4 modern problems of venture investment
GVA LaunchGurus translated for you this undoubtedly entertaining article by Mark Saster, a partner of Upfront Ventures, about the current problems of venture investment. The expert expressed everything that he thinks was boiling about venture capital investments in the project at various stages. What can ruin a startup, what causes excessive funding and what to try to avoid the project - in the revelations of a serial entrepreneur and investor.
Mark Saster:
')
Venture capital investment
Our prospects increase and decrease depending on the market cycles. First, we admire the efficiency of investments, then we admire the seizure of the market, then we despise excessive funding until we are incredibly growing and again convulsively attract additional funds, until we convince all the “non venture capitalists” of the planet to invest in startups, until these startups sink into non-existence, and we begin anew, not a bit wiser. Then comes the blessed amnesia, and again we are fun jumping on the same rake.
I saw a beautiful twitter picture of Simon Wardley, CC3.0 from SA ( blog here ). The simple truth about our lives, suitable and under the scope of investment. I often observe it in new venture projects. Investors enter into a market with a wide step about which they know nothing. Swam, we know. If an investor entered the market between 2009 and 2015, he is at risk, and he needs to be extremely careful not to start thinking that he knows more about the market than he actually knows. Since then, we have only one option, which can create the impression that:
• each project finds its investors
• any company, both good and not very good, finds its niche or, at least, lands on its feet (“there are no dirty tricks, people will buy at least for IP”)
• everyone knows everything about Brazil, India, China, SaaS sales, e-commerce and analytics
• the more money you invest in a startup, the faster it grows
I think, according to the Wardley hierarchy, I am now drawn to a venture capital expert. The longer I do this, the less I am sure of myself. And this is not ostentatious humility like “I am still learning,” but rather “Yes, FIG know him, how it works,” and “Lord, I hope I'm right!” One of my acquaintances — successful investors — somehow confessed to me in a private conversation: “Frankly speaking, I have paranoia, it seems to me that everything that I have learned over the past five years is no longer relevant, and I can become obsolete literally tomorrow” .
I know what I know. I have strong beliefs. But I also know what I do not know.
Here are a few of my beliefs, about which I do not dare to say that they are true, because every time I declare that I know something, the market throws out something new. Either gregarious behavior engulfs everyone, or I’m losing my mind. Time will tell.
1. Too much money at too early stages of development will ruin the company.
Everyone I know raises $ 10 million these days. And by “all” I mean startups that have only just appeared on the market, and they would be enough for 3-5 million dollars. No, I'm not talking about you specifically - everyone does it.
10 is like three in the recent past. My friend from the Valley says: $ 10 out of $ 50 - these are the rounds of investment that now fall under class A in Silicon Valley.
Well, yes - this is not entirely new. The market did the same in 2007. And then he stopped.
“Do we really need such an amount?” Asks a short-term investor from Los Angeles, who has only 300 miserable millions and cannot afford to play like an adult.
- She needs to get better contracts. With the existing competition and availability of information, either you pay, or they turn to someone else and get what they want.
I think Silicon Valley billions of venture capital funds can afford it and it's hard to compete with them, because they have proven the ability to earn on their investments over the past decades. One has only to get on one page in Facebook, on someone's twitter, and all investments quickly pay off.
I firmly believe in the principles of venture capital investment in the early stages of a startup. It motivates innovation. This motivates the founder to communicate more closely with customers. This holds back an excessively rapid increase in staff. Of course, in this case, it is easier said than done, especially when there is a whole bunch of orphaned money around, and everything seems easier with them. I do not blame you for taking more than necessary. But if you take 10 million from a common fund of 30, 40 or even 50 million, then good luck with trying to make another investment round, if you didn’t show tremendous progress. You strongly narrow your horizons. And I am almost sure that in the end money will be used inefficiently.
2. Too much money, when you have already gained momentum, will kill the company.
The next big problem that I see is when companies very quickly reach their peak on the received pocket 2 to 3 million dollars, and are convinced that they have “a lot of things” in stock, and they can attract another 10 million in next round. But this “many” is often deceptive, but then ... God help you. You take the newly acquired money, flood Facebook with ads (because it is much easier than trembling over every cent). You want to show great progress and quickly rush to attract another 25 million in the next round to keep up with the neighbors.
