate the multiples of each comps. That leads to the final step – applying multiples. Based on the company multiples, you can apply the average to the numbers to calculate the value. However, because valuation is not an exact science, remember to stress test the numbers. You can also look at the 25th and 75th percentiles as guidelines to give you a range for your valuation.

In case you are a bit confused, let’s come to the example of Fancy Fintech Ltd. The startup is about to call a series A round, with $10 million in sales last year and growth forecasts this year.

Founder of Fancy Fintech decided to use Enterprise Value/Revenue as the main multiple because it is simple and easy to compare. Then find competing fintech businesses and come up with a list of 3 to 6 that are relative in terms of size, product, business model, and geography. Then calculate each ratio Enterprise ValueRevenue of the company. Finally, apply multiples.

For Fancy Fintech, their average Enterprise Value/Revenue ratio is 8x. So take the revenue of US$10 million multiplied by 8 to get a pretty viable amount of US$80 million.

In general, which valuation method you use largely depends on the original rationale. In addition to the method above, you can choose from other less common valuation calculations, each with different use-case applications such as:

If you are an investor and are looking to acquire a company, you can also consider duplicating pricing. Let’s say, as a company when buying a startup, how much does it cost me to recreate this startup.

A prime example was when Google acquired YouTube in 2006. At the time, Google had a competing video product, Google Video, but in its review, the tech giant determined that it was in order to start. keeping up YouTube will cost more than acquiring it.

In addition, how the value is determined will also depend on the stage of development of the company, mainly because investors look at different aspects of a business, depending on its maturity:

During the seed round, investors will consider whether the idea is a promising idea and business potential. So it depends a lot on the aspirations of the founders, as there are not many achievements or traction to judge.

  • In series A, there are many factors that go into whether you have said what your aspirations are? And how is the business? Will you be able to follow through on what was said?
  • In series B, they will determine if you are a market leader or not? Because if this industry and business is something right, there will be more than one player, and the question is are you a top player? Because the market leader has a higher chance of survival and a higher probability of success.
  • In series C, the focus is on profitability as a company.

After all, the above formulas are still just formulas. Since valuations are often determined when investments or acquisitions take place, the founders’ ability to negotiate throughout these processes is also important. It is for this reason that many people consider startup valuation to be both an art and a science.

Should I raise debt or equity?

Startups often raise their seed round by selling convertible debt instead of equity because debt is simpler and cheaper. Read Yokum Taku’s excellent series on convertible debt for a primer.

Seed stage convertible debt agreements are fairly simple, especially if your investors are angels. There isn’t a lot to hack into these agreements. You should be more careful if your debt investors are VCs, but these debt financings are still much easier to negotiate than equity financing.

Later stage convertible debt can get complicated and adversarial. We know companies that took convertible debt from a corporate investor and couldn’t pay the debt back on time—which triggered the corporate investor’s right to take over the company. Fun stuff.

If you are raising convertible debt, you should focus on negotiating simple and short documents, closing quickly and cheaply, and maintaining your options for Series A. But first…

Determine whether you should sell debt or equity.

Let’s say your seed investors purchase debt with a 20% discount off the Series A share price. If you eventually sell shares in Series A for $1 each, the seed investors will convert their debt to equity for $0.80/share.

Now, let’s say your seed investors are willing to buy equity for $0.90/share instead of buying debt. Should you sell debt or equity?

You should sell debt only if you can use the money to increase today’s share price by over 25% before the Series A financing. Otherwise, sell equity.

In this example, debt is worthwhile if you think you can sell Series A shares for over $0.90/share × 125% = $1.125/share.

Let’s say you decide to sell debt in your seed round and you raise a Series A at $2/share. After applying a 20% discount, your debt investors pay $1.60/share for their Series A shares. You were wise to sell debt to your seed investors in the seed round instead of selling them equity for $0.90/share.

But if you raise a Series A at $1/share, your debt investors pay $0.80/share for their Series A shares. You should have taken their offer to buy equity at $0.90/share in the seed round.

In general, you should sell debt only if you think it will increase your share price over today’s market price for your shares ÷ (1 – discount).

Selling debt is usually better than selling equity in a typical seed round.

If you are raising a typical seed round, say $50K-$500K, you probably want to sell debt instead of equity. If you raise enough seed debt to last 6-12 months, you should have enough time to increase your valuation by the 25%-100% required to overcome typical discounts of 20%-50%.

