Week 1: Why and how to choose a VC

Week 1: Why and how to choose a VC

“Weekly Overview … What is Venture Capital? … How a VC Fund works … What a VC offers … Entrepreneur’s View … VC’s Perspective”
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Summaries

  • Week 1: Why and how to choose a VC > What is Venture Capital? > What is Venture Capital?
  • Week 1: Why and how to choose a VC > Experts: 1.1 + 1.2 > Experts: The difference between VC and other sources of early stage funding
  • Week 1: Why and how to choose a VC > Experts: 1.1 + 1.2 > Experts: The current state of Venture Capital
  • Week 1: Why and how to choose a VC > How a VC Fund works > How a VC fund works
  • Week 1: Why and how to choose a VC > What a VC offers > The Added Value of Venture Capital
  • Week 1: Why and how to choose a VC > Experts: 1.3 > Experts: Benefits and Inputs that a good VC can offer
  • Week 1: Why and how to choose a VC > Entrepreneur's View > Entrepreneur's View: Michael Minis
  • Week 1: Why and how to choose a VC > VC's Perspective > VC's Perspective

Week 1: Why and how to choose a VC > What is Venture Capital? > What is Venture Capital?

  • The difference between the two is informal equity is provided by private individuals in general which can be business angels on the one hand and family and friends or as we say the 4 F’s on the other hand.
  • Formal equity works with some kind of fund structure and this fund structure has implication and this is why informal and formal equities basically differentiated first-hand.
  • If you look closer into formal equity, you can say there are investors with mainly financial goals and they are investors who have financial and strategic goals.
  • Venture capitalists are the ones who have primarily financial goals so this is why you find venture capital there and you can again differentiate certain venture capitalists.
  • In some countries also you have incubators, incubators who can be company builders so they’re entrepreneurs and they go to those incubators and incubators provide money plus help and this is salts out of financial reasons.
  • Many corporations have corporate venture capital programs and these are typical strategic investors.
  • So this is the typical like pre pre pre round of starting with the 4 F’s. In addition to that if you than develop your company more professional or more professional way you try to get business angels on board, because they do not only provide money and more money then family and friends in most cases are able to provide but also they can help you establish the business because they’ve seen everything as former entrepreneurs and so on.
  • Then in addition to that later on in order to make especially this early equity cycle works you have to go for some exit which is the IPO for example and this is why this is the in later stages also a source of capital on the one hand because its public money and an exit mechanism on the other hand so this is to understand the cycle and especially the way of the past you as an entrepreneur are going through if you want to build your company.
  • If you look at venture capital in in the USA you can see the total volume of VC investment in the US per year over the last twenty years starting in 1995 and you see 1995 I mean VC was present before but it really started then and especially went really high and the dot-com bubble as we all know the bubble crashed and it went down again and now it’s recovering to some extend so we have significant amounts of money being invested into venture capital.

Week 1: Why and how to choose a VC > Experts: 1.1 + 1.2 > Experts: The difference between VC and other sources of early stage funding

  • There’s 3 or 4 classical ways to do it and a lot of it depends upon the nature of the way in which the business scales so it’s sort of understanding it and that’s not necessarily a given you may have a particular business you may think about variations in the business model at one end you bootstrap it you funded out of cash flow it’s not high-tech venture but the consulting firm I built here we basically financed out of internally generated cash like that’s great ’cause you retain complete ownership but it does very severely limit the rate at which you can grow.
  • Angel investing works when your demands for capital are moderate and where people have specific domain knowledge to bare and the critical distinction here is angels are typically not professional investors.
  • So for instance one of the ventures which is a software venture with significant technical risk associated with it, we have friends and family based angel investing, our need for capital is moderate, it’s a few hundred thousand in the each of the first couple of stages and we decided we want to take very patient money while we figured out product-market-fit.
  • So look at those and there’s a fifth source of funding in a whole variety of places in the world in Germany in Finland in the UK in the US- they’re very often, what I call them, non-diluted forms of financing.
  • You can go to a bank of course but at the same time you can go to your friends and families or you go to individual angel investors, maybe some executives or founders who have started and had an interesting positive exit over the last ten or so years.
  • They may have done it multiple times so these people and there are more and more in silicon valley now who have the expertise of starting a company running a company an exiting their company.
  • These are very very good sources are you not only getting the money you also get the expertise and their network as well.
  • At the same time you go to the more organized angel groups to get their money or you go to the VC community directly where you have institutional investors, where you have the top names the A-list you can go to a B be one or you can go to with C-level VC, it all depends on what kind of company you have, what interesting idea you have, and how different you are compared to the many many start-up companies and entrepreneurs who are trying to raise money.
  • I think certainly when we talk about a little bit earlier which is figure out if your business is appropriate for venture financing and be clear on that from early on and if it is then great if it’s not that also great but I see a lot of founders struggle when they think that venture financing is the default way to finance a business and they may have a business that is more of a services business or something doesn’t have the attributes that a high risk high return venture investor looks for and so this is one guideline for a founder to figure out the economic attributes and the pace at which you want the business to grow and that will help figure out how to finance for it.
  • In education in particular be realistic about how long an education oriented business will take to surface and manifest itself and these are highly regional highly localized systems.
  • So be very clear about who this customer is and how that customer buys and then probably double the amount of time you think it will take for that customer to come around to your way of seeing the world and actually buying your product.
  • Regulation in your industry tends to also be I think a filter for a lot of venture capitalists and if it’s a highly regulated industry where its dependent on a single government agency improving your product or sending a price for your product that tends to be less interesting to venture investors and other kinds of investors and so it’s another rule of thumb you can use to figure out if your venture is suitable for venture financing.
  • We have representatives from our investors in our board of directors and we consult with them, we confirm with them and we make sure that there is a good continuous communication and we also get advice from them.