You hire convulsively people, you are no longer 8, but 45. The production culture suffers, the business process is cracking at the seams. The cost of attracting customers rolls over. Not all your ideas shoot. If you are lucky, and your product immediately found a market niche - fine. But if not, investors who criticize your CAC (customer attraction cost) and LTV (customer lifetime value), customer churn rate, and inefficient employees turn up in the queue. Then you start to panic, cut staff, tighten your belts, roll up your sleeves to show everyone what you are worth.
It's funny that this “too much money” comes not only from entrepreneurs. I often heard how venture capital funds argued that "if we had given them 10 million, they would have quickly lost touch with competitors, and we would have captured the market." I'm not quite sure about that.
Most recently, I watched as one entrepreneur launched a wonderful project without capital, attracted about 10 million, and suddenly lost control of his business, almost went bankrupt, drastically cut costs, and again began to surprise him again with his innovations and creativity, realizing that no one would to invest in it in view of his past exploits. I don’t know if he survived (he can live from paycheck to paycheck), but I really support him. In my opinion, a wonderful transformation.
3. Once there is a niche for a product, money is key
Here the irony covers me, and I look at my schedule again. Intuition tells me that in a certain magic moment money plays a decisive role. When you need to fill all the bins, take 20-30 million dollars and blow up the market with your arsenal.
Saw it already.
I saw the companies that raised mega investments, after their company began to grow, and then scaled the business by leaps and bounds. I saw companies that would have evaporated without large investments, companies that, on the contrary, avoided rounds of large investments, and then faced the fact that they lacked resources for timely delivery of products, and, as a result, missed market opportunities, selling mediocre profits , and sadly watched the passing deals pass by.
How is it that excessive financing is very bad, and then suddenly the most desirable result, and where is the notorious turning point? It happens differently. I know that inexperienced forecasters say that “venture capital is dead”, “capital is the same product”, “by the finish line”, and that “you shouldn’t be greedy,” but I also saw exactly how much capital attracted to the right moment, separates the winners from the losers.
4. Excessive funding after the round, in an attempt, like all winners, to “get everything” - seriously threatens complete failure for the company.
Following my logic: excessive financing in the early stages is bad, excessive financing directly after you have taken up your rut is bad, and an increase in financing after you have taken a place in the market is a necessary factor of competitiveness and success.
It is available, is not it?
Now the lesson of increased difficulty. A mega round that follows an investment round for growth can kill many companies. Not all, but many. How is this possible? If a company received money during a round of investment to maintain growth, and has already occupied a niche in the market - isn’t it also great to get a huge chest of money for every fireman?
The market thinks so, but I am inclined to look a little further into the future, and I propose to meet in five years and see what will happen.
For companies that attract too much money that exceeds their economic value at the moment, it would be better to gradually gain momentum or to hope that they will be bought back before they collapse. There are plenty of companies in our market that are not known in the near future, but are too expensive for most buyers. They are good only on paper, but in reality they have already driven the corner.
Some will get out. They will be patient and build a great company in 5-7 years and realize their potential over time. And many - no. Those who hit the big jackpot of investment will not want to linger and see what follows the golden days.
We'll see. But “smart money” already points to a huge gap between the assessments of the private services market in the later stages and the assessments of stock exchanges based on more sound thinking.
So what do I know about venture capital?
I'm not completely sure. When I will be on April 50-30, 2018, I will let you know if my hypotheses were correct. While I am only consulting with senseis who have already seen everything, and have decided to drink water instead of tequila.
Mark Saster is an Upfront Ventures partner. He joined the company in 2007, after 8 years already collaborated with Upfront Ventures as an entrepreneur “on two fronts”. Prior to joining Upfront, Mark held the position of Vice President of Production Management at Salesforce.com, after the company was bought by Koral, where he in turn was one of the founders and CEO. Prior to Koral, Mark ran his own BuildOnline- European software company (SaaS), which was later bought out by the SWORD group. Mark is always looking for enthusiastic entrepreneurs to invest in projects in the early stages of technology development. His areas of interest include digital content and distribution, AdTech, consumer Internet technologies, and SaaS companies; Mark has impressive experience in this sector, given that he has already founded and sold two companies. Follow the link to read his articles in his blog "Two Sides of the Table " ("On two chairs").