For example, if you raise $250K in a seed round in return for 15% of your equity, your seed round pre-money valuation will be $1.42M. You should raise debt instead if you expect your Series A pre-money valuation to be at least

$1.42M ÷ (1 – .2) = $1.77M (in the case of a 20% discount)

or

$1.42M ÷ (1 – .5) = $2.83M (in the case of a 50% discount).

In general, if you don’t think you can increase your share price and valuation by 2 to 3 times in every round of financing from Series A to Series C, you should probably pack up and go home. In fact, the company’s share price typically increases the most from the seed round to the Series A as the business goes from nothingness to product, users, or revenue.

Selling lots of debt may be worse than selling equity.

If you are raising a large seed round, say $1M, you may want to sell equity instead of debt.

For example, if you raise $1M in a seed round in return for 15% of your equity, your seed round pre-money valuation will be $5.67M. But if you raise $1M in return for debt at a 25% discount, your Series A pre-money will have to be at least

$5.67M ÷ (1 – .25) = $7.56M

for the debt to be worthwhile. $1M of seed financing may not take your Series A valuation above $7.56M—you may want to sell equity instead of debt in the seed round.

How have you decided to raise debt or equity?

How much capital should be raised for the next investment round?

SOME NOTES ON STARTUPS NEED TO PREPARE WHEN SENDING CAPITAL.

When approaching raising capital, investors will often be interested in certain issues when looking at the business plan of startups such as profit (Income), profit margin (Margin Profit), and costs. capital (CapEx – Capital Expenditure). But besides that and equally important, investors will need to know real, relevant data on cash-ins, cash-outs, and projected milestones. company’s vision for the future.

In a nutshell, venture capitalists want to know how much money startups need to raise, what is the purpose of use, and what is the duration of that money.

1. CASH IN

Here will be the number of capital startups want to raise; and VCs will often want to see the legitimacy of a given number. Some frequently asked questions might be: does the amount you call align with what the startup wants to achieve? Given the current needs of startups? With the company’s human resources and capabilities? The advice here would be to consider raising the right amount of capital over a 12, 18 or 24-month period.

“Don’t ask for more than the current need, but make a strategic plan to run your company.”

And when you get advice like this from investors, it’s a signal that they may not be interested in your company.

2. CASH OUT

This is the case when the startup uses up all the capital raised before the calculation deadline for the next round. The advice here would be not to draw up a plan with the amount of capital needed to keep the company operating for more than two years, even three years.

What investors always expect when pouring money into startups is liquidity through exit strategies to gain profits.

3. END

VCs will typically lead a round of capital and refer the startup to other funds on the next call. Some questions startups can prepare for next time are:

  • What are the milestones and achievements you need to achieve before your next fundraising?
  • Are those milestones and achievements enough to spark interest in other VCs?
  • Will, what you get will be enough to make VC spend a higher amount in the next capital call?
  • Have you made significant progress in recent years?

Planning a fundraising strategy is not a simple matter, the thing to consider here is the support of experts in tailoring the capital raising plan to suit the company’s situation, ensuring that the investors. The data number is accurate and effectively linked to the next fundraising.

12 questions Founders need to ask VC before “closing deal”

Entrepreneurs are often so focused on trying to “close the deal” with the VC – and always try so hard to answer any questions posed by the VC – that they forget to ask the VC any questions!

Here are 12 questions founders should ask potential investors more often:

1. Is there a CAPITAL DEPOSIT?

You want to start your fundraising process by finding a lead investor. If a certain VC refuses to take the lead, keep talking to them, but at the same time make it a priority to find another partner who is a better fit. Many fundraising processes were abandoned because the founders could not find primary investors.

It’s easy to find dozens of companies that want to fill a round, but most will want someone else to take the lead first. A lot of founders only discover this fact after having conducted more than 3 meetings for negotiation – this is a HUGE waste of time.

2. HOW MUCH % OF THE FUNDS IS THIS INVESTMENT?

In general, the larger the percentage, the better – that means the VC has more “flesh in the game”. Keep in mind, the larger the number, the more closely investors will monitor your progress!

3. DO YOU STAY ON THE BOARD OF DIRECTORS?

Here’s another question that gauges how important VCs are to your startup. Financial capital is easier to obtain and deploy, it is the reputation capital and time of VCs that are the real currency in today’s venture capital market.

4. HOW MUCH BETWEEN THE INITIAL AND CONTINUOUS INVESTMENT?

Most VCs make the initial investment and “reserve” the funds to maintain their ownership in future rounds or to help a struggling startup in need of cash.