Week 1: Why and how to choose a VC > Experts: 1.1 + 1.2 > Experts: The current state of Venture Capital

  • There is a lot of money out there, but not in the US. There is a lot of investment opportunities coming from China.
  • Chinese are very aggressive, somehow there is a lot of money there and they’re very aggressive in investments.
  • So the changes :that I’m seeing: I’m seeing venture capitalists, I’m seeing corporate ventures coming to the game they’re not waiting anymore for the companies to exit to them.

Week 1: Why and how to choose a VC > How a VC Fund works > How a VC fund works

    • welcome to the introduction to venture capital.
    • How does a venture capital fund work and what’s the implication of the funds structure to an entrepreneur well first of all let’s look basically how a fund is built you have and this is how the fund normally starts he has some kind of management of the fund which is the management company and the management company couple people as saying okay we can do a venture capital fund sometimes it’s it’s entrepreneurs who got rich and then put some money into that fund by themselves and what they do they basically try to convince investors in raising a fund.
    • So what they say we want to build a fund in IT or fintech or what ever is on vogue right now and and they convince potential investors and that’s they raise a fund so they trying to get money into their venture capital fund.
    • It is around one to three percent fund volume per year but they get so if it’s a hundred million they get two to three million in order to pay for the expenses of the fund management.
    • That is the first money flow so the second many flow is now when the fund management looks for potential portfolio companies and they invest into the companies so they basically buy stakes in portfolio companies which could be by the way equity which is shares but also other forms of capital there’s one general is to try to get any stakes into startups which is between 15 and 75% of the equity plus the other forms of capital and in return as you can see says the money flow the venture capital company gets to shares.
    • Now it takes time to add value to those portfolio companies however when it comes to the very end of the cycle these portfolio companies have to exit one day so they have to find potential buyers who take over the shares at least a venture capital company ahead but probably the whole entity had. So what the fund management but also the entrepreneurs will be doing is look for potential buyers which can be public buyers in the case of an IPO or private buyers in case trade sale or another VC company or private equity company coming in, taken over shares so there’s various ways of exits possible.
    • The money which is coming from the buy flows back into the VC fund and the VC fund can take that in order to repay the investors which is the last part of the money flow.
    • If the money came into the VC fund the investors normally get back the principles.
    • Total of the principal and maybe sometimes plus at least 7% interest rate or something like that and adding to that also 75 to 85% after capital gains where you can also see that remaining part of capital gains 25 at least 15% goes to the fund management so the fund management also earns more money if capital gains a higher which is the incentive mechanism for the fund management in order to select the right portfolio companies they can add a lot more value to.
    • Having seen all that for an entrepreneur 3 implications are really really important.
    • The first implication of the whole venture capital fund is that this capital commitment investors give in to a VC fund is limited time wise what the VC fund normally does is in the first third of the duration of the VC fund which can be eight to 12 years something like that they try to invest in their portfolio companies they don’t do more investments into new companies later on however that also means that in the remaining two-thirds they have to exit these companies again so it’s a question of time and not only a question of time this is why time plays a crucial role for the return secondly if you can have the payback in a small amount of time the return is higher on an annual basis.
    • So first of all time plays a crucial role that’s very important for entrepreneurs.
    • Sometimes venture capital fund put pressure on you because they do not have any more time, the fund is expiring maybe there’s a grace period of two years after fund duration however entrepreneurs have to know that that’s the first thing.
    • Second thing it’s a partnership for only a limited time frame.
    • So what venture capital funds will do and if they see they run out of time is, they take what they put into the contract and this is why looking at term sheets and contracts are details is so important to drag entrepreneurs in order to sell.
    • So if you are an entrepreneur and you think “I want to run this company for ever don’t need any trade sale or IPO whatever venture capital or in general equity financing is not the right thing for you and then you have to look for other capital means but if you approach a venture capitalist you have to know there’ll be the day he puts pressure on you in order to sell his shares at least.
    • Normally it’s not possible that you buy the shares because they have higher value than you’re able to pay.
    • A last thing as you’ve seen before it’s at the very end it’s again a portfolio game for the VC. A VC bills of a portfolio I mean if you talk about entrepreneurship we deal with uncertainty.
    • Normally uncertainty doesn’t have anything to do with portfolio.
    • However VCs have that risk return equi- librium in their mind.
    • So what they basically do is they push your risk in the individual risk of one portfolio company because if they look at their portfolio only one or two have to make it and normally the fund return comes out of one or two or most of the return comes out of one or two great investment they make this billion dollar deals when they make an exit and the remaining companies are may be living deaths so they are bankrupt.
    • For them it’s a high interest to push the risk of every company in the portfolio in order to have this one or two portfolio companies that count for the return.
    • For an individual entrepreneur it might not be the best thing.
    • Because you you like to survive first of all and if he puts pressure on you to grow for example and you don’t now what the profitable way to grow is or Sustainable way to grow as you might want to wait a little longer however they puts pressure on you spend money spend management money because they have enough money and if you are not profitable later on the money is gone they’ll give you more but there’s one more shows and that’s part of the deal so be careful when approaching VCI at least the fund structure with the fund on a limited time frame has these three implications time print plays a crucial role the VC will force you to exit and at the very end it’s a portfolio game for him which might not be the best for you.

