Lecture 9 Flashcards
Why raise venture capital?
● You are aspiring to build a ‘power law’ company
● Capital is a key contributor to de-risking a critical milestone
● Capital can be used as a competitive advantage
● You are comfortable giving up control and freedom in your business
● You are investing in long-term equity not short-term profits
What are examples of businesses that don’t fit VC?
● Most ecommerce/retail businesses
○ Steady cash flows, low equity value
● Non-tech businesses
○ There are other forms of capital (debt, etc) to fund those
● Services businesses
○ Consulting, etc
What are the benefits of being venture backed?
You are allowed to burn money
○ Negative operating profit is the norm
○ No positive cash flows expected for years
You are allowed to make mistakes
○ Many large companies have no appetite for risk or failure
○ Startups are a place to fail fast and learn
It allows you to monetize equity even when equity is worth next to nothing
○ It allows you to get priced on future performance rather than past performance
What is a CEO coach?
life coach for CEO
expensive expensive expensive
takes equity in company
like a therapist and life coach
charges $200,000 per year per CEO
How does a Profit Loss Statement work?
gross revenue: amount you sell
net revenue: actual cash that hits the bank
- returns and discounts
gross merchandising value: total amount that you sold for and part of it is someone elses material
( if you are selling material or any other retail/market place, they are selling someone elses goods)
cost of goods sold (COGS)
(in software business there is very low COGS so the gross margin is expected to be 80-90%
gross margin: whats left after paying COGS
contribution margin: What’s left after paying for customer acquisition
operating profit: What’s left after paying for overhead and technology
cash burn: Total amount of cash leaving the bank account (cash out)
How can gross profit be confusing?
most people of very different definitions for this term
you make sure to put a glossary for the entire thing to ensure everyone is on the same page
How is cash burn measured?
Cash burn is usually measured monthly. Amount in the bank at first day of the month vs. amount in the bank at the end of the month
Why can Operating profit differ from cash burn?
Operating profit may exclude other cash expenses, such as:
■ Interest payments on debt
■ Other payables
■ Working capita
What is revenue referred to as?
top line
Explain the shift in thinking from growth to profit in VC financial evaluations.
before everything was focused on growth
but now its focused in profit –> make sure your making money on every sale (contribution margin)
What was the mentality of VCs when looking at financials from 2015-2021? How has that shifted?
2015-2021: revenue at all cost
you can lose money on sale
only being valued on revenue
not looking at anything below that
Now its all about contribution margin and the entire P&L
2022-present: contribution margin must be healthy otherwise slow revenue growth and get it healthy
What determines the balance between revenue and contribution margin?
market cycles
How do you slow revenue?
You slow revenue by:
■ Investing less $ in customer acquisition (less customers)
■ Building less product features
■ Servicing less customer demands
What is the 7 Powers Framework?
- Scale Economies
- Network Economies
- Counter-Positioning
- Switching Costs
- Branding
- Cornered Resource
- Process Power
What is the most common form of competitive advantage for a start-up? What drives its success?
The most common form of competitive advantage for a startup: attacking an incumbent where they cannot fight back
the ability for these companies, initially, to lose money while investing in their go-to-market strategy.
○ If they could not lose money, they would be unable to undercut the incumbent where it hurts the most
Why is the power of losing money so essential?
When you are capable of sustaining large operating losses you can build tremendous value for the end customer that incumbents cannot match
e.g., Uber flooded their markets with supply of drivers to make sure every time you ordered one it would arrive in 2 minutes
- This incredible customer experience contributed to fast growth
- It also is a huge driver of losses
When should you raise capital? Whats the best time?
The best time to raise capital is at the point in which you are about to reduce a major risk by accomplishing a major milestone (not linear but a step function)
You raise capital right before the milestone hits so you can raise money on the back of an accomplishment.
How to fundraise?
Condense the fundraising process to several weeks
Be really smart and strategic about the amount of capital you are raising
Spend tons of time on the pitch deck
Find a lead quickly
○ Everyone waits for the lead, once you have a lead the rest of the round is easy since the lead drives momentum into the process
What is Startup Work Culture? Why is it so different?
Startups have made an attempt at creating a “new” style of work experience to lure people away from larger companies
○ Why? Typically they pay less in base salary and equity value (ESOP) is long-term
○ Startups compensate for this in theory through stronger culture
What are examples of the start-up culture in practice? Why would they do this?
○ Unlimited vacation
○ Free stuff
■ Lunches
■ Snacks
■ Beer on tap
■ Macbooks / technology
○ Remote work
○ Work clubs / parties / socials / pet-friendly, etc
○ Shuttle buses, free transportation
○ Comfortable ‘campus-style’ offices
○ Strong medical benefits
Obviously, this comes at a huge overhead cost
○ But this is meant to be offset by higher productivity, and longer retention
When we are talking about unit economics we are talking about what?
When we are talked about unit economics, we are talking about contribution margin
Do startups need to comply with GAAP?
Start-ups don’t need to comply with GAAP so they will highlight important information. Just concerned about reporting positive information.
This will change as they are larger and public, where they will change to accounting standards.
Not to be deceitful
Just don’t understand their financials well enough and want to show positive momentum
Force the venture fund to calculate the number themselves