This reserve is often described as a ratio, for example. 4:1. So if a VC invests $1 million in your #Seed round, they theoretically have $4 million available for your future rounds. But don’t be sure that they will, especially if you have a rough start…

5. HOW MUCH ONE TIME DO YOU INVEST IN THE NEXT?

VCs are not lifecycle funds, but they always make small investments in the startup’s next round of valuation to signal their support for the venture capital market. However, most funds make individual decisions about the companies in their portfolio, and that can create “signaling risk” for startups.

6. HAS VC LED ANY NEXT INVESTMENTS?

One benefit of having ample reserves is that VCs can “bridge you” if you don’t achieve breakout growth. However, some companies have policies against this, which also negates the benefit of a large reserve fund for your startup.

7. WHAT ARE THE FUTURE REPORTING REQUIREMENTS?

You should set expectations for the communication process from the start – some VCs like to visit you quarterly. Others may want you to stay updated by presenting at the annual partnership meeting.

8. DO WE COMMUNICATE WITH ANYONE ELSE ON THE TEAM?

Some VCs will introduce you in CEO forums, introduce you to cross-functional teams of experts, and cover all your needs. Others will write checks and dig until things start to work out.

9. HOW does the VC handle POTENTIAL COMPETITIVE SITUATIONS?

Ask VCs how to share information in their portfolio. What if a company appears to be #pitching for them or they receive a pitch deck from a competitor to your startup – what is their policy on how to handle these situations?

10. VALUATION ROUND OR CONVERTIBLE LOAN 

Each VC has a different preference. Today, most VCs will participate in both a valuation round and a convertible loan, depending on the situation. Find out which will happen and they will usually also ask for a side agreement.

A sub-agreement that enacts simple agreements on future equity. The sub-agreement includes a number of rights that are sometimes granted exclusively to investors, such as the right of first preference (or right of way), the “Major Investor” right, the right to reimburse expenses, the right to information, and observer rights.

11. HOW IS THE STARTUP ASSESSMENT PROCESS?

Each company has different standards, but generally, you should expect them to ask for references and access to a company’s financial and operating data. The later the funding round, the more detailed you should expect them to do.

12. HOW MUCH IS THIS INVESTMENT IN THE FUND?

This is a good question to ask if this VC is a new fund or outside of the traditional VC circle. It would be helpful to know if your potential VC will be around for the next few years. This is less of a concern with established funds.

This is not an exhaustive list. Of course, you want to ensure that you and your investors see firsthand the core aspects of your business, the product roadmap, the speed at which you plan to deploy capital, and so on.

A few more notes:

HISTORY IS BETTER THAN THEORY

It’s easy to talk about what you’re going to do; It’s more impactful to talk about what you’ve done. Be suspicious if reputable investors answer your questions abstractly rather than with concrete examples.

BE CLEAR

Don’t ask all of these questions in your first meeting. “Are you in the lead?” is the only question you should definitely ask first; The rest should be through email and meetings Monday and Tuesday when you feel interested.

DON’T JUST ASK VC

Do your own due diligence on the VC. Get in touch with founders that VC backs have been successful and, more importantly, those that have not! This is too big of a commitment to entrust completely to your intuition!

Don’t Raise VC Money Before You Understand Unit Economics

The coronavirus has not loosened these criteria. Commercial traction is not a magic phrase that gets you money. The quality of this traction and how that projects into the future matters even more.

Investors will ask questions such as:

  • How much money are you spending to get each client?
  • What is each client worth to you?
  • What percentages of your clients will churn?
  • When do you expect profitability?

These types of questions help investors create an economic health check, otherwise known as Unit Economics. The outcome will determine if you have the potential for sustainable growth and if your company has the potential to be valued at 8 or 10 times your revenues upon exit, meaning Enterprise Value (EV) / Revenue will be 8 or above.

Shift in the investor’s mindset

Unit Economics was not always in the investor’s mindset. Not long ago, investors rewarded high-growth companies, without looking at the costs. These companies survived and thrived for years, at the expense of their investors, and normally hit a wall when attempting an IPO and more conservative investors analyzed the numbers. We’ve witnessed a drastic pivot in the VC industry toward a more conservative result-based mindset. COVID-19 has made this even more apparent.

Basic requirement at any stage

Investors are looking for entrepreneurs who understand Unit Economics. Even if the economic indicators will straighten out in a few years, they want to know that you, the entrepreneur, know where you’re headed, and that you’re measuring the right economic indicators to steer the ship in the right direction.