Week 1: Why and how to choose a VC > What a VC offers > The Added Value of Venture Capital

  • Welcome to the introduction to venture capital.
  • First of all we talked about money and how the money flows and how a venture capital fund makes money and what the implications of a fund structure are.
  • The second thing that’s really important if you want to understand venture capital fund because a venture capital fund doesn’t only give money but they also tried to add value to your startup and this is really important because especially in the early stages when you are a young unexperienced entrepreneur it’s important to have someone who can help you in crucial questions.
  • Crucial decisions at least someone you can you can discuss with.
  • At the very end it comes to the point that there are really really good VC’s in the VC world and if you have some of the real famous and good VC’s investing into your company they are probably the ones who can add value and make the high returns for the fund themselves there’s lots of other VC’s out there and I’m not saying these are all bad but it’s worth looking at the VC, worth choosing the VC by yourself worth leading the process by yourself and worth looking into the terms sheet really really well in order to understand what the VC is potentially doing to you and this is what we’re going to do next “.

Week 1: Why and how to choose a VC > Experts: 1.3 > Experts: Benefits and Inputs that a good VC can offer

  • What role does the VC take within the company? What input does he offer? So ultimately if you found a VC, or if you found multiple VCs and you have the money in the bank then it’s really all about what the value add is that the VC that you chose can bring to the table.
  • What kind of services does Plug and Play Tech Center provide to start-ups? Plug and Play is a eco-system, that we are helping the company to take their idea all the way up to be a public company or selling their company to a public company or bigger company.
  • So for that reason when the companies come in, asking for help: sometimes its seed money at the earlier stage that they need help and this is why we are here and we want to do early stage investments.
  • We do seed and we participate at the series A. We do from the idea stage all the way up but for later-stage company we have partnerships for four to six different verticals.
  • With B cooperations that they are not just investing at the same time they’re helping the companies to grow at their market and their industry.
  • A good example of that: If you are a company for IOT and one of the elements of Internet of Things is the sensors that you’re using for your business.
  • How about if you are partnered with Bosch? How about if you are partnered with Bosch, if you are partnered with Ford or Chrysler or car manufacturers to help you for connected car? How about when you are doing this business and you are partnering with Bosch and you are doing something for connected house.
  • So the combination of these ecosystems, the combination of all these programs, helping the companies to move faster, learn fast and fail faster, obviously.
  • Out yourself How do you benefit from your VCs? I guess, you know, the simple answer is: VCs provide funding and you need funding in order to get resources to be able to build the products and services that you need, but that’s just you know the basic level I’d say.
  • VCs provide various levels of services and support whether that is introductions to companies that might be helpful to partner with.
  • Do you benefit from having a well known VC and being in the Plug and Play environment? Obviously a good logo adds a lot of value right.

Week 1: Why and how to choose a VC > Entrepreneur’s View > Entrepreneur’s View: Michael Minis

  • We were looking for venture capital in a quite late phase of our development we did to 12 months of bootstrapping with our team.
  • Then we needed fuel to actually increase our business and to get that amount of fuel we were looking into venture capital because that’s a source where you get much more money than you get from fools and friends or from a business angel so that’s why we took venture capital.

Week 1: Why and how to choose a VC > VC’s Perspective > VC’s Perspective

  • I am very bullish on the venture capital industry in particular in Europe.
  • Fifteen years ago the dot-com bubble burst and hardly any investors invested in venture capital.
  • Since then lot of university students decided to join startups instead of slightly more traditional career path.
  • A lot of investors decided to invest in venture capital funds and venture capital firms have been created.
  • A lot of industries are ripe for disruptions and based on these ingredients I am very bullish on the current state of the venture capital industry.
  • The financial industry and in particular banks are based on IT systems from the seventies and eighties.
  • In addition if we look at europe I believe we have three identities centers Europe.
  • There’s Berlin their Stockholm and there’s London.
  • All three start-up hubs in Europe have different strengths.
  • Whereas in the US – people are getting over it, they are much more optimistic many more university graduates want to go into internet startups.
  • This is changing in Europe but I still believe there’s a huge advantage in the US – and finally the venture capital ecosystems much more mature in the US. There are many more venture capital firms in the Silicon Valley that you just mentioned.
  • This is also improving in Europe but they’re still a big gap between Europe and US. “.

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