MSS Series — Venture Capital Conviction

This feature appeared as part of a Facebook group about startups

VC Conviction (1/6)

I’ve been engaged at a Venture Capital firm since April 2020. From a founder perspective, this has made me realize that most entrepreneurs under-estimate the type of outcomes needed by the VC economic model when they invest in a startup. In summary, each investment must have the ability to render the full VC portfolio profitable, and not just a return on investment on the $ amount invested in that startup.

From an investor perspective, one of my key takeaways is that in order for the VC fund to invest, the analyst or partner involved in presenting that investment opportunity needs to build CONVICTION. Not just that a startup is a reliable investment, but that it has a credible path to return the portfolio 🔝

This series will discuss, briefly, the top elements that help build that conviction:

🎩 Category Defining Venture Opportunity

✨ Stellar team, with proven execution ability

🤖 Technology edge

💰 Great Market and inflection points

? Key unproven uncertainty

🗣 Expert/third party strong reviews

VC Conviction (2/6)

🎩 Category Defining Venture Opportunity

Let’s say a VC with a $50M fund approaches your startup

  • You negotiate for a $1M investment for 10% of your company

Did you ever stop to consider the outcome the VC is seeking?

You may think that if your company exits for $50M that is an extraordinary achievement

  • The VC returns $5M, which results in a 5x return
  • That’s great isn’t it

Sadly, no! 😮

A $50M fund requires a $150M outcome for the VC fund.This is what the VC tells its investors the fund will achieve. Most of the investments a VC will make will fail. Data has shown over the years that only a handful of startups earn the type of returns that VC investors’ seek. Early stage is inherently high risk / high reward.

At 10% holding, VCs need to be CONVICED that your startup has a credible path to a $1 billion plus outcome, as this will allow them to make their sought after $150M outcome on the fund.

The upcoming series of posts will try demystify what VCs look for when making such assessments

VC Conviction (3/6)

✨ Stellar team, with proven execution ability

In the book: Super Founders, Ali Tamseb researched the characteristics that make up the founders of the world’s fastest growing and largest startups.

Amongst his findings there was no distinction of age, gender, location or social class 🧕🏼🧓🏼👨🏼‍🏫

One of the leading indicators was previous proven execution ability

  • This does not mean that first time founders never make it, but it’s exceedingly rare

He explained that when a founder has proven they have been able to execute in a previous project; either as a startup founder, or as a management executive or product owner in a leading institution — that is a leading indicator of ability, knowledge and network reach to be able to build a Venture-level opportunity

Having a complimentary team of founders is also a top ranking data point. He also remarked on the need of having one co-founder with technical expertise in high tech sectors.

Other data points he highlighted were:

  • access to an entrepreneurial hub
  • Being an alumni of institutions or companies with strong entrepreneurial pedigree
  • A competitive market actually helps create significant moats, differentiation and defensibility

Particularly, he labeled as Super Founders: “Repeat Entrepreneurs Had Previously Founded A Successful Company”

Maybe🤔 your first startup does not have to be a home-run business, but it needs to lay the groundwork for your future ambitions.

VC Conviction (4/6)

💰Great Market and inflection points

When a startup launches, there needs to be a cohort of users that REALLY need what they are making — not people who can see themselves using the product one day — but who want it urgently

  • Paul Graham, Y Combinator

Between choosing a path that serves the needs of a wide pool of people who have no urgency for your product, and one that is “inch wide, mile deep” in a demand driven market choose the latter choose the latter

Why now? What is happening across tech — culture — regulatory that may be causing a market inflection point?

Tech: Blockchain, A.I., Sovereign Identity, cloud and quantum computing, clean tech.

Culture: work from home (Covid), Sustainability, Diversity, Digital Natives, geopolitics

Regulation: RegTech (AML), FinTech, SFDR, UN SDGs

VC Conviction (5/6)

?Key unproven uncertainty

One of my favorite themes is venture capital is:
UNCERTAINTY AS A FOUNDATION FOR PROFIT — Jerry Neumann

Game-changing outcomes are fundamentally impossible to predict

Incumbent companies stay away from unpredictability as instability does not allow them to set budgets and earn predictable performance bonuses

VCs deal take advantage of this by building a diversified portfolio of assets within a high growth opportunity sector

Doing the thing creates the knowledge, so this kind of uncertainty is mitigated through doing things. The uncertainty should be about something that would provide some tangible benefit to the company or its customers if it ends up resolving in a certain way. A startup takes on uncertainty, but must then manage so that it eventually dispenses with the uncertainty but ends up with a clear competitive edge

VC Conviction (6/6)

🗣 Expert/third party strong reviews

The three pillars for attracting investor attention are:

1- building a market presence, so that you can be found by the right people

2 — working your network to create positive momentum around your startup

3 — have positive traction so you can “show not tell” your startup story

The components to achieve these are to work on the following:

Community: Building an audience

  • Find early adopters and turn them into power users, people who love your story and want to be part of the journey

Traction: Proof of concept, demo days, pilots

  • Be able to provide tangible access to what you are building. Whether its lines of code, a physical prototype, a one-off event or even a great series of articles

Peer reviews: entrepreneurship ecosystem and cohorts

  • An under estimated source of great energy for founders is other founders. Peer support on both mental and technical matters can help solve seemingly impossible challenges. They may also be the genesis for a great investor tip in your direction

Expert advisors, mentors and lighthouses

  • Successful entrepreneurs become leaders, or lighthouses. These leaders create and shape the various cultural, social and material factors that make up an ecosystem
  • Human capital is upgraded through training and experience, success stories inspire new generation

Investors: angels, open innovation

  • Being able to maximize local grants and attract a first tier of local friends and family investors can help in the earliest stages
  • many do not have enough capital to allocate to several financing rounds so such early investors should act as prime introducers for larger sources of capital

Author profile:

Adrian Galea is a professional in venture capital and portfolio management for early stage startup investors. He also manages a facebook group called Malta Startup Space that inspires startup culture in Malta. For more information: www.clutchplayadvisors.com

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AdiG

www.clutchplayadvisors.com Early stage company advisory and startup fund raising. Human connections that build relationships, add value and move the needle