The three main rules of Unit Economics

  • Rule of 3: The lifetime value (LTV) to customer acquisition cost (CAC) ratio is at least three. Lifetime value is calculated as the gross profit per user, multiplied by the lifetime. Lifetime is calculated as one divided by churn. Having a high LTV/CAC ratio may not be an advantage, as it could mean you are not spending enough on marketing and sales while your competitors are. Hence your growth will be slow and you will lose market share. If your LTV/CAC ratio is lower than three, investors will question the scalability of growth and spending needed to grow larger.
  • Rule of 40: EBITDA margin in percentages, plus annual growth in percentages should sum up to 40 percent or higher. Balancing profitability with growth is essential. As most SaaS-based tech startups are not profitable, they would require a growth rate of 40 percent or above to survive in the long term and provide a revenue multiple of eight or above. Profitability (EBITDA margins) of 10 percent means you can grow at 30 percent or higher.
  • Rule of 4: The growth to churn ratio should be four or higher. Churn is the percentage of people who leave in a period of time. So the growth of 40 percent allows for a churn of 10 percent, which is not easy to reach. It should be noted that churn figures are very hard to come by as companies tend to keep them a secret. Enterprise B2B SaaS companies can have a churn of 5 percent to 10 percent. Companies focusing on medium/small size businesses or B2C startups normally see a double-digit annual churn rate.


Summary

While you build your forecast and business plan, you should note the basic Unit Economic indicators. Beyond the numbers, the C-level executives have to create a culture of great customer service, of value-adding products that continuously evolve, with a good pricing strategy that makes sense to the end user, and that rewards long-term engagements. Adhering to the Unit Economic mentality could help you commercially as well as with your fundraising efforts.

UNDERSTANDING VENTURE CAPITAL 3

© Tien Nguyen

Why do venture capital funds often choose emerging technology businesses to invest? Why don’t they invest in classic businesses, wear durable clothes and rest assured that their capital flow will not be lost? There are many questions about who the venture capital funds will be interested in. What these businesses are like and the investment logic of venture capital funds for these businesses is what we will discuss in today’s article.

Part 3: Fast-growing startups.

Classic businesses will typically decide on a market to enter, produce products and services, and then find a way to get their first customers. Gradually increase the number of customers paying for the product. After 3-4 years of steady growth, cost control and gradually increasing profit margins, these businesses continue to compete until the market pie is divided and business owners benefit from their investments. slowly, of course, after about 15-20 years. This type of business will prefer debt financing because their profits are planned to cover reinvestments and borrowed capital is a cheap flow of capital as we know it.

The picture completely changes when we talk about venture capital funds. The goal of success for funds and fund managers is to increase the share of assets they are managing. This goal can only be achieved when the valuation of the business in which they invest increases, and must increase rapidly. From there, the fund can divest by selling shares or IPO. With a life cycle of typically 10 years, funds expect to divest some or all of them in about 3-7 years. This, for the business receiving the investment, means that their growth rate must be outstanding during this time period.

The Venture Capital industry is driven by the hope of finding a handful of successful businesses and that success must be large, resonant and high value. In a portfolio of funds, 10 failed deals can be salvaged by just 1 successful one. A hugely successful megahit deal can accelerate the growth of the entire industry.

These megahits will be called by the beautiful name: “Unicorn”, which are startups with a valuation of over 1 billion USD.

Typically, businesses that are able to meet the criteria (1) high growth rate and (2) ability to expand quickly are enterprises with disruptive innovation capabilities. Like the UBER case has done for the taxi industry.

Today’s technology allows the number of users to grow almost unlimitedly. Social networks are operating with as many users as the population of the most populous countries in the world, something that before, private businesses could not dream of.

The cost to serve a new customer is now almost negligible for the technology industry thanks to the extensive network infrastructure and very high automation capabilities.

Thus, we clearly see that: VCs are unicorn hunters.

However, in reality it is not easy to distinguish a real unicorn from a colorful old horse.

A startup at the same time as the Amazon monument whose name few people remember now. It’s Webvan. Founded in 1996 with an online grocery model, Webvan is one of the pioneers with a post-IPO valuation of only 3 years after its founding of $ 4.8 billion. Webvan went bankrupt just 2 years after its IPO. Many reasons were given, and most of them became lessons for a truly unicorn of the time, Amazon.

Investors for Webvan through the stages include many famous names such as Benchmark, Goldman Sachs, Softbank, Sequoia, Yahoo, etc. Even the super and experienced eyes of the Venture Capital industry are sometimes That’s how old horse and unicorn are confused. However, always remember: failure is part of the venture capital process. Sequoia has also had many admirable tractions such as investing in Google with Kleiner Perkins so that not too many people remember their Webvan failure. To this day, Sequoia remains one of the most trusted VC fund managers.

