Understanding VCs

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My goal is to provide early-stage entrepreneurs with accessible & “no bullshit” insights to understand the implicit rules of the “VC game”.

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Understanding VCs

  1. 1. Understanding VCs Insights for early-stage entrepreneurs* * but not a guide to fundraising Boris Golden March 2017
  2. 2. Why this topic matters to me As an ex-entrepreneur, I wish I had known that! As a VC, I want entrepreneurs to understand us. As a person, I believe it can help entrepreneurs. B.Golden – Partech Ventures
  3. 3. Preliminaries Don’t take all this for granted! Focused on seed & early stage only, Based on European (esp. French) experience, Only my opinion (but probably mostly shared), Content is work in progress, always evolving. B.Golden – Partech Ventures
  4. 4. Preliminaries My story: been on both sides of the table. I’m an ex-entrepreneur & mentor, now Seed VC @ Partech Ventures. Same ecosystem but different cultures! B.Golden – Partech Ventures
  5. 5. Preliminaries Many founders don’t understand VCs: who they are, how they think, what they want... I experienced it myself as an entrepreneur & can now see it on a daily basis as a VC. Fundraising & pitch tips or technical explanations don’t really help. B.Golden – Partech Ventures
  6. 6. Preliminaries But you need to understand VCs before fundraising! This presentation intends to help you do so. Providing accessible & “no bullshit” insights to understand VCs & the implicit rules of the game. But not a guide to fundraising (lots of great resources already) B.Golden – Partech Ventures
  7. 7. Summary 1. An introduction to VCs 2. How VCs typically think 3. Entrepreneurs’ disappointments 4. Why (not) go with a VC 5. What VCs are looking for 6. Building a relationship with a VC 7. Pitching to VCs 8. Fundraising with a VC B.Golden – Partech Ventures
  8. 8. An introduction to VCs B.Golden – Partech Ventures
  9. 9. An introduction to VCs Venture Capitalists are professional investors, targeting very specific companies: “startups” i.e. “young” & "innovative" technology companies, needing money for ambitious but credible growth plans. Thus, only a small % of companies can potentially get funded by VCs. B.Golden – Partech Ventures
  10. 10. An introduction to VCs Business model of VCs = raise money, invest in a portfolio of startups & take a % of returns: Share of returns LPs’ money* Investments ROI on outliers 1 4 2 3 * LP = Limited Partner B.Golden – Partech Ventures
  11. 11. An introduction to VCs But early-stage VC is not a finance job! • Raise and manage funds, on behalf of Limited Partners • Take an active role & build a network in the startup ecosystem • Source great startups & build relationships with entrepreneurs • Assess startups & strive to invest in the high potentials • Bring value to entrepreneurs & help build global success stories • Facilitate the sale of companies at the right time / right price • Learn, build & share knowledge, vision, insights, expertise... B.Golden – Partech Ventures
  12. 12. An introduction to VCs Support portfolio Raise a VC fund Source startups Assess them 1 2 36 45 Win & make deals Exit with a ROI Reputation, Brand, Network + Knowledge, Expertise, Experience B.Golden – Partech Ventures
  13. 13. An introduction to VCs Sourcing is key to identify & meet promising startups. It relies on network, brand/reputation & hunting: • Network (referrals from network, incl. entrepreneurs & other VCs) • Entrepreneurs (that VCs already know, follow & ping regularly) • On the ground (events, jurys, online & offline networking) • Proactive (market/media monitoring, accelerators, VCs’ portfolios) • Fundraisers (but not really usual at very early stage) • Cold inbound (entrepreneurs reaching out directly to VCs) B.Golden – Partech Ventures
  14. 14. An introduction to VCs VCs strive to understand & assess which “idea”/vision/project/team could succeed! Takes: insights on market & trends, judgment on people / products / business models / traction, network, luck, time... And then, VCs must also convince their colleagues internally. Early-stage VCs hardly agree with each other, this is quite subjective! B.Golden – Partech Ventures
  15. 15. An introduction to VCs VCs often also strive to win the opportunity to invest in the “best” startups, at a “reasonable” price. It typically relies on personal fit, reputation, brand, value-add, and negotiation & sales skills. VCs too often have to “beat” the competition to succeed! B.Golden – Partech Ventures
  16. 16. An introduction to VCs Beyond money, a good VC will provide you with support & resources to accelerate your growth. Being an advisor, challenger, confident, coach, insider... Helping hands-on. Offering access to network & resources. VCs support, enable & influence. But in the end, you decide & do! (excepted when the VC as a board member has a veto on key decisions) B.Golden – Partech Ventures
  17. 17. How VCs typically think B.Golden – Partech Ventures
  18. 18. How VCs typically think VCs bet on companies with high risk / high reward. Ok to lose money on a deal, but wins should be really “big”. → VC returns ~ follow a “power law”. Moreover, VCs are interested in deals that can have a significant impact on the funds returns. B.Golden – Partech Ventures
