Last month, we held our VC101 workshop for aspiring investors and founders with Sean Stuart covering the basics of Venture Capital, how investment decisions are made to the critical questions asked by investors. Here is a primer and the main takeaways from the session:
What is venture capital?
VC is an investment strategy where you provide capital for equity in early stage, high growth private companies. The other financing options aside from VC funding are debt-funding or bootstrapping. Venture capital scales ideas into some of the largest companies in the world. 60% of new Fortune 500 Companies were backed by VCs.
Venture Capital is all about power law distribution. It is about the systematic search for outliers. One or a handful of outlier investments typically return the fund and make outsized gains. Out of 4,000 VC investment rounds annually, the top 100 generate between 70 and 100 percent of industry profits. Some of the best VC-backed exits of all time include Coinbase, Snowflake, Zoom in 2020-2021, and Alibaba in 2015.
Tracking some of the best VC-backed exits (2000-2021)
Breaking down funding rounds – The Road to the End of the Road by Aura
Seed- at the seed stage, a company raises 1-2 million to own 10-25% of the company. In general, it makes less than a million dollars in revenue (there are many caveats).
Series A- a Series A round will see the company raise more money at a higher valuation. Your cap table might include more outside investors.
Series B- Capital raising is a process of reaching milestones, getting more money and a higher valuation in order to progress to the next round.
Unicorn-A unicorn is a private company with a valuation over a billion dollars. Usually, it occurs when a business receives 100 million in Series D or E funding.
For founders starting their fundraising journey
How do VCs evaluate a company?
When it comes to assessing a company, these are the four key questions to ask:
Are people going to want the unit of value?
Can they distribute this value efficiently and at scale to those people
Is there enough demand and people for it to generate $100M+ revenue?
Is there a unique value proposition greater than incumbents and will this hold true into the future
1) Will people want the unit of value it creates?
The first step is to quantify value based on Time Saved, Money Saved, Profit Made, and Convenience NPS.
Would the target customer be willing to pay? There are many ways to find information about customers, through browsing forums, online reviews, and conducting surveys
2) Can value be distributed efficiently and on a large scale to those people?
Can it sell efficiently: The three ways to determine this is by assessing LTV/CAC, CAC Payback, and the GTM Advantage.
Does the company have the capability of scaling its products?
Several questions should be asked, such as checking gross margins, the difficulty of overseas expansion, and product roadmaps.
3) Can we make a $100M+ revenue if enough people want it?
As a starting point, size the market top down, bottom up, and assess the tailwinds.
4) Is the value proposition greater than incumbents?
Firstly, compare the unique selling proposition to its competitors. This can be observed through competitor product demos, feature matrixes, and tailwind assessments, this can be observed.
Review the defensibility of your startup over time, barriers to market entry can be assessed alongside the seven powers and platform risk.
Unlike a career in finance and law, there is no linear pathway into breaking into Venture Capital. A career in Venture Capital is defined by your unique proposition- whether that be finding your superpower in connecting with founders, building confidence and conviction around investing. This is further reinstated in recent times, where a wave of creatives from the film and entertainment industry have found their way onto cap tables and have invested in private companies. Find your edge!
The best way to get your foot in the door, is to start doing the job before you even get through.
Curious to learn more about VC, you can check out:
Sean's Medium covering the tech and startup landscape, how VCs make decisions and more