Understanding VCs

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My goal is to provide early-stage entrepreneurs with accessible & “no bullshit” insights to understand what VCs do, how they think, what they want...

Understanding VCs

  1. 1. Understanding VCs Insights for early-stage entrepreneurs* * but not a guide to fundraising Boris Golden July 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. Understanding VCs – @Boris_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. Understanding VCs – @Boris_Golden – Partech Ventures
  4. 4. Preliminaries My story: been on both sides of the table. I’m an ex-entrepreneur & mentor, now early-stage VC @ Partech Ventures. Same ecosystem but different perspectives! Understanding VCs – @Boris_Golden – Partech Ventures
  5. 5. Preliminaries Many founders don’t understand VCs: what they do, how they think, what they want... I experienced it myself as an entrepreneur & can now see it on a daily basis as a VC. And guides on Fundraising / Pitching / VC funds don’t really help. Understanding VCs – @Boris_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. Understanding VCs – @Boris_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 Understanding VCs – @Boris_Golden – Partech Ventures
  8. 8. An introduction to VCs Understanding VCs – @Boris_Golden – Partech Ventures
  9. 9. An introduction to VCs Venture Capitalists (VCs) spot, fund & support very specific companies: high potential startups = [innovative & unproven]1 [“young” ~tech]2 companies, needing money for [ambitious but credible growth plans]3 Thus, only a small % of companies can potentially get funded by VCs. BAs are different: not their job (but their money!) & often less ROI-driven. Understanding VCs – @Boris_Golden – Partech Ventures
  10. 10. An introduction to VCs Business model of VCs = raise money, get fees on it, invest the rest, sell with a ROI, get a % of the returns: Share of returns LPs’ money* Investments (equity) ROI (power law) 1 4 2 3 * LP = Limited Partner (the ones investing money in VC funds) Understanding VCs – @Boris_Golden – Partech Ventures Fees1’ €
  11. 11. An introduction to VCs But early-stage VC is not really a finance job... • Raise & manage funds, on behalf of LPs (a VC firm often has several funds) • 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 most promising ones • 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... Understanding VCs – @Boris_Golden – Partech Ventures
  12. 12. An introduction to VCs A “paradox” in the VC lifecycle: a very long time horizon & overall feedback loop (~10 years!), but at the same time a fast-paced, rich daily work with continuous experiencing & learning. Understanding VCs – @Boris_Golden – Partech Ventures Support portfolio Raise a VC fund Source startups Assess them 1 2 36 45 Win & make deals Exit with a ROI Reputation, Brand, Network + Experience, Skills, Knowledge
  13. 13. An introduction to VCs Sourcing is key to identify & meet promising startups. It relies on network, brand/reputation & hunting: • Referrals (entrepreneurs, accelerators, VCs, schools, ecosystem, friends, etc) • Cold inbound (entrepreneurs reaching out directly to VCs without an intro) • On the ground (talks, jurys, events, networking, media presence, gossip, etc) • Proactive (market analysis, press/social networks monitoring, startups lists, etc) • Entrepreneurs “pool” (that VCs already know, follow & ping regularly) • Fundraisers (but not usual & rather not too positive at very early stage) Understanding VCs – @Boris_Golden – Partech Ventures
  14. 14. An introduction to VCs VCs strive to understand & assess which innovative “idea”/vision/project/team could succeed (no hard truth). Takes insights & judgement on: market & trends / people / product / business model / 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! Understanding VCs – @Boris_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! Understanding VCs – @Boris_Golden – Partech Ventures
  16. 16. Understanding VCs – @Boris_Golden – Partech Ventures Beyond $$: VCs support & enable! • Advisor (inform, guide, share experience/intuition/opinion/feedback/advice/ideas...) • Facilitator & challenger (discuss, elicit, reformulate, reframe, ask questions...) • Supporter & coach (support, listen, empower, educate & help you grow) • Methodologist (provide & help to implement methods, tools, best practices...) • Curator (share relevant content, stories, patterns, comparables, news, info...) • Investment banker (help define, prepare & execute next fundraisings, M&A, exit) • Network (connect you with the right people for: bizdev, hiring, advice, networking...) • Platform (provide in-house/external hands-on expertise, e.g. HR, PR, tech, sales...) • Board member (direct, validate, monitor... but entrepreneurs mostly decide & do)
  17. 17. How VCs typically think Understanding VCs – @Boris_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”. → Indeed: returns follow ~ a “power law” (i.e. most come from few), + 1 win is expected to have a significant impact on the overall fund. Understanding VCs – @Boris_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”! Understanding VCs – @Boris_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!). Understanding VCs – @Boris_Golden – Partech Ventures
  21. 21. Entrepreneurs’ disappointments Understanding VCs – @Boris_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 Understanding VCs – @Boris_Golden – Partech Ventures
  23. 23. Entrepreneurs’ disappointments Most VCs invest when you have already ~proven “something”, and can “grow” quickly from there! Because: they take “reasonable” risks / other startups have done so / it proves you’re resourceful & can execute. So probably later than you think (and hardly at ‘idea’ stage!). Understanding VCs – @Boris_Golden – Partech Ventures
  24. 24. Entrepreneurs’ disappointments VCs see a lot of startups & have very 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. Understanding VCs – @Boris_Golden – Partech Ventures