The original article can be read on the link in the blog AlwaysOn.
Mark Saster:
')
Venture capital investment
Our prospects increase and decrease depending on the market cycles. First, we admire the efficiency of investments, then we admire the seizure of the market, then we despise excessive funding until we are incredibly growing and again convulsively attract additional funds, until we convince all the “non venture capitalists” of the planet to invest in startups, until these startups sink into non-existence, and we begin anew, not a bit wiser. Then comes the blessed amnesia, and again we are fun jumping on the same rake.
I saw a beautiful twitter picture of Simon Wardley, CC3.0 from SA ( blog here ). The simple truth about our lives, suitable and under the scope of investment. I often observe it in new venture projects. Investors enter into a market with a wide step about which they know nothing. Swam, we know. If an investor entered the market between 2009 and 2015, he is at risk, and he needs to be extremely careful not to start thinking that he knows more about the market than he actually knows. Since then, we have only one option, which can create the impression that:
• each project finds its investors
• any company, both good and not very good, finds its niche or, at least, lands on its feet (“there are no dirty tricks, people will buy at least for IP”)
• everyone knows everything about Brazil, India, China, SaaS sales, e-commerce and analytics
• the more money you invest in a startup, the faster it grows
I think, according to the Wardley hierarchy, I am now drawn to a venture capital expert. The longer I do this, the less I am sure of myself. And this is not ostentatious humility like “I am still learning,” but rather “Yes, FIG know him, how it works,” and “Lord, I hope I'm right!” One of my acquaintances — successful investors — somehow confessed to me in a private conversation: “Frankly speaking, I have paranoia, it seems to me that everything that I have learned over the past five years is no longer relevant, and I can become obsolete literally tomorrow” .
I know what I know. I have strong beliefs. But I also know what I do not know.
Here are a few of my beliefs, about which I do not dare to say that they are true, because every time I declare that I know something, the market throws out something new. Either gregarious behavior engulfs everyone, or I’m losing my mind. Time will tell.
1. Too much money at too early stages of development will ruin the company.
Everyone I know raises $ 10 million these days. And by “all” I mean startups that have only just appeared on the market, and they would be enough for 3-5 million dollars. No, I'm not talking about you specifically - everyone does it.
10 is like three in the recent past. My friend from the Valley says: $ 10 out of $ 50 - these are the rounds of investment that now fall under class A in Silicon Valley.
Well, yes - this is not entirely new. The market did the same in 2007. And then he stopped.
“Do we really need such an amount?” Asks a short-term investor from Los Angeles, who has only 300 miserable millions and cannot afford to play like an adult.
- She needs to get better contracts. With the existing competition and availability of information, either you pay, or they turn to someone else and get what they want.
I think Silicon Valley billions of venture capital funds can afford it and it's hard to compete with them, because they have proven the ability to earn on their investments over the past decades. One has only to get on one page in Facebook, on someone's twitter, and all investments quickly pay off.
I firmly believe in the principles of venture capital investment in the early stages of a startup. It motivates innovation. This motivates the founder to communicate more closely with customers. This holds back an excessively rapid increase in staff. Of course, in this case, it is easier said than done, especially when there is a whole bunch of orphaned money around, and everything seems easier with them. I do not blame you for taking more than necessary. But if you take 10 million from a common fund of 30, 40 or even 50 million, then good luck with trying to make another investment round, if you didn’t show tremendous progress. You strongly narrow your horizons. And I am almost sure that in the end money will be used inefficiently.
2. Too much money, when you have already gained momentum, will kill the company.
The next big problem that I see is when companies very quickly reach their peak on the received pocket 2 to 3 million dollars, and are convinced that they have “a lot of things” in stock, and they can attract another 10 million in next round. But this “many” is often deceptive, but then ... God help you. You take the newly acquired money, flood Facebook with ads (because it is much easier than trembling over every cent). You want to show great progress and quickly rush to attract another 25 million in the next round to keep up with the neighbors.
