We are privileged to be a part of the entrepreneurial journey with our clients. The lessons learned and knowledge transfer is a way to contribute to our community as well as identify key areas of interest to the Colorado ecosystem.
Fundraising is an art, not science
Capital is chased by most startups, in any shape and from whatever source can be found. Necessity and innovation combined with the opportunistic nature of entrepreneurs gives way to the perfect vision of funding an idea. The reality of raising capital is harsh, from months of meetings and pitches to the emotional toll and roller coaster ride that it takes, fundraising is an art not a science.
Most companies that think they need venture capital are not a fit for it. Truly the best way to start a company is through boot strapping and re-investing free cash flow into growth. Enticing investors is more akin to dating than transacting business and requires a deep level of focus combined with a surgical understanding of how your business is going to grow. This is accomplished through a curated narrative about who you are as a team, how you plan to win customers and retain them as well as how you are going to make the financial side of the business work.
This narrative is often muddled by unrealistic expectations about going to market, unit economics and the amount of people required to execute it. Our advice is to always plan for growth taking twice as long as you think with half the revenue you forecast. Creating a narrative takes time, often bringing in outside advice and perspective. What is required is a very harsh internal discovery process about who you are, what you do and, most importantly, why you do it.
Venture Capital at an all time high
2017 saw the highest VC investment activity since the dot-com era, creating confidence in the startup landscape although companies are remaining private longer forcing VC's to inject capital into companies that would have otherwise gone public. Last year's investment story includes notable deals like Lyft's two rounds totalling over $2.5 billion, WeWork's $3 billion raise from SoftBank and $450 million raised by Space Exploration Technologies Group.
A look at the numbers:
VC's deployed $84 billion across 8,000 companies
VC's raised $32 billion across 209 funds
2017 only saw 5 mega-funds, compared to 9 in 2016
While the number of deals has declined for the third straight year, VCs are looking for large deal opportunities that may represent exit opportunities for valuations that resemble the unicorn craze of 2014 & 2015. Due to the lack of IPO events for startups in the current market, we saw decreased deal volume that places emphasis on bigger bets on a smaller number of companies. Because of the likelihood that 2018 will see stronger IPO activity in combination with VC optimism, this year should be another year of record-setting investment activity. The negative outcome of the market conditions have created a more difficult seed and angel investment landscape. Angel and seed deals dropped to 47% of all deals, compared to above 50% in the previous years.
Corporate Venture Capital to 'blame' for startup valuation bubble
Corporate Venture Capital (CVC) has been on the rise over the past decade, and for good reason. CVCs don't invest simply for returns, they invest for long-term strategic factors that greatly influence portfolio architecture and investment thesis. CVCs are gaining momentum because corporations are slow to innovate and require infusion of new technologies and talent to maintain market share.
A look at the numbers:
In 2016, CVCs invested $32.3B across 1,203 deals, this accounted for 1/3 of all Venture Capital activity that year.
In 2016, the median valuation of a CVC investment was $26M while the median valuation for a VC investment was $16.5M.
CVCs play a very important role in the startup landscape, often by making use of corporate resources when the investment is conducted under a strategic and long-term vision. This translates to higher valuations, potentially quicker exits and an increased rate of patents because CVCs wll increase a startups innovation value. Research has shown, in Europe for example, that overall economic performance is 50% higher for CVC-backed startups, compared to 41% for VC-backed startups.
In late-stage investments a CVC investor, as part of a syndicate, will generally double the valuation.