Raising money from a Venture Capital (VC) firm is extremely challenging. The odds of receiving an equity check from Andreessen Horowitz is just 0.7% (see below), and the chances of your startup being successful after that are only 8%. Combined, that's a 0.05% or 1 in 2000 success rate.
12 of the Most Difficult VC Questions
- What is your hole?
- How are you different?
- How much is your company valued at?
- What's your customer acquisition cost?
- When are you paying me back?
- Why won't a huge corporation build something like this?
- Why hasn't this worked before?
- How do you define success for you and your company?
The easiest business to start is a service business, especially for a beginner. A service business is any kind of business where you sell services. In other words, you sell your skill, labor or expertise — instead of products or goods.
VC should be a catalyst for growing companies, but, more commonly, it's a toxic substance that destroys them. VC often compels companies to prematurely scale, which is typically a death sentence for startups. Venture-backed startups face great pressures to perform. The more money raised, the more pressure.
In average only 1 in 100 startups gets VC funding. In emerging startup markets the ratio is much lower, something like 1:250. I don't have extensive research supporting these statements, but it's what many experienced VC report, and it feels about right.
A minimum 'respectable' return for a VC fund is 20% per year. This is set by the expectations of the investors in VC funds, the relative risk levels compared to other investment classes and the performance achieved by other venture capital fund managers.
How can you spot a unicorn? Let's repeat this again: a company has a . 00006% chance of becoming a unicorn, or three out of every five million companies.
Top 5 Things VCs Evaluate Before Funding Early-stage Startups
- Talent: Does your team have the necessary technical skills to be successful?
- Experience: Where did your team come from?
- Passion: Does your team have the gumption to persevere through highs and lows?
- Adaptability: If necessary, is your team ready to pivot?
Used correctly, KPIs give an objective assessment of your company's performance and allow investors to get an analytical view of the state of your company. But, not all KPIs are the right match for your startup.
VCs metrics for Marketplace Startups
- GMV = Average value of an order x Number of transactions.
- Take rate or Rake- refers to the percentage of sales and commission a company earns on its sales.
- ARR Calculation.
- Clean, Precise and User Friendly.
- One size CAN fit all.
- Stay Updated.
Even though these are intermediate figures, VC performance at a high level tends to be measured through three metrics: TVPI, DPI, and IRR.
- TVPI.
- DPI.
- IRR.
- These metrics are useful, but typically only after some time has transpired.
- VC funds are typically compared to each other, and also measured in absolute terms.
Typically, we invest in companies that are going after market sizes of at least $100M. At that size, a market is large enough to support a $25M+ company.
Key TakeawaysValue investors use financial ratios such as price-to-earnings, price-to-book, debt-to-equity, and price/earnings-to-growth to discover undervalued stocks. Free cash flow is a stock metric showing how much cash a company has after deducting operating expenses and capital expenditures.
An actionable metric is one that ties specific and repeatable actions to observed results. The opposite of actionable metrics are vanity metrics (like web hits or number of downloads) which only serve to document the current state of the product but offer no insight into how we got here or what to do next.
Revenue is the most important metric when it comes to starting a business.
In its simplest form, your CAC is the total of your sales and marketing costs divided by the number of customers you acquire during a determined period.
Calculating 'GMV' — The following formula can be used: GMV = (Sale price of goods) x (Number of sales over a period of time). Here's an example of GMV: Over the course of 12-months, Startup X makes 3,000 sales of Product Y which is priced at $20.00 per unit. Startup X's GMV for that 12-month period is $60,000.
Key metrics, also known as key performance indicators (KPIs), are integral to the success of your business. Tracking them is how you measure your company's performance and gain insights that help you boost your bottom line.
Everything that relates directly or indirectly to selling is a revenue metric. Profitability metrics have to do with the efficiency of the processes by which the company creates and delivers its products and services to customers.
KPIs are measurable values that show you how effective you are at achieving business objectives. Metrics are different in that they simply track the status of a specific business process. In short, KPIs track whether you hit business objectives/targets, and metrics track processes.
Growth metrics are used to examine a company's historical growth (and hopefully provide clues for the future). Depending on a company's current context, different metrics can be used to more accurately capture a company's historical growth.
The current industry standard for VC compensation is “2 percent and 20 percent.” Meaning VCs get paid 2 percent of the fund size in management fees (salaries) and an extra 20 percent of any liquidation event that might happen. So VCs get paid even when they “fail” to return adequate returns.
Valuation by Stage
| Estimated Company Value | Stage of Development |
|---|
| $500,000 - $1 million | Has a strong management team in place to execute on the plan |
| $1 million – $2 million | Has a final product or technology prototype |
| $2 million – $5 million | Has strategic alliances or partners, or signs of a customer base |
To determine the current value of a share (called the fair market value, or FMV), you divide the valuation by the number of shares outstanding. For example, if a company is valued at $1 million and it has 100,000 shares outstanding, the FMV of a share is $10.
The percentage of equity ownership required by a venture capital firm can range from 10 percent to 80 percent, depending on the amount of capital provided and the anticipated return.
A successful VC for a top-tier firm can expect to earn somewhere between $10 million and $20 million a year. The very best make even more. Meanwhile, there's also the “management fee” of 2% or 2.5% that venture capital firms charge their investors.
According to the data, the average successful startup has raised $41 million in venture capital and exited for $242.9 million dollars since 2007. Among those that were acquired, Crunchbase reports startups raised an average of $29.4 million and sold for $155.5 million.
In an attempt to evaluate a start-up job offer, go on to have a look at the number of the outstanding shares. At first, ask for the amount of outstanding shares, from which you can calculate the percentage of the company to be owned by the employee.
Depending on the industry and the local business and economic environment, the multiple might be one to two times the actual revenues. However, in some industries, the multiple might be less than one.
Use the Earnings Multiple ApproachYou can also justify your valuation by using the earnings multiple approach. It's quite simple. All you need to do is to multiply your total earnings without including any deductions such as tax and depreciation by some multiple.
