Angel investors vs Venture capitalists: What’s the best for you?

Many founders, especially in the startup business, cannot find the fund to raise their business because of the unknowledge about the investors. To build a startup strong and survive in the market, the founders need more money than just their own funds or debt from the banks.

However, the banks tend to not be available for new startups due to risk. In that case, getting funding from Venture capital or an Angel investor pops up as a pilgrim (a startup) looking for a lake among the arid desert regions.

In fact, angel investors and venture capitalists are interested in funding companies, particularly startups, to exchange a piece of the action. Nevertheless, there are still several differences between the two entities.

What is an Angel investor?

An angel investor (private investor or seed funder) is a high-net-worth individual, who invests their own money into startups. They mostly fund into an early-stage (seed stage) business when the company exists only as an idea or perhaps when the running up is initially in place.

Apparently, this is the most important phase of a new business to survive in the market and faces a bunch of challenges. The funds help startups grow and sustain in the critical stage of development until the companies require more sizable investments from venture capital firms for the next stages.

The funding of angel investors varies at different levels. It can be low around $5k, or even higher, approximately $100k. They also can combine into a group form as a syndicate with an amount of funding up to 1 million dollars and more for selected companies.

As the name of angel investors, they might not be mainly on profit like a venture capitalist but could invest to exchange the ownership equity or convertible debt. However, some seed funders pour their money into a startup merely to supply the finances that push the company’s development.

Because of the comprehension of the founders who need to hold the highest stake to encourage their companies to succeed, angel investors don’t usually acquire more than 25% stake in the company. Furthermore, the business owners will not be required to repay if the companies go belly up.

What is a Venture capitalist?

Unlike an angel investor, a venture capitalist pools funds from other investors called a limited partner (LP), and perhaps in addition their own money. They can write larger checks than angel investors, which could reach 100 million dollars for the company.

The limited partners (LP) can be wealthy individuals, insurance companies, pension funds, and other institutional investors. While each partner has partial ownership of the fund they have invested in, it is the venture capital firm that holds control over where to invest.

Indeed, venture capital basically invests in new businesses with breakthrough ideas with high potential for growth and advancing social progress in the long term, but coevally containing a substantial amount of risk enough to scare off banks to fund.

However, as the above saying, even venture capitalists are gamblers who could hazard into very new ideas, they usually don’t want to jump into the idea stage because of the risk and lack of conviction.

In this case, venture capitalists tend to wait until getting a proof of concept in hand, then do due diligence before deciding to invest. Metaphorically, they are the high experts at hunting a ‘unicorn’ among a herd of horses.

After investing in a company, angel investors are more likely to keep a ‘hands off’ policy while venture capitalists usually take a board seat and are operationally involved in the company.

How can startups approach investors?

In conclusion, both angel investors and venture capitalists are holding a substantial position in the startup process of a business. That’s why most startups try to incarnate themselves as the ‘unicorns’ of these hunters.

However, not many of them know how to perform, or at least convince investors to take a stare at their projects. For the resolve, besides preparing a potential project, startups can begin finding the chances in real by attracting investors through:

  1. Involving in offline business events or association meetings. Businesses and founders usually attend these events to network and explore collaboration opportunities. Hence, it is a chance for startups to introduce their potential projects to investors when they attend these events.
  2. Being enthusiastic to dip into the startup communities on social media like Launch, Vietnam Venture Capital Community (VVCC), TAO start-up, etc. These communities are ‘fertile grounds’ for startups to connect and make attention from investors.
  3. Connecting to a third-wheel company that collects a huge amount of data from investors and has high expertise in supporting startups fitting themselves with investors’ tastes and raising the ability to get the deal. This is also the way that most previous successful startups used its speed, convenience, and effect. In Vietnam, Wiziin Inc. is one of the most dynamic partners that provide the service connecting startups with investors.

40+ questions top founders asks in fundraising meetings to gain not only the money

There is a crucial thing that only top founders know better than others: when you meet with VCs, don’t just fixate on getting their money — learn from them. So which question should you ask to gain the most from the meeting?

For any offered meeting with a VC, the possibility it will result in funding is between 1% and 10%. That means you have 90+% chance that you will not raise money from this person. So if money is your only goal for that meeting, you are wasting 90%+ of your time.

It’s better to consider the meeting as an opportunity to build your company using the information you get from the VC, not just the money you might get. This will give you a higher return on your time.