  25. 25. Entrepreneurs’ disappointments VCs benchmark similar startups & try to pick the “best” one! Choosing you = “No” to others! Probably dozens of startups similar to yours. Most VCs will 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) Understanding VCs – @Boris_Golden – Partech Ventures
  26. 26. Why (not) go with a VC Understanding VCs – @Boris_Golden – Partech Ventures
  27. 27. Why (not) go with a VC A relevant VC is an “unfair advantage” to grow fast & outsmart competition. Brings: value add, credibility, more $$ next... But: don’t need it to stay in business, don’t consider it as a key milestone. Understanding VCs – @Boris_Golden – Partech Ventures
  28. 28. Why (not) go with a VC However, VC money has a “cost”: Give away a minority stake Growth, ROI & liquidity expectations A bit less freedom Time spent on fundraising Understanding VCs – @Boris_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 → before fundraising, assess if “VC” makes sense for you Understanding VCs – @Boris_Golden – Partech Ventures
  30. 30. What VCs are looking for Understanding VCs – @Boris_Golden – Partech Ventures
  31. 31. What VCs are looking for Future market leaders, bringing big financial returns . Thus “big” exits. E.g. in seed: > 100M€ (not “only” 10). Is it really your ambition & potential? Considering the risks, very good VC funds will target e.g. ~3x in < 10y. But most of the returns come from e.g. top 15% startups (power law). Multiple required thus 3x/15% = 20x. If 5M€ seed valuation, exit ~100M€. Understanding VCs – @Boris_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 will still make a big business) 2. Disruption (disrupting the rules & incumbents of this market) 3. Unique strengths (making it credible that you will scale & win) 4. Capital-efficient model (reasonable capital needs to grow fast) 5. Strong exit potential (multiple, credible & attractive exit paths) Understanding VCs – @Boris_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 Check also a more visual 4Ms infography here 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 Understanding VCs – @Boris_Golden – Partech Ventures
  34. 34. MARKET = big market opportunity 1. Specific people with real needs 2. Clear competitive positioning 3. Large & attractive market 4. Favorable trends & timing A depiction of the startups VCs look for 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 Understanding VCs – @Boris_Golden – Partech Ventures Exit Traction TimeCurrent fundraising Next fundraising 1. Vision that could turn into a valuable company 2. Credible & efficient way to achieve it 3. Unique reasons to bet on you, today
  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! Understanding VCs – @Boris_Golden – Partech Ventures
  36. 36. Building a relationship with a VC Understanding VCs – @Boris_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. Understanding VCs – @Boris_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... Understanding VCs – @Boris_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, ~ on purpose… (allegedly preserve entrepreneurs & VC optionality → wrong imho) Understanding VCs – @Boris_Golden – Partech Ventures
  40. 40. Pitching to VCs Understanding VCs – @Boris_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! Understanding VCs – @Boris_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 very early stage, more financial at later stage) Understanding VCs – @Boris_Golden – Partech Ventures
  43. 43. It’s hard to craft a great pitch! 1. Make your pitch really clear, smooth & obvious 2. Provide only specific & easy-to-digest content 3. One clear, relevant, impactful message per slide 4. Explain the market & context, before what you do 5. Show unique insights & a clear differentiation 6. Make it understandable to “non experts” 7. Help assess how good your achievements are 8. Be ambitious, and give reasons to believe in you 9. Put yourself in VCs’ shoes & use their language Understanding VCs – @Boris_Golden – Partech Ventures
  44. 44. An example of what to pitch (1/2) 1. Teaser (vision & what you do in a clear/impactful way, key achievements, ambition/goals) 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) Understanding VCs – @Boris_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. Growth-to-market (your GTM strategy, how you target & acquire users, how it scales) 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 plan) Understanding VCs – @Boris_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. Understanding VCs – @Boris_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! Understanding VCs – @Boris_Golden – Partech Ventures
  48. 48. Fundraising with a VC Understanding VCs – @Boris_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 to convince several people. E.g. of VC funnel: 200 startups > 40 meetings > 5 digs > 1 invest. But if you're "hot", you have the power to filter & choose your VC! Understanding VCs – @Boris_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 can lose interest if it takes too long. They are often more excited when others are. They usually don’t like to invest if you struggle. Understanding VCs – @Boris_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! Understanding VCs – @Boris_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, business’ potential & risks, VC competition, fundraising momentum. Understanding VCs – @Boris_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. PS: How do I spend my days? • Supporting portfolio (updates, discussions, workshops, boards, biz dev...) • Sourcing & ecosystem networking (events, jurys, talks, hunting...) • Managing emails & dealflow (filter & answer to everyone! [except ‘spam’]) • Meeting entrepreneurs (pitchs, updates, open discussions...) • Analysing & closing deals (deepdive & memo, negotiations, due dill, legal...) • Reading & curating (articles, news & co about startups/tech/VC...) • Learning & growing (formalizing ideas, learnings, analysis, best practices...) • Firm work (others’ deals, biz dev, team mngt, fundraising, LPs, reporting, events...) Understanding VCs – @Boris_Golden – Partech Ventures
  55. 55. 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 Understanding VCs – @Boris_Golden – Partech Ventures

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