STARTUP INVESTINGNicole Gravagna, Ph.D.

Coauthor of Venture Capital for Dummies !

Tweet this: @NicoleGravagna

VENTURE CAPITAL• Introduced in the 1940’s

• Funding structure that allows for new companies to develop intense technologies that take years to mature into a product

• Recent trend is to invest earlier

• VC investing will keep evolving with changing economic pressures

TECHNOLOGIES• Oil&Gas

• LifeScience/Biotech

• Clean Energy

• Social Media/Apps

• Consumer goods/wearables/internet of things

• Financial/transactions/lending

VC INVESTMENT PROFILE

• Upfront investment

• Technology risk

• Market risk

• Execution risk

• ROI possibilities in the multiples

BECOME A STARTUP EXPERTthis is not corporate business at all

–Steve Blank

“A startup is a company designed to search for a repeatable and scalable business model.”

THE VC GAMEIt’s not what you think

VC SKILLS NEEDED

• Strong stage-appropriate business knowledge

• Finance head

• Deep understanding of the technology

• Personal trust from the LPs

VC ECONOMICSDependent on stage of company

DIFFERENT ECONOMIC PRESSURES

Stage of companyearly late

$$$$

$

100k100 companies

8 companies25M

10M Fund200M Fund

DIFFERENT ECONOMIC PRESSURES

Stage of companyearly late

$$$$

$

100k100 companies

8 companies25M

10M Fund200M Fund

Spray and pray!

More chances to win More management

More chaos More failure

DIFFERENT ECONOMIC PRESSURES

Stage of companyearly late

$$$$

$

100k100 companies

8 companies25M

10M Fund200M Fund

Conservative

Big fund to raise Less management later companies Less risk in each

Fewer chances to win

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Create the mission, vision, entity, and marketing materials to sell the dream. Start raising money.

Year 0

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Keep raising money, begin sourcing deals

Also Year 0

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Close the fund, source deals, become very visible to entrepreneurs. Maybe invest in 1 or 2.

Year 1

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Source more deals, vet lots of deals, invest in another 1 or 2. Manage the companies from the prior year.

Year 2

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Vet lots of deals, invest in another 1 or 2, maybe 3. Manage portfolio companies

Year 3

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Vet lots of deals, invest in another 1 or 2, maybe 3. Manage portfolio companies.

Year 4

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Vet lots of deals, invest in the last deals. Manage portfolio companies.

Year 5

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Manage portfolio companies.

Year 6

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Manage portfolio companies.

Year 7

VENTURE CAPITAL

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Lifecycle of a fund

Start selling off portfolio companies.

Year 8

VENTURE CAPITAL

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Lifecycle of a fund

Sell off portfolio companies.

Year 9

VENTURE CAPITAL

101 +2 3 4 5 6 7 8 90 0

Lifecycle of a fund

Sell off portfolio companies.

Year 10

VENTURE CAPITAL

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Lifecycle of a fund

Sell off the last portfolio companies that you argued to keep for extra time.

Year 10+

VENTURE CAPITAL

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Lifecycle of a fund

Fund creation

Portfolio Management

Sourcing, Vetting, Investing Liquidation

FUND CREATION

• Setting the rules of investment

• Defining the legal structure

• Selling the LPs

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SOURCING, VETTING, AND INVESTING

• Getting entrepreneurs interested in your VC firm

• High deal flow means better deals

• Investing the right deals

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LIQUIDATION AND RETURN

• Managing the companies in the portfolio

• Selling the companies the portfolio

• Wrapping up the fund and distributing the capital

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THE GOAL IS EXIT

•Merger •Acquisition •Acquihire •IPO •Liquidation

FUND GOALReturn more money than

initially invested.

THE UNICORNS

• Investment to exits are 10:1

• 0.7% of VC-backed companies have had >$1B exits

• 4 unicorns born per year

• consumer ecommerce, consumer audience, saas, and enterprise software

Data published last year by Aileen Lee , founder of

Cowboy Ventures

VENTURE CAPITAL COMPANY MODEL

Step 1: Test it

Step 2: Scale it

Step 3: Sell it

THINGS CHANGE OVER TIME

Mini Co

Year 1

THINGS CHANGE OVER TIME

Mini Co

Year 2

THINGS CHANGE OVER TIME

Mini Co

Year 3

THINGS CHANGE OVER TIME

Mini Co

Year 4

THINGS CHANGE OVER TIME

Big Co

THINGS CHANGE OVER TIME

Big Co

Mini Co

Mini Co

Mini Co

Mini Co

Mini Co

ACQUISITION BY BIG CO

Big Co

Mini Co

Mini Co

Mini Co

Mini Co

Mini Co

THINGS CHANGE OVER TIME

Big Co

Mini Co

Mini Co

Mini Co

Mini Co

Mini Co

MERGER OF LITTLE CO

Big Co

Mini Co

Mini Co

Mini Co

Mini Co

Mini Co

THE CULTURE OF STARTUP

CasualCreative

Technical

Nimble

Fast moving

ChangeablePersonal

Informal

Passion-based

Life/Work BlendIntimate

Intimate

Ill-defined

Insecure

Exciting

Fun

HardHubrisTemporary

Quick and dirty

VETTING DEALSLearn to measure value in early stage companies

INTANGIBLE ASSETS

• Caliber of advisors on boards

• IP: patents and trademarks

• Traction

• PR, news exposure

• Users email addresses

PICKING WINNERS

• See hundreds of deals

• Learn to gut-feel founders

• Hone your intuition

• Build your network of resources

BECOME A VC

1. Work for a VC as an associate

2. Build a reputation for picking winners

3. Gain trust of LPs

4. Raise your own fund

5. Don’t screw it up

OTHER VC-LIKE OPTIONS

• Private Equity (PE)

• M&A

• Angel investing

• Startup Banking/Lending

MORE INFORMATION

• Feld Thoughts - feld.com (Brad Feld, Foundry, TechStars)

• AVC.com (Fred Wilson, Union Square)

• thisisgoingtobebig.com (Charlie O’Donnell, Brooklyn Bridge Ventures)

• bothsidesofthetable.com (Mark Suster, Salesforce, Upfront Ventures)

NICOLE GRAVAGNA, PHDBlog: NicoleGravagna.com

Follow tweets @NicoleGravagna