Remember that investors see 1000s of companies and have invested in 10s or 100s of them over their careers, which means they’ve likely seen different insights than you have. They see and hear things that you may not. This wealth of experience is sitting right in front of you. You just need to know what to ask, and how.

The right mindset for investor meeting
  • Come to VC meetings as an equal, not as if the VC is above or below you.
  • “Pitch” meetings are poorly named. They are better to be seen as strategy meetings.
  • As a Founder, your #1 job in building your startup is to learn quickly. VC meetings are no exception.
  • Use the first part of this strategy meeting to explain what you know about your business so far, not simply “pitching.” Then the vast majority of the remaining time should be spent asking the VC questions and engaging in dialogue as collaborators. For example: If you have 10 minutes, explain what you know about your business for 4, and ask questions for 6. If you have 30 minutes, explain for 8 minutes, and discuss for 22. It would help if you had a large appendix in your deck that you can refer to during the discussion.
  • The VCs you talk to are likely to give you different pieces of advice because there is no right answer and it also depends on the level of experience with who are you meeting. But over many meetings, you will cobble together the right advice. You’ll then be able to improve your business so that investing in your business becomes a no-brainer.

To help the founder get the best from this mindset, I’ve collected 30+ great questions that I’ve observed from others in the pitching meeting connected by Wiziin and James Currier from NfX. These are useful questions that every founder should ask to open up the dialogue and start building more authentic, open, and long-term relationships with their investor. These questions focused on

  • Getting an Understanding of How Your Company is Viewed
  • Know the downside
  • Competitive Landscape
  • Addressable Market
  • Level Up Your Fundraising Process
  • The Right KPIs
  • How Your Team Measures Up
THE QUESTIONS
Getting an Understanding of How Your Company is Viewed
You’re busy, and a lot of people want to see you. Why did you decide to take the meeting with me? What were you hoping to hear?
When you look at my deck, do you think it good reflects the business as I’ve now described it to you?
When you explain this to your partners, how will you describe this business?
What are the negatives your partners will think of first when they look at this business? What initial concerns might they have?
How much do you think location matters? How should I be thinking about location/geography?
How can you see this company fitting in your portfolio?
Are there challenges to this company fitting in your portfolio?
KNOW THE DOWNSIDE
What is the one thing you think I’m underestimating or being naive about?
What are the main obstacles you see to our success? What are the main concerns you have that could cause you not to invest?
Can you see your partnership investing in this company?
After what I’ve described, are there patterns you’ve seen in the past (positive or negative) that would apply to this business? E.g. ad tech is dead, hospitals are horrible customers, sales teams are great customers, etc.
COMPETITIVE LANDSCAPE
How many other companies have you seen that seem to be targeting the same sector?
Have you seen somebody try this business and fail or succeed in the last ten years?
How common is this idea in the world already? Have you ever seen anything like this before?
Are there successful companies this startup reminds you of? Any good analogies? (e.g. the “Craigslist” of farming equipment)
Do you get the sense that we’ll be able to defend this business once it’s up and running?
Are there any companies you think it’d be natural for this company to partner with either now or shortly?
Is there anything I’ve shown you that is on trend with other companies you’re seeing?
Now that I’ve explained the business, what sectors would you categorize it in?
ADDRESSABLE MARKET
Does the way we’ve calculated TAM feel right to you?
The way I’ve calculated TAM is on this slide. Is there another way you could think of calculating the TAM?
Could we redefine our market to make it a bigger market? E.g. Airbnb TAM as home rentals vs. much bigger Airbnb TAM as hotels.
What’s your opinion of the niche this company is targeting to enter this market? In talking this through, is there any sub-segment of the market where you think the fast-moving water will be?
Can you see this being a billion-dollar company? Why or why not?
What do you think are the biggest opportunities ahead of us in this space?
LEVEL UP YOUR FUNDRAISING PROCESS
If this company were to go public, what would you expect the fundraising history to have been? What would you expect about the future financing and dilution characteristics of this business?
I’d like to fill in this round with a few smaller checks from angels and advisors. Can you think of anyone who would be dynamite to advise me on getting this going even if you don’t invest? (Make it clear that you’re not asking for an introduction.)
Other than you, who would you recommend is the best type of investor for this type of business? Does anybody come to mind? I’m not asking for an introduction.
If you had somebody else helping you evaluate this company, whose opinion would you trust?
I understand that statistically, the chances of you investing in this company are only 1%-10%. I don’t want an intro, but I’m just curious, who else would you expect I’m talking to about raising capital?
THE RIGHT KPIS
What’s the main metric that would prove that this is going to be a great business?
What sort of traction metrics would make investing in this business a no-brainer? Where does this company sit on the ladder of proof based on what you know?
What experience have you had with companies that try to distribute on the channel(s) that I’m planning to use? And what were your lessons with companies working with that channel?
When this company is worth $2B and we look back, what do you think the likely path is that the business would have taken to get there?
HOW YOUR TEAM MEASURES UP
On a scale from 1 to 10, how much do you think we have founder-market fit or founder-product fit?
What attributes do we need to be excellent at to make this business work? What are the skillsets and expertise that we need to be world-class to succeed? E.g. Digital marketing expertise, being a supply chain guru, etc.
Just meeting me, do I feel like the kind of person to make this business work?
When you look at the team that I’ve assembled here, how would you compare them to other investments that you’ve invested in?
Talk with me about the team you see here. What are the pros and cons of the team I’ve built so far?
Who would you like to see me add to this team in the next year?
What are the top cultural characteristics that this company would need to have to be successful? Being aggressive? Careful and frugal? Highly compliant? Breaking the rules? Sales-driven? Tech-driven?
Final words