The venture capital industry exists and develops based on the “Hits Driven” principle, which is very similar to the industries of gold mining, oil and gas exploration, space exploration, music, literature or cinema. Investors in these industries often have to foresee a prospect of success, willing to take the risk to invest money, time, and effort in pursuit of their beliefs. With a little luck, if successful, it will be a great success.

In the literary world, one can take J.K. Rowling as an example for an entrepreneur. The book “Harry Potter and the Prophet’s Stone” was submitted in manuscript to 12 publishers and was rejected. Surely there are founders or pitchers who will understand this pain. When Bloomsbury decided to publish the book, they were like venture capitalists themselves. So far, Harry Potter has remained a bright spot in the company’s portfolio with 13% contributing to 2018’s profits.

Venture capitalists are not interested in a startup with steady profits and slow growth. For us, those are the “walking dead” that, when there are too many in our portfolio, we will never be able to return the investment to our investors, not to mention the increased assets. We are looking for startups with “Hockey Stick” growth potential (as shown). To achieve this form of growth, we will commit to multiple rounds of funding, enough for the startup to hit certain milestones (milestones).

A VC when investing is like launching multiple rockets to the moon (which is when we exit). Fuel will be burned in stages to overcome the atmosphere and the resistance of gravity. Here is each round of funding that we will be participating in. Any rocket that does not reach the moon is considered abandoned. The moon is the ultimate destination with a VC and pretty milestones along the way don’t mean much.

In short, to understand these principles, startups should carefully consider their vision and model to understand what VCs want when they refer to “a startup with high growth”.

Read more at Vietnam Venture Capital | Startup Entrepreneurs, Investors & Innovators

UNDERSTANDING VENTURE CAPITAL

© Tien Nguyen

Rekindled in the 1950s in the California wilderness that nurtured the daring and the American dream, the venture capital industry is a powerful driver of the rapid development of not only modern business but also of technology and innovation around the world. Today’s tech companies turn to venture capital funds to share ideas, find connections, financial backing, and strategic perspectives.

Understanding the historical origins, investment motivations, profit expectations and day-to-day operations of Venture Capital VC (Venture Capital VC) management companies is a key factor in helping (1) innovators have an appropriate fundraising strategy, (2) traditional investors have more new investment approaches and (3) policymakers have an effective way to attract investment in the context of closed technology. role in promoting the economy. The series of articles on UNDERSTANDING VC FUND aims to provide official perspectives on the venture capital industry and analyze related factors, serving the three groups mentioned above.

In each part of the world, depending on the level of economic development, the quality of enterprises and government policies, VCs will operate in a number of different ways and serve different audiences. Essentially, however, a venture fund will (1) raise capital from other institutions to (2) invest in the equity of (3) small and medium-sized enterprises (SMEs) or Startups that have a high growth rate.

Part 1: Capital of VC

VC management companies (venture investment firms) do not use all their own money to invest, but they are professional capital managers, using the capital of many other organizations to make profitable investments.

Partners investing in VCs are usually organizations such as:

  • Pension Fund: Usually a state fund and manages employees’ pensions. These funds are familiar partners of VCs, especially in the Euro area due to their ability to unify several technology and sustainable development goals. Not many Southeast Asian VCs have access to this fund. AP4 and AP6 of the Swedish government are among the funds that coordinate the most capital into VCs today with about 11% to 15% of total assets under management (Asset Under Management AUM).

In our view, to promote innovation and effective investment, countries in the region need to expand the possibility of cooperation between pension funds and VCs. This needs thorough research, relevant human resource training and institutionalization to increase the efficiency of this capital management.

  • University Endowment: University endowments contribute to the development of fundamental scientific research. These funds, along with a wealth of knowledge from the university, are the basis for increasing the ability to connect and solve problems of the companies in the VC portfolio. In 2019, UE’s investment in VCs was rated as the most effective, bringing an average return of 13.4% per year, according to The National Association of College and University Business Officers – 2019 NACUBO-TIAA Study of Endowments.

The majority of universities in the region focus their cash flow on optimizing infrastructure and research activities, we do not have enough long-standing and sustainable capital flows like Western economies to increase the rate. contribution rate to the UE from which to navigate into the VCs. The most successful case of this type of fund is the National University of Singapore Endowment, which invests in the style of Yale University: long-term, diversified assets, diversified foreign currency sources and global investment audience. This fund also only spends 20% for equity investments, a very small part of which is VC.