  19. 19. How VCs typically think VCs know they will often be “wrong”. They must deal with uncertainty & risks. E.g. miss the winner in a space, dismiss ultimately great startups, bet on ultimately bad startups... VCs are never 100% confident, esp. when saying “no”! B.Golden – Partech Ventures
  20. 20. How VCs typically think Scarcest resource of VCs is time, not money! They are thus very careful on how they spend it. VCs typically receive dozens of requests a week (or even a day) and sadly can’t engage with everyone. → VCs prioritize & filter requests, and make decisions, often based on limited information (like recruiters!). B.Golden – Partech Ventures
  21. 21. Entrepreneurs’ disappointments B.Golden – Partech Ventures
  22. 22. Entrepreneurs’ disappointments VCs decline to invest 99% of the time, and often do so quickly & without digging a lot: Not convinced Too early Out of scope Don’t believe Too intricate No team-fit Don’t get it Too risky No project-fit B.Golden – Partech Ventures
  23. 23. Entrepreneurs’ disappointments Most VCs invest when you have already “proven” something, and can grow quickly from there! Because: we take “reasonable” risks, other startups have done so, and it proves you’re resourceful & execute. So probably later than you think (and hardly at “idea” stage!). B.Golden – Partech Ventures
  24. 24. Entrepreneurs’ disappointments VCs see a lot of startups & have “high” standards. For instance, many achievements that are huge for a startup are just "Ok" (or “What’s next?”) for a VC. Also, VCs assess the past but invest on the future. B.Golden – Partech Ventures
  25. 25. Entrepreneurs’ disappointments VCs benchmark similar startups & try to pick the best one (worldwide)! Choosing you = “No” to others! Probably dozens of startups similar to yours. A VC can only bet on 1... A VC thus needs to be really convinced to bet on you! Also, VCs won’t steal your idea (but beware of existing portfolio!) B.Golden – Partech Ventures
  26. 26. Why (not) go with a VC B.Golden – Partech Ventures
  27. 27. Why (not) go with a VC A relevant VC is an “unfair advantage” to grow fast & outsmart competition. But: don’t need it to stay in business, don’t consider it as a key milestone. B.Golden – Partech Ventures
  28. 28. Why (not) go with a VC But VC money has a “cost”: Give away a minority stake Growth & ROI expectations A bit less freedom Time spent on fundraising B.Golden – Partech Ventures
  29. 29. Why (not) go with a VC Most companies shouldn’t & can’t raise with a VC. But it’s OK & there are other ways to find the money: Public grants BA / Family office Customers Debts / Banks Love money Crowdfunding B.Golden – Partech Ventures → before fundraising, assess if “VC” makes sense for you
  30. 30. What VCs are looking for B.Golden – Partech Ventures
  31. 31. What VCs are looking for VCs expect very high growth & “big” exits. E.g. in seed: exits ~ 100M€ in < 8 years. Is it your ambition & potential? E.g. a 3x fund return on Top 15% startups with €5M seed valuation → exits around: 3x / 15% * 5M ~ 100M€ (i.e. 20x on the winners!) B.Golden – Partech Ventures
  32. 32. What VCs are looking for To potentially achieve such a performance, startups must meet very selective criteria: 1. Large market (taking a small pie still makes a big business) 2. Disruption (disrupting the rules & incumbents of this market) 3. Capital-efficient model (limited capital needs to grow fast) 4. Unique strengths (making it credible that you will scale & win) B.Golden – Partech Ventures
  33. 33. MARKET = big market opportunity 1. Specific people with real needs 2. Clear competitive positioning 3. Large & attractive market 4. Favorable trends & timing 4Ms: a framework for early-stage startups MANAGEMENT = best team to execute 1. Smart, skilled & cohesive team 2. Strong ability to deliver & learn quickly 3. Ready to go big whatever it takes 4. Unique insights, vision & project-fit MODEL = disruptive & virtuous model 1. Valuable & Differentiated Product 2. Efficient Go-to-Market / Growth channels 3. Profitable Monetization 4. Scalability / Defensibility MOMENTUM = ability to grow very fast 1. Cracked something / Traction 2. Ambitious but credible growth plan 3. Capital-efficient growth model 4. Clear strategy to scale & win B.Golden – Partech Ventures
  34. 34. Ultimately, VCs look for... Traction Time 1. Opportunity to build a big company 3. Credible path to grow quickly Seed 2. Unique reasons to believe in you Series A B.Golden – Partech Ventures
  35. 35. What VCs are looking for There must be a real fit between the VC and {you + your startup}. It’s a mutual choice! You’ll be together for years, for the best and the worst… It’s like in recruiting: cultural & personal fit, shared vision and trust are key to build a great story together! B.Golden – Partech Ventures
  36. 36. Building a relationship with a VC B.Golden – Partech Ventures
  37. 37. Building a relationship with a VC VCs are human above all. Demystify them: they’re just people. They’re often wrong & have their moods. You deal with a person, not a VC firm. VCs can be vastly different from each other. B.Golden – Partech Ventures