VCs are a resource. They are pattern recognition machines that have been trained by thousands and thousands of data points from the startups they’ve seen. They’re a strategic wellspring of the startup ecosystem that is there for you to avail yourself of. If you ask the right questions, VCs can help calibrate your business, help you avoid costly mistakes, and ultimately get your startup to become the best version of itself and maximize your chances of success.

How to evaluate late-stage funding sources

As a later-stage company, you will have a broader set of investors to choose from than you did in the early days. If you are a high-growth company choosing from a strong crop of investors, consider the following factors when selecting a later-stage funder:

Follow-on capital. Some late-stage funds can deploy hundreds of millions or billions of dollars. Is the fund able to follow on as you raise larger rounds?

Public market impact. Some public market investors, such as T. Rowe Price and Fidelity, send a strongly positive market signal, as they are known as long-term holders of general equities. As you go public, they may hold your stock over the longer run, and this may impact your post-IPO perception and performance.

Note: At least one public market investor recently began publicly listing month-by-month changes in value in their private market portfolio (which makes no sense—can you really change a public company’s valuation on a monthly basis?). This has caused issues for these companies in follow-on fundraises, secondaries, and employee morale.

Strategic value. Late-stage investors may have specific industry knowledge, partnership/introduction potential, or country-specific knowledge. For example, when entering the Chinese market, Uber originally set up a stand-alone subsidiary through which money was raised from Chinese funders who can help with government relations and other aspects of entering China. An investment from a strategic investor can also solidify a key partnership. For example, when Google signed the deal to power Yahoo! Search (at the time a company-making move), Google took an investment round from Yahoo!

Simple terms. Some late-stage private equity firms or hedge funds ask for complex structures or extra liquidation preferences when doing investments. Terms may include additional issuance of shares under an IPO price, extra clawback of value during a sale under a certain price, and the like. If you are able to keep terms simple that is often worth the trade-off of also getting a lower valuation.

Board seats. A number of late-stage investors are willing to invest without taking a board seat—something DST pioneered. Avoiding a bloated board may become challenging as the number of rounds a company completes grows.

Ability to buy secondary stock or drive tenders. Some companies will couple a primary financing event (buying preferred stock) with a secondary sale or tender (allowing employees, founders, or early investors to sell part of their stake). Depending on the fund they may or may not have the appetite or the SEC registrations

KEY TERMS

Late-stage financings are not that different from earlier-stage rounds for the key terms to consider. However, at the later stages the two most important items you’ll weigh tend to collapse down to preference and board membership.

Preference. While top-tier early-stage investors tend to have a clear preference structure (i.e., non-participating preferred 1), private equity firms and family offices may ask for unusual preference structures that effectively convert an equity round into a debt round. For example, if the company and investor cannot agree on valuation, the private equity fund may ask for a 2X or 3X preference, as well as a ratchet on the next round. Similarly, later-stage investors may put in special provisions around IPOs (e.g., if the IPO prices under a certain valuation, or takes longer than six to nine months, the investor gets extra stock), future fundraises, or other aspects of the company’s life cycle. In general, you should avoid these special terms if you can, although you may not have the chance to do so, especially if your valuation starts to exceed your core business metrics or capital is scarce.

