Angels Venture Capital and More

32 minutes
Share the link to this page
Copied
  Completed
John goes into detail explaining how angels and venture capital professionals think and act. He expands this session to show fresh sources from new money pools.

Transcript

Welcome to the next snippet of the quick course where the money is. In this snippet, we're going to focus on the formal sources of money starting with venture capital. We'll go on to another snippet covering a lot more sources and then examine the process for raising money based on whatever you have chosen. The goal is to pick the right source for the condition your startup is in right now. You're going to learn a number of new terms in this particular snippet. By the time you're done, you'll be able to figure out each of them and how they're relevant to making your choice what's best for my startup.

The formal sources come in many different sources along the way. These are seven of them, and we're going to concentrate on the venture right now. it by itself is divided into six new categories. Each of those top four been around for a while, but numbers five and six are new over the past decade. The angels 40 Niners are individuals that would have been employee number 100 to 200 out of Facebook. They made a lot of money we say they hit the mother lode and now are financially independent.

They found that Vina gold in the mountain and our nicknamed rich like the 1849, or gold rush people. They as individuals often understand a particular technology or industry, whether it's fashion or high tech or something life science pharma. As a result, they're good for so called impossible see grounds where it's difficult for people to get their heads around what is going to be done here. They're Esker extra risky as a result. And people say, Hey, I get it. Yeah, I really understand as these people do.

Their cost of capital is a little less than venture capitalists that's good for you. And their time horizon is about the same as venture capitalists. Three to five years. The trouble is they're often well, frankly, mostly unorganized. They're individuals and as a result have famous hobbies and things. They're known for.

Helicopter skiing and mountains jumping out of things on. tops of mountains going down powder snow are heading off in their jet to fish for a month, Outer Banks of Australia for black Marlin. They're tricky to pin down as a result. People that have been employee number 10 at Facebook are likely to be what we call mega bucks or angels are super angels. They have made so much money they can have a professional staff sit on your board of directors. They are able to be provoked that is stimulated their emotions triggered remember that's important emotions by appealing to their great vision.

In the past a person like a ross perot, super angel or Today Zuckerberg would be triggered by saying this thing, this business, perhaps this technology can revolutionize education. Their cost, the capital is a bit less expensive than venture money. And they think a little bit longer term because in reality, it's really quite difficult to go public in just five years. And they've experienced that. The problem here is that maybe a sole source game, by that is meant the board of directors is going to be composed of this person or His representative. And that ego is pretty big.

And as a result, a number of them are very difficult to work with. Other venture capitalists have other things to do in the world and go to a meeting with such a person and start arguing. Be careful before you take their money without a real venture firm saying that's terrific. The angels fortunately in both those priorities, categories are getting organized. The business Angel list incorporated has done a very good job of putting together uniformly consistent places for you to go to look for Angel money look@angel.co and you'll find a large number of resources available that you show you who's interested in what, as investors, how syndicates are forming, employee opportunities to go for who you're going to hire, as well as vice versa look for a job as a person looking in a start up for a job. This is an example of something that's done in syndication by having a number of larger unit count of people gathered together under this thing called Republic and become one of the limited partners in an investment deal.

More of this is growing. It's all part of have what's called the JOBS Act of 2012, which has enabled a bit more flexibility in what you can do with shares before they go public. That used to be extremely restricted, you could not sell a single share. Now, that opens up more opportunities. And it one of the opportunities is you can solicit a number of people maybe 100 along the way to get your money before that was prohibited. In other words, talk to your attorney about what you can and cannot do flexibly before you go public to raise money.

Because of the JOBS Act of 2012. There may be an opportunity for your startup in that regulation zone. Real venture capital or the classic pool is very large. I don't really have a concern exactly how big it is. It's gone global and is gigantic. Most of the enduring firms decades long, are in California, like Wall Street firms that have been around For a long time in the height, world of high finances, New York City and Silicon Valley, you'll find 60% of the enduring firms located.