You hire convulsively people, you are no longer 8, but 45. The production culture suffers, the business process is cracking at the seams. The cost of attracting customers rolls over. Not all your ideas shoot. If you are lucky, and your product immediately found a market niche - fine. But if not, investors who criticize your CAC (customer attraction cost) and LTV (customer lifetime value), customer churn rate, and inefficient employees turn up in the queue. Then you start to panic, cut staff, tighten your belts, roll up your sleeves to show everyone what you are worth.
It's funny that this “too much money” comes not only from entrepreneurs. I often heard how venture capital funds argued that "if we had given them 10 million, they would have quickly lost touch with competitors, and we would have captured the market." I'm not quite sure about that.
Most recently, I watched as one entrepreneur launched a wonderful project without capital, attracted about 10 million, and suddenly lost control of his business, almost went bankrupt, drastically cut costs, and again began to surprise him again with his innovations and creativity, realizing that no one would to invest in it in view of his past exploits. I don’t know if he survived (he can live from paycheck to paycheck), but I really support him. In my opinion, a wonderful transformation.
3. Once there is a niche for a product, money is key
Here the irony covers me, and I look at my schedule again. Intuition tells me that in a certain magic moment money plays a decisive role. When you need to fill all the bins, take 20-30 million dollars and blow up the market with your arsenal.
Saw it already.
I saw the companies that raised mega investments, after their company began to grow, and then scaled the business by leaps and bounds. I saw companies that would have evaporated without large investments, companies that, on the contrary, avoided rounds of large investments, and then faced the fact that they lacked resources for timely delivery of products, and, as a result, missed market opportunities, selling mediocre profits , and sadly watched the passing deals pass by.
How is it that excessive financing is very bad, and then suddenly the most desirable result, and where is the notorious turning point? It happens differently. I know that inexperienced forecasters say that “venture capital is dead”, “capital is the same product”, “by the finish line”, and that “you shouldn’t be greedy,” but I also saw exactly how much capital attracted to the right moment, separates the winners from the losers.
4. Excessive funding after the round, in an attempt, like all winners, to “get everything” - seriously threatens complete failure for the company.
Following my logic: excessive financing in the early stages is bad, excessive financing directly after you have taken up your rut is bad, and an increase in financing after you have taken a place in the market is a necessary factor of competitiveness and success.
It is available, is not it?
Now the lesson of increased difficulty. A mega round that follows an investment round for growth can kill many companies. Not all, but many. How is this possible? If a company received money during a round of investment to maintain growth, and has already occupied a niche in the market - isn’t it also great to get a huge chest of money for every fireman?
The market thinks so, but I am inclined to look a little further into the future, and I propose to meet in five years and see what will happen.
For companies that attract too much money that exceeds their economic value at the moment, it would be better to gradually gain momentum or to hope that they will be bought back before they collapse. There are plenty of companies in our market that are not known in the near future, but are too expensive for most buyers. They are good only on paper, but in reality they have already driven the corner.
Some will get out. They will be patient and build a great company in 5-7 years and realize their potential over time. And many - no. Those who hit the big jackpot of investment will not want to linger and see what follows the golden days.
We'll see. But “smart money” already points to a huge gap between the assessments of the private services market in the later stages and the assessments of stock exchanges based on more sound thinking.
So what do I know about venture capital?
I'm not completely sure. When I will be on April 50-30, 2018, I will let you know if my hypotheses were correct. While I am only consulting with senseis who have already seen everything, and have decided to drink water instead of tequila.
Mark Saster is an Upfront Ventures partner. He joined the company in 2007, after 8 years already collaborated with Upfront Ventures as an entrepreneur “on two fronts”. Prior to joining Upfront, Mark held the position of Vice President of Production Management at Salesforce.com, after the company was bought by Koral, where he in turn was one of the founders and CEO. Prior to Koral, Mark ran his own BuildOnline- European software company (SaaS), which was later bought out by the SWORD group. Mark is always looking for enthusiastic entrepreneurs to invest in projects in the early stages of technology development. His areas of interest include digital content and distribution, AdTech, consumer Internet technologies, and SaaS companies; Mark has impressive experience in this sector, given that he has already founded and sold two companies. Follow the link to read his articles in his blog "Two Sides of the Table " ("On two chairs").
The original article can be read on the link in the blog AlwaysOn.
Source: https://habr.com/ru/post/295064/
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