  • Banks: As a risk-sensitive group, banks have maintained a very small amount of their capital invested in VC funds throughout the industry’s history. Currently, some banks like Goldman Sachs invest directly in startups such as the recent case of leading Series C $ 81 million in fintech startup Amount based in Chicago, IL. Banks are interested in FinTech startups because of the possibility of strategic cooperation rather than direct profits. The investment banking group makes a more prominent contribution to the VC industry in IPO listing activities than an investor.

Asian banks in particular have not yet applied much interaction with VCs to their operations. The main reason is that the risk tolerance of both well-trained bankers and financial policy makers is not high. This market has also witnessed many financial crises that have had a lasting effect that has caused the investment behavior of the majority to remain oriented towards traditional and low-risk options. Moreover, the number and quality of startups in the region is not as high as in the West.

  • High Net Worth Individuals (HNWI) and Family Offices: European VC funds often source funds from Middle Eastern oil billionaires due to historical ties and the lack of specialized fund managers. industry in this area. However, managing relationships with many of these investors consumes a lot of VC resources. Large VCs tend to raise capital from a small number of large investors rather than many HNWIs. Small VCs will typically raise HNWI funds until they have the reputation and experience to raise money from larger partners. Some of the celebrities such as Jared Leto, the Joker in Suicide Squad, the lead singer of the band 30 Seconds to Mars, have an impressive portfolio that includes Uber, Airbnb, Spotify, Nest, Reddit, Slack, Snapchat.

HNWIs in Asia are quite large and the amount of money they have is enough to create a very good motivation for VCs and startups. However, the majority of HNWIs have the need to invest in U.S. regions to benefit from immigration policies as well as more trust in Western fund managers. The HNWIs in the region themselves reap the same amount of capital from traditional industries, leaving a gap in trust between them and the tech VCs.

These organizations/individuals when contributing capital to VC will be called Limited Partners (LP).

Some VCs formed by founders who have successfully exited startups will tend to use their own cash flow to generate initial capital for that VC. For example, VC Andreessen Horowitz was founded in 2009 with an initial AUM of $300 million from Marc Andreessen after divesting from Netscape.

An important principle for minimizing investment risk is portfolio diversification. This principle is stated as “never put your eggs in the same basket”.

The organizations mentioned above have large resources that need to be managed. In addition to investing in the traditional bond and stock markets, they have a need to put a small portion of their funds into high-risk alternative assets with high return expectations. such as Hedge Funds or Private Equity funds, of which VC is one of them.

Typically, the portion of capital authorized or contributed to VCs will account for about 2-5% of the total AUM. However, this proportion is increasing because of the interest in the impact of technology on national development and successful divestments of VCs. Sweden’s AP6 pension fund currently maintains an 11% share of its $2 billion AUM to invest in VCs. One successful case of this fund is music and media platform Spotify through VC Northzone.

In addition, pension funds have a long life cycle, which is very suitable for the life cycle of VCs, most of which are 10 years.

WHAT DOES VC GET WHEN MANaging MONEY FROM THESE ORGANIZATIONS?

VCs usually charge fees with the “2 and 20” principle. 2% annual management fee on the total AUM and 20% performance fee (Performance Fee or Carried Interest) based on the total growth of the VC fund. Depending on the market and the strategy of the VCs, this fee may change. Compared to some other sources of capital, especially loans, VC is considered an expensive source of capital. However, LPs always know that this industry requires thoroughness, high concentration, practice with companies in the portfolio and a system of specific knowledge and skills. That’s why LPs still trust and more and more VCs are born.

In order to ensure the interests of the LPs, the VC is subject to legal constraints related to the obligations of the trustee (Fiduciary Duty). In this case, the VC is entrusted to manage the funds owned or raised by the LPs according to a number of purposes and scopes agreed between the parties. This legal constraint forces VCs to perform their professional obligations in the best possible way, serving the interests of the LPs. In the opposite case, the LPs can sue the VC in court and the individuals who commit the wrongdoing will have to pay compensation depending on the damages. However, the publicity of the lawsuits is relatively low, and the parties involved often choose to negotiate to resolve the issue. The biggest price VC has to pay is not being able to raise new capital sources if it shows poor fund management and profitability.

In part 2, we will analyze the equity-only characteristics of VCs and their expectations during the investment process.

UNDERSTANDING VENTURE CAPITAL 2

UNDERSTANDING VENTURE CAPITAL

© Tien Nguyen

Throughout the history of the financial industry, the currency has always been under pressure to depreciate due to inflation and must create a surplus from its own value through financial activities. In order to make a profit on the capital you manage, you have many options such as lending at interest, investing in other funds, buying stocks, buying government bonds, buying oil or rare metals, etc., if you are managing a venture fund, you will primarily invest in the equity of a startup.

