11. Investing in Dig.Inno Flashcards
Why are VCs importance growing?
Because when we look at the most valuable companies today and in the history, it has changed from traditional companies toward tech companies and tech companies often have more crazy ideas that banks cannot offer funding for. 8/10 in the top are VC-backed firms.
Why are banks reluctant to invest in startups?
Because their way to success is often a very bumpy road and most of them fail. It is too risky.
Out of a billion ideas, how many get funded and how many exit strong/unicorn?
1000 get funded and only 50 exit strong of which only 1 become a unicorn.
How does the startup financing cycle look like?
First 5 steps.
A startup typically starts with:
- Investing themselves. about 50K USD
- Then, turning to FFF - friends, family and fools.
- Angels/Pre-seed.
- Seed-stage VC
- Series A VC - this is where you get the large investments of 5-15M USD.
But it is hard, for ex only 5-15% make ir from angel to seed-stage VC.
What are the later stages of the financing cycle?
After Series A funding, you can get another VC round called Series B and then C, D, E and so on..
After this, you might get Mezzanine/Private equity ( a mix of debt and equity) and the last step is IPO where you get access to the stock market investments.
What is the structure of a VC fund?
We have the Venture capital firm and Limited Partners that both go into a VC fund. The limited partners only invest and get some ownership of the fund and the VC firm go into the fund with both investment and management. Then the VC fund create a portfolio of different investments.
5 things a VC do in their daily life:
- Source - find promising startups.
- Select - decide which startups to fund
- Support - help portfolio companies with advice and management etc.
- Fundraising - get money to invest.
- Admin - compliance, fund logistics etc.
How many investments does 2500 pitches lead to?
Typically only 10. Which means that VCs see a lot of pitches….
How is a successful investment according to a VC and how is it measured?
A successful investment should end with an exit - and the best exit is the IPO. This is when their investments pay off. This is measured with IR. typically, the larger exit, the better. and the sooner, the better.
A great exit is often when they get back 10 times their money.
6 types of exits:
- IPO - listed on stock exchange, great return.
- Trade sale - bought by another company, often at a larger valuation.
- Quick flip - company sold after short time, typically at a small valuation.
- Acq-hire - lager comp takes over the startup’s team, often small financial returns.
- Asset sale - another comp acquire the assets, typically great loss.
- Shut-down - startup closed and investors lose all their money.
What 3 things matter to investors?
- Market (market risk) - there must be a demand and WTP in the market. Can you show proof of revenue and demand?
- Team (execution risk) - good management and high skills. Often good if there is a serial entrepreneur in the team because then the VC knows that this guy have done the most mistakes already. Also a well-balanced team is important.
- Product (tech risk) - does it actually work? demonstrated MVPs and patents are good.
What is the rule of thumb regarding an ‘incredible product’?
A new solution to a problem should be 10 times better or 10 times cheaper (or a mix of both) to get customers to switch from their old solution.
3 types of great products:
- “Better mousetrap” - solving a well-known problem in a somewhat better way that improves multiple dimensions at the same time. Ex. Ledgy.
- Out of the blue - some products discover new customer needs that so far wasn’t well understood. Ex. Snapchat.
- Tech disruption - new tech suddenly enables a new solution. Ex Uber.
What should a great team have? (3)
- Complementary skills.
- Diversity (background/academic)
- Experience
How to get a VCs attention? 84 things)
- Best: get a warm intro from somebody they know and trust
- Second best: accelerators and similar programs (because they already filter)
- Fallback: could outreach with a. personalised message(but make sure to be well understood with the VCs market and strategy)
- Upload deck on VC websites, but Farley leads to investments.