  38. 38. Building a relationship with a VC STAND OUT and impress VCs! You need to win their attention & make them spend time with you. E.g. catchy referral/approach, very well articulated teaser, easy/pleasant to deal with, impressive/passionate... B.Golden – Partech Ventures
  39. 39. Building a relationship with a VC Build a personal, valuable, trustful relationship. Ask them for advice first, before fundraising. If you’re good but too early, they’ll say “later”, not "no". It’s relational, not transactional! But VCs’ answers can be fuzzy & hard to interpret… (allegedly preserve entrepreneurs & VC optionality → wrong imho) B.Golden – Partech Ventures
  40. 40. Pitching to VCs B.Golden – Partech Ventures
  41. 41. Pitching to VCs VCs like when it is easy & fast to: understand + feel excited + believe. Keep in mind that VCs usually form an opinion quickly, with limited data. Outcome depends as much on the pitch as on the startup! B.Golden – Partech Ventures
  42. 42. Pitching to VCs VCs want both relevant storytelling & a clear demonstration (of 4Ms). A data-driven business plan story, with clear logic & assumptions. (true at early stage, more financial at late stage) B.Golden – Partech Ventures
  43. 43. B.Golden – Partech Ventures It’s hard to craft a great pitch! 1. Make your pitch really clear, smooth & obvious 2. Put yourself in VCs’ shoes & use their language 3. Provide only specific & easy-to-digest content 4. One clear, relevant, impactful message per slide 5. Explain the market & context, before what you do 6. Show unique insights & a clear differentiation 7. Make it understandable to “non experts” 8. Help assess how good your achievements are 9. Be ambitious, and give reasons to believe in you
  44. 44. An example of what to pitch (1/2) 1. Teaser (what you do in a clear/impactful way, purpose/vision/ambition, key achievements) 2. Team (who you are, your story: how you met/got the idea, why you are the best at it) 3. Company (birth date, location, history, cap table, money spent, # of employees...) 4. Problem (people & situations, the way it works today, key problems/needs they have) 5. Market (the market you’re in, key things to know about it, current & future trends) 6. Opportunity (where existing alternatives fail, why solve it now, how big it could be) 7. Approach (strategic & market positioning, place in the value chain, value proposition) B.Golden – Partech Ventures
  45. 45. An example of what to pitch (2/2) 8. Product (key principles & features, use cases + demo, user love & engagement metrics) 9. Secret sauce (how it works & scales, what is unique/hard, potential virtuous effects) 10. Go-to-market (how you target & acquire users, how you sell, how you will scale it) 11. Monetization (who pays, for what & how much, the unit economics & profitability) 12. Competition (who is in the space, who is a competitor, how you differentiate & win) 13. Status (where you stand now, significant achievements so far, traction & momentum) 14. What’s next (goals & plan for next years, money needed, structured financial model) B.Golden – Partech Ventures
  46. 46. Pitching to VCs It's a conversation, not a speech. VCs ask questions on key points of your startup to find answers & understand how you think. So don’t expect to talk for 30 minutes without interruptions. B.Golden – Partech Ventures
  47. 47. Pitching to VCs VCs assess both form & content: The heart of your project + the way you convey it + all weak signals! B.Golden – Partech Ventures
  48. 48. Fundraising with a VC B.Golden – Partech Ventures
  49. 49. Fundraising with a VC It is usually demanding to raise VC money: it takes time & success rate is very low. Many VCs will reject you. A “yes” from a VC firm takes several meetings & requires several people convinced. VC funnel e.g. 100 startups > 25 meetings > 5 digs > 1 invest. But if you're "hot", you have the power! B.Golden – Partech Ventures
  50. 50. Fundraising with a VC Momentum is a key psychological factor. It can make or break a deal with VCs. E.g.: VCs lose interest if it takes too long. They are more excited when others are. They don’t like to invest if you struggle. B.Golden – Partech Ventures
  51. 51. Fundraising with a VC An interested, excited or even “in” VC ≠ actually closing the deal. A deal can fail at any stage of the process. Until money is actually wired, it’s not over! B.Golden – Partech Ventures
  52. 52. Fundraising with a VC At early stage, valuation is not “what you’re worth”. It just means: you give X% in exchange for Y€. Balance between founders’ dilution & VC ownership. Valuation is ~ an “art” & depends on: round size, market standards, VC competition, fundraising momentum, vertical, potential & risks... B.Golden – Partech Ventures
  53. 53. Thank You! I’d love to hear your feedback (and about your startup too ) bgolden@partechventures.com @Boris_Golden
  54. 54. Pictures Credits Reinventing Your Exit by Will Foster Tragedy by Johnathan Nightingale Brainy vs. Brain by JD Hancock Brains! by Hey Paul Studios Synchronized climbing by Ruth Hartnup Dice by Daniel Dionne Lego Men 5 by Sprout_labs Lost in Translation by Focus Features Suessian megaphone by Michael Between fog and tress by Robert Couse-Baker SpaceX CRS-1 Blastoff by Steve Jurvetson Design by Benoît Laurent benoit@worders.net