Part 2: Investing in business equity

When a VC invests in a business, which is mostly high-growth startups or owns technology that promises future outperformance, the VC buys the equity in that business. That is also why startups that are oriented to raise capital from VCs should set up joint-stock enterprises to be able to transfer equity more easily.

A VC’s purchase of equity in a business is similar to the purchase of shares in a listed business, except that there are a few differences:

  • The openness of information: VCs mostly invest in private companies (Private). Therefore, share prices and investment volumes for these investments are not required to be disclosed to the public as is the case when buying shares of companies on the stock exchange. However, some VC investments are now being announced like: “Company A gets an investment of $700,000 from Fund X at a 7-figure valuation”. This activity has the purpose of communication rather than the transparency of investment information.
  • Liquidity: Unlike shares on a stock exchange, equity in a private enterprise is not highly liquid. This means that VCs cannot easily sell this capital for cash or more liquid assets. In contrast, when buying a stock on the HOSE, for example, you will be able to liquidate faster by selling that stock almost anytime right on the floor at a published price.
  • To liquidate this investment, VCs will have to take an additional period of time, usually 3 to 7 years, and the price must be negotiated. Most startups are even more liquid than real estate. VCs, based on expertise, problem-solving skills and market sensitivity as well as a little luck, will get liquidity from this investment through the sale of their shares to mutual funds. other private investors, other companies or, in rare cases, go public through an initial public offering (IPO).
  • Active role: Unlike stock investment, investors who choose startups as an investment object will have to take a more active role. Often, they will have to use their knowledge, experience, and connections to help startups succeed. A VC will typically invest a 20-40% stake in a startup to ensure they have a seat on the board and have a say in strategic decisions.
  • Creation of new preferred shares: In the case of stock trading on the exchange, no new shares are created. Conversely, when a VC invests in a startup, a new amount of preferred stock is created in exchange for the cash the VC transfers to the startup’s bank account through shareholder equity. The increase in the number of shares causes the ownership of the business of the founders and previous investors to be diluted.

In addition, these newly created shares are often preferred shares. This means that VC shares will be preferred over common shares in a number of ways, such as divestment priority, voting preference, undiluted priority in the next funding round, priority. be eligible to participate in the following round of funding or dividend incentives. These rights will be discussed by the parties and we will analyze in detail in the next series of Term Sheet articles.

In Asia and especially Southeast Asia, VCs often ask startups to set up new companies to receive investment capital. Newly established company locations will be countries with open and professional financial services systems, strict investment legislation or easy cash flow. The locations that are usually chosen are the area where the fund is located, Singapore, Hong Kong or the tax havens of Virgin Islands, Cayman Islands, etc. This sometimes leads to some legal risks when raising money to come. The real market of startups. Therefore, startups and VCs need to discuss carefully, as well as balance the benefits when choosing the option of establishing a new company in another country to receive investment capital.

Equity and Debt: As discussed in the previous post, venture capital is a process that requires more than money with high risk, so the cost of equity investments is very high. expensive. When faced with the choice of borrowing or raising VND 2 billion for a startup, you will have to consider a few things:

  • If you borrow, you will have a personal debt (because a startup has no assets to mortgage). And if that startup fails, you’re sad twice, once for your startup and again for the upcoming time you have to plow to pay off debt.
  • If you raise capital, you will (1) not have to pay debt to VC because this is an investment, jointly owning the business, and the same board. It’s not easy for you (2) to get out of a VC just by paying off their debt. If the startup thrives, the VC will benefit more than the bank gets from you. This is obvious because the risk of VC is much higher. VC will create (3) pressure to divest because they will only be able to get the most profit from divestment. VCs won’t stay in startups to enjoy annual dividends because that amount is too small compared to the risk they are taking and the return investors give them hope for.

Building rapport and understanding the VC is extremely important because it is clear that when a dispute arises, you cannot get out of the VC easily. A popular example is Benchmark Capital’s 2017 lawsuit in Delaware court accusing UBER CEO Travis Kalanick of fraud for personal gain, breach of contract, and breach of fiduciary duty. The case was dropped a year later under an internal agreement involving a deal to buy back a large portion of capital at a valuation of $48 billion (30% lower than the most recent valuation) by UBER and a group of investors. another investment, led by SoftBank.

However, with that said, VCs don’t just invest money. They are the launching pad for many successful startups thanks to their experience, knowledge, relationships and strategic vision.