It's mostly high tech for information and life sciences, but increasingly consumer centric internet, businesses have been emerging in big, big numbers. And because they appeal to so many people, when you figure out a business model that can do that. These can be enormous and you can contribute to these things that are often called unicorns. It's very serious money as well as most of your business is going to be given over to them in exchange for the shares. I'll show you real numbers soon. It's very expensive money.

They have a reputation as vulture capitalists as well. That comes because the history has shown that it's very difficult to expect your business to be able to have a founder CEO survive more than three years. Usually the business that is successful, has grown so fast that the ability to learn how to manage that business becomes extremely challenging for the founder, who typically has minor business experience prior to that, as a result, the Board of Directors says we got to replace you. Jerry Yang at Yahoo was very wise in saying yes, I agree. Let me help you find the great person. I'd like this to be successful.

I work so hard at it. And he took the title chief Yahoo and became a chief spokesman for the business along the way. That's a successful way to make managerial transition. All right, let's look at these five items. Now as we go through what venture capital is all about. When you understand that you'll be in a better position to decide if you want money from them and under what conditions Silicon Valley is where the businesses started that became known as Silicon Valley style startups.

That style startup has grown around the world and is focused on an original idea which can become a world class company going public on the NASDAQ stock exchange within five to 10 years. Money is poured in, in the seven years 2010 to 17. After the last big boom wave crashed, it presents opportunities to hire employees to do startups to join a company to bring in investors along the way. Silicon Valley style startups have been very successful. Wall Street loves them when they go public. There's a lot going on and to keep up with the trends you should look at one of these daily emails crunchbase daily from crunchbase cb insights a lot of statistics venture pulse daily stories written up all over Very helpful for getting the pace.

If you haven't done a start up before, it really is mandatory. You can find in most major metropolitan areas, at least one daily email focusing on what's going on in that locale. This happens to be New York City. That combined with the prior items that I've just mentioned, will really get you in the know quickly. Statistics can come from where the professionals get it, the National venture capital Association, as well as the Price Waterhouse money tree, a lot of database they're available. CBN sites daily has a lot of statistics and the database behind crunchbase is truly very, very helpful.

I'd like you to pause for a moment and pick one word that comes to mind when you think about what happened with the venture investing world between 1985 and 2006. Grab one word right now, I'll pause for a moment. Okay, here we go. One word I think about is volatile. On the left side, you have the number of initial public offerings, starting at 1985 and going to 2015. On the right side, you have the amount of money raised.

And you can see, that is not a consistent pattern either up or down. It represents what most people would call a very volatile picture. Roller Coaster is another word, these initial public offerings from 2006 to the first quarter 2016. And this graph shows the IPO count and capital raised and similarly in a short period of time here 10 years you can see how things go up, down, up and down again. Waves of investing are evidenced here where the money that's gone into startups reached enormous people In 2000, as e commerce and the internet hit a peak, and things went frankly crazy, then coming down you'll also see additional waves along the way, and another rise after that, again, look at the pattern. It's not consistent in any form, shape or manner along the way.

Those waves that drive venture investing are triggered by basic technology arrivals, personal computers and genetic engineering triggered a decade in the 80s of new venture investing. The following decade was dominated by internet startups, Genome Research in microbiology, and the 2000s added global disruptors and unicorns, particularly from consumer centric, internet net delivered businesses. Another word I certainly think about is sick at Silicon Valley. On the left you can see the region's and on the right the amount of money that they have invested. You'll see it dominated by those firms in Silicon Valley, New York has now taken over the lead from New England by a bit and continues to grow rapidly. The other parts of the US have grown less rapidly.

But notably Los Angeles has started to really click for the first time, snap, Inc. was able to go public in 2017. As one example of Southern California's livelihood, others are growing, there's plenty of room for you in those as well. You don't always have to get your money from Silicon Valley. This is evidenced even further by looking by state at great companies branded and known and you will find big companies in every single state in the United States. Similarly throughout the world in major metropolitan areas. It's rare today that there isn't at least one startup extremely well known at the world class level.

Another word I think about is unicorns. They arrived at the middle half