Incubators - business arithmetic
Many copies are already broken in battles Incubators vs Startups.
Break another, through the knee.
Breaking spears - do not build spears, right?
Each new public encroachment of incubators and angels in the direction of making an offer “which cannot be abandoned” on Habré noticeably erects the public. Emotions are mostly heating up around the idea of ​​“Giving $ 10,000, but do you want 50% (or 20, or 70 - depending on the respondent's sensitivity) in my future Google? Goats! (this is added to itself for startups value their karma) ". Here are links to some of the latest Topics on the Startup blog: 1 , 2 .
')
Yes, incubators are a normal cynical business, but this in itself is not a minus and not a plus, especially considering that they are not imprisoned for anyone to stick their hands in their safes and fill their pockets with rustling happiness. In fact, even if you are satisfied with the conditions that you are offered, it is also important to understand what the financial goals of the incubator are and how they correlate with yours. What does an incubator generally do when handing out its money? That's about it and talk.
paragraph 1.
An incubator is a micro-investment fund, its business is to earn money by investing its money in emerging projects. This means - they want to receive a decent profit for their share in the company in the future, or sell their share much more expensive than they bought. What is a "decent profit"? Of course, each incubator has its own criteria, but this at least means - many times more than if you just put money in a bank for a deposit.
Let me remind you that bank interest on deposits in dollars ranges from 5% to 12% per annum. What is “selling a share much more expensive”? From the same deposit considerations - if the incubator invested 10,000 in you and sold a share in 3 years for X , then their annual profit percentage =
[3rd degree root of (X / 10,000) -1] * 100% .
And this figure should be significantly higher than the very 5-12% per annum in the bank. Take at least 30% per annum as the lower limit of the incubator's interest (although, I think, most are hardly ready to work out of 30% - for such profitability it is easier to speculate on rumpers with laptops).
X = (0.3 + 1) ^ 3 * 10,000 = 22,000 .
Total need to ensure the growth of value by 120% or 2.2 times .
point 2.
At the same time, it is important that all startups on the Internet without exception are extremely risky - that is, the probability of their successful implementation in accordance with the business plan is low (roughly speaking, out of 100 projects, only a few will come out of their intended capacity) which leads to the requirements of a very high percentage of return on invested capital. For example, if the incubator invested 10,000 in 10 projects and fired one , then it is necessary that the cost of the share of the incubator in this project grows to at least 100,000 , that is , 10 times . Otherwise, the total investment of the incubator 10 x 10,000 = 100,000 will not even return, not to mention the profit. An incubator needs to have at least several projects, as otherwise there is a danger that not one will shoot and the incubator will lose all of its investments. For example, if the incubator has 10 projects , then with the industry average probability of shooting (and actually lower) is 1/100 , the probability that at least one of the ten shoots is V = 10% . And if the incubator has 100 projects , then this probability is V = 63% . ( V = 1 - (0.99) ^ N ) where N is the number of startups at the incubator). Hence, from probabilistic considerations, an incubator with 10 projects should lay a 10-fold increase (plus 900%) in the value of a share in each project, and an incubator with 100 projects - 100/63 = 1.59 (plus 59%) . This is without taking into account inflation and with the total profit of the incubator 0 - we leave only for the return of the invested money. If you think that the probability of a shot is above 1%, you can easily recalculate for any other parameter.
Combining 1 and 2, we have: to exit from 30% per annum on invested funds, an incubator with 10 projects needs to build up the increase in the value of its share in each project by 2.2 * 10 = 22 times or by 2100% . Namely - having invested 100,000 in 10 projects, of which 9 were dead, a good one needs to be sold so that for your package you get a minimum of 220,000 - this will provide 120,000 profits , which is equivalent to 30% per annum.
An incubator with 100 projects needs to grow 2.2 * 1.59 = 3.5 times or 250% . Having invested 1,000,000 in 100 projects of 10,000 each (of which 37% will die), the incubator will sell its shares in 63 successful projects and receive (63 * 10,000 * 1.59 * 2.2) = 2,200,000 or 1,200,000 profits , which is equivalent to 30% per annum. The share in each successful should be sold on average for 10,000 * 3.5 = 35,000 .
It is easy to see even without additional variables (remember the joke about “pi with the handle”, is there a physics department?) That for a small incubator a large share in a project is often a necessity, not greed: if a share is for example 20% , then the price of a single successful project for sales will be 220,000 / 0.2 = 1,100,000 , and this may be completely unrealistic (the project is small, the crisis and so on). And if the share is 50% , then you need to sell the entire project for 220,000 / 0.5 = 440,000 . In general, the sales price of the project is inversely proportional to the share of the incubator, and selling cheap is much easier than expensive - oddly enough ...
Another thing is that the probability of a shot, as can be seen from simple numbers, is a critical parameter. It is clear that the probability of a shot in the "competent" incubator will be higher than in the industry. The "competence" of the incubator will also affect its ability to seek further funding or sell the business - such an incubator has the necessary contacts and credibility among fat buyers. Ask yourself - the incubator, with which I am going to tie myself with the bonds of an investment agreement, has experience working with real business buyers in my subject (in the sense that you have to imagine who may be the final buyer of your startup - Yandex, for example, or AOL ) or investors of a higher level; whether he sold or brought to design capacity at least 2-3 projects (1 may be an accident); Is he financially well-off to ensure that my project is supported for the required time, taking into account other projects?
all success and incubators, and incubated. There is another important topic about how fundamentally different Russian incubators are from Western ones, and they differ ...