Board membership. As with all financings, a key element to think through is whether or not to add a board member as part of the round. In general, larger boards are harder to manage. However, late-stage investors may bring a perspective to the board that has been lacking up to this point—around financial discipline, for example, or the state of the public market. This perspective can be helpful or destructive, depending on the board member and broader company context. On average, later-stage investors will be more numbers/revenue/margin driven, and this can drive a company down either a very good or a very bad path.

Additionally, later-stage investors may not be as used to dealing with the many “oh shit” moments that a startup typically faces in a rapidly evolving market, with a shifting product road map, and a changing org structure. Some late-stage investors are notoriously hands-off/founder-friendly (e.g., Yuri Milner and DST). However, many are used to “safer” late-stage investments and can cause trouble for a high-growth startup that’s still rapidly evolving.

Choose your board members carefully! And consider avoiding new additions altogether, unless your late-stage investors can help in unique ways. Depending on the dynamics around your fundraising, you may not have a choice—e.g., if the investor requires a board seat and you do not have a good alternative option.

Before adding anyone as a board member, make sure to (1) do due diligence on her past investments and board seats; (2) have frank conversations about company direction and expectations; and (3) decide if there are other ways to give late-stage investors meaningful impact and access to company information—without adding a board seat. Alternatively, a late-stage investor may be able to add enormous value to your board and even help to clean out poorly performing early-stage investors. See the section on Removing Board Members for more information on this.

Sources: THE HIGH GROWTH HANDBOOK BY ELAD GIL

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.

What do venture capital funds seek for in an investment?

Venture capital is one of the options for early-stage companies and startups raising capital. To attract the fund, the company needs to prepare an excellent business plan. Before doing that, it is better to understand what a venture capital expects for new investment.

An attractive business plan will prove the following
The team and assets to be committed to the business can plausibly sustainable market power in a market large enough to justify the investment.
according to Dermot Berkery, author of Raising venture capital for the serious entrepreneur.

Market power is a key ingredient missing in most business plans. Hence, Dermot Berkery addresses three main propositions to examine if the business is worthy of investment from the view of venture capitalists. 

Potential for accelerated growth in a big, accessible market

Venture capital investors will generally invest in a company only where they can see a way to earning a 10 or higher multiple on the investment. Thus, VCs focus heavily on the size of the market. They want to be involved in a big market that the company can grow quickly to a large size. But they are just like one that is not well signaled to investment communities. The reason is the weight of capital pursuing opportunities through different investment vehicles might drown the prospects of achieving great return on capital. 

Ideally, they want to get involved in markets that rights on the cusp of takeoff that customers are yet willing to consider the product and there are no established competitors with good revenues. The business plan needs to outline how the early sales will be closed and how the sales model will scale over time, as well. They will assess whether the company will dominate in the industry, ranked 1 or 2. The dominance assures the ability to gain supernormal return as above mention. 

Achievable position of market power

The business must meet three requirements: convey huge value to customers relative to offerings of competitors; have a sustainable, defensible position; yield very high gross margins (at least 70%).

Capable, ambitious, trustworthy management

Quality of management execution has a significant impact on the success of a company. Venture capital fund tends to look for a superb team that owns good characteristics including a balanced team, deep domain knowledge, prior experiences and record, and ambition.

The team needs to be balanced with a mix of technical, sales, marketing, skills, etc. Investors don’t want to back an individual, they want to back a team. The team needs to possess knowledge and insight not only macro-level trends but also micro-level facts. The company has more opportunities to convince VCs if members own great highly relevant resumes. More importantly, VCs want to cooperate with trustworthy and passionate management, who adapt to changing the business environment.

Still curious and want to learn more? Here is a unique opportunity to meet and talk with Dermot Berkery. We’re pleased to host the event with his presence called Etalk Adventure to the Venture | Chat with VC Elite

  • Date: Saturday, 28.08.2021
  • Time: 03:00 PM – 4:30 PM (Vietnam Time)
  • Register here: https://www.facebook.com/events/573363153663564
  • Submit your Question before the event to get a chance to meet 1on1 with our speaker: https://bit.ly/VVCP-Etalk-Exclusive-Chapter-QnA

Writter: Hằng Thu – VVCC Project