A Startup needs to understand and analyze carefully before making a decision to borrow or call for VC capital. There is never the best source of capital, only which capital is suitable for which business at a particular stage.

In part 3, we will focus our discussion on the audience most interested in investment funds: Fast-growing startups.

Documentation of the case: https://www.courthousenews.com/wp-content/uploads/2017/08/Benchmark-Kalanick-COMPLAINT.pdf

Fintech on the rise during COVID -19 & Lessons from VCs in Fintech investment

The COVID-19 pandemic has posed many challenges to the business world, especially to Venture Capital (VC) investment, when the risk factor is now multiplied given the increasing uncertainty sentiments. However, as individuals and businesses are trying to recover and respond to changes, along with challenges there are opportunities arising. This applies well to the Fintech industry, where businesses and financial institutions are collaborating to facilitate seamless digital finance for customers and corporations. Digital financing is no longer an additional fancy service package, but an essential when everything is expected to operate online.

According to a Fintech investment report by KPMG International, the first half of 2021 has seen a strong rebound in Fintech investment, with respect to both deal value and deal amount. The momentum is expected to carry on to the second half of the year, with focus spanning wide to different segments of Fintech, including

  • cryptos (trading platforms, NFTs, etc.)
  • Cybersecurity (fraud management, password-less security)
  • B2B services (banking services, not only in the payment sector but also in insurance, wealth management, regulatory, etc.)

So how has Fintech been riding the COVID-19 wave?

A study from Deloitte, “Beyond COVID-19: New opportunities for fintech companies”, has identified several advantages that the industry can leverage during times of the pandemic.

  • Expertise in data processing – a skill underlying credit and line insurance
  • Strong focus on digital customer experience
  • Leverage of partnership and collaboration – digital service providers are accustomed to shaking hands with large financial institutions (e.g. banks, funds, etc.) to complete the service chain
  • Unburdened by the complex, disparate, legacy systems – allowing them to quickly integrate cloud-native approach and take advantage of API system.
6 charts on deals and investments in the global fintech market

In short, fintech’s differentiated capabilities, agility, and innovation are helping it not only to survive the pandemic but also to take the opportunities and create breakthrough disruptions. As the huge potential of Fintech has proved itself a lucrative investment, let’s dive into some insights from VCs – one of the main sources of funding behind this rising industry.

Inside from VCs – main sources of funding behind this rising industry

FinchCapital, a Fintech and AI focus fund, believed that the crisis accelerates a “fundamental shift” in the lives of people and businesses, and this is where disruptive Fintech companies step in to help society respond to changes. While severe impacts are being seen across all industries, FinchCapital believes in the light at the end of the tunnel for these innovations, especially in the field Insurtech, Proptech, and Online mortgage, because post-Covid, a contact-free, data-driven, and insurance-protected lifestyle is the new normal.

In a webinar on Fintech investment (2021), representatives from DoVentures and Touchstone Partners – two significant players in Vietnamese VCs, expressed positive views on the future of Fintech, especially in Wealth management and online loan/mortgage/ BNPL (Buy now pay later) sectors. The movement is also supported by the State Bank of Vietnam (SBV)’s process of drafting a new decree on Fintech regulations, which will clear some of the grey areas and benefit fintech businesses, especially P2P lending largely. It was also emphasized that for such a sophisticated industry like fintech, the investors are looking for startups whose teams comprise both financial and technology experts. While the combination is clear in the industry’s name, such well-rounded expertise is not easy to find. Ideas that involve both integrations of new technology and response to financial system issues are more success-guaranteed.

Manuel Silva Martinez, Partner from Santander InnoVentures (SIV), also shared his interesting views on fintech investment after researching the industry’s global movement. Whilst being an advocate for “classic fintech” (mentioning “B2B blockchain application in the capital market”), the fund is also eyeing more forward-looking segments of fintech that directly drive customer decision makings. Similar to the aforementioned fund partners, Manual also named Proptech (mortgage cycle), Mobility (Car ownership), Logistic (trade and supply chain finance) being some of the potentials to pay attention to in the coming years.

In general, the pandemic has placed all businesses under distress, and fintech is no exception. However, with its high adaptability and data manipulation expertise, fintech is acing the crisis, through providing businesses and end-customers with innovative solutions that come as saviors during difficult times. Given the increasing trend of fintech investment, we expect the industry to thrive even further and create disruptive changes to our societies when COVID is behind.

To learn more about insight into fintech investment from VC’s point of view, why don’t you take a chance to join our upcoming event called Etalk Adventure to the Venture on Thursday night 23.09.2021 at 07:00 PM (VNT)