Break another, through the knee.
Breaking spears - do not build spears, right?
Each new public encroachment of incubators and angels in the direction of making an offer “which cannot be abandoned” on Habré noticeably erects the public. Emotions are mostly heating up around the idea of ​​“Giving $ 10,000, but do you want 50% (or 20, or 70 - depending on the respondent's sensitivity) in my future Google? Goats! (this is added to itself for startups value their karma) ". Here are links to some of the latest Topics on the Startup blog: 1 , 2 .
')
Yes, incubators are a normal cynical business, but this in itself is not a minus and not a plus, especially considering that they are not imprisoned for anyone to stick their hands in their safes and fill their pockets with rustling happiness. In fact, even if you are satisfied with the conditions that you are offered, it is also important to understand what the financial goals of the incubator are and how they correlate with yours. What does an incubator generally do when handing out its money? That's about it and talk.
paragraph 1.
An incubator is a micro-investment fund, its business is to earn money by investing its money in emerging projects. This means - they want to receive a decent profit for their share in the company in the future, or sell their share much more expensive than they bought. What is a "decent profit"? Of course, each incubator has its own criteria, but this at least means - many times more than if you just put money in a bank for a deposit.
Let me remind you that bank interest on deposits in dollars ranges from 5% to 12% per annum. What is “selling a share much more expensive”? From the same deposit considerations - if the incubator invested 10,000 in you and sold a share in 3 years for X , then their annual profit percentage =
[3rd degree root of (X / 10,000) -1] * 100% .
And this figure should be significantly higher than the very 5-12% per annum in the bank. Take at least 30% per annum as the lower limit of the incubator's interest (although, I think, most are hardly ready to work out of 30% - for such profitability it is easier to speculate on rumpers with laptops).
X = (0.3 + 1) ^ 3 * 10,000 = 22,000 .
Total need to ensure the growth of value by 120% or 2.2 times .
point 2.
At the same time, it is important that all startups on the Internet without exception are extremely risky - that is, the probability of their successful implementation in accordance with the business plan is low (roughly speaking, out of 100 projects, only a few will come out of their intended capacity) which leads to the requirements of a very high percentage of return on invested capital. For example, if the incubator invested 10,000 in 10 projects and fired one , then it is necessary that the cost of the share of the incubator in this project grows to at least 100,000 , that is , 10 times . Otherwise, the total investment of the incubator 10 x 10,000 = 100,000 will not even return, not to mention the profit. An incubator needs to have at least several projects, as otherwise there is a danger that not one will shoot and the incubator will lose all of its investments. For example, if the incubator has 10 projects , then with the industry average probability of shooting (and actually lower) is 1/100 , the probability that at least one of the ten shoots is V = 10% . And if the incubator has 100 projects , then this probability is V = 63% . ( V = 1 - (0.99) ^ N ) where N is the number of startups at the incubator). Hence, from probabilistic considerations, an incubator with 10 projects should lay a 10-fold increase (plus 900%) in the value of a share in each project, and an incubator with 100 projects - 100/63 = 1.59 (plus 59%) . This is without taking into account inflation and with the total profit of the incubator 0 - we leave only for the return of the invested money. If you think that the probability of a shot is above 1%, you can easily recalculate for any other parameter.
Combining 1 and 2, we have: to exit from 30% per annum on invested funds, an incubator with 10 projects needs to build up the increase in the value of its share in each project by 2.2 * 10 = 22 times or by 2100% . Namely - having invested 100,000 in 10 projects, of which 9 were dead, a good one needs to be sold so that for your package you get a minimum of 220,000 - this will provide 120,000 profits , which is equivalent to 30% per annum.
An incubator with 100 projects needs to grow 2.2 * 1.59 = 3.5 times or 250% . Having invested 1,000,000 in 100 projects of 10,000 each (of which 37% will die), the incubator will sell its shares in 63 successful projects and receive (63 * 10,000 * 1.59 * 2.2) = 2,200,000 or 1,200,000 profits , which is equivalent to 30% per annum. The share in each successful should be sold on average for 10,000 * 3.5 = 35,000 .
It is easy to see even without additional variables (remember the joke about “pi with the handle”, is there a physics department?) That for a small incubator a large share in a project is often a necessity, not greed: if a share is for example 20% , then the price of a single successful project for sales will be 220,000 / 0.2 = 1,100,000 , and this may be completely unrealistic (the project is small, the crisis and so on). And if the share is 50% , then you need to sell the entire project for 220,000 / 0.5 = 440,000 . In general, the sales price of the project is inversely proportional to the share of the incubator, and selling cheap is much easier than expensive - oddly enough ...
Another thing is that the probability of a shot, as can be seen from simple numbers, is a critical parameter. It is clear that the probability of a shot in the "competent" incubator will be higher than in the industry. The "competence" of the incubator will also affect its ability to seek further funding or sell the business - such an incubator has the necessary contacts and credibility among fat buyers. Ask yourself - the incubator, with which I am going to tie myself with the bonds of an investment agreement, has experience working with real business buyers in my subject (in the sense that you have to imagine who may be the final buyer of your startup - Yandex, for example, or AOL ) or investors of a higher level; whether he sold or brought to design capacity at least 2-3 projects (1 may be an accident); Is he financially well-off to ensure that my project is supported for the required time, taking into account other projects?
all success and incubators, and incubated. There is another important topic about how fundamentally different Russian incubators are from Western ones, and they differ ...
Source: https://habr.com/ru/post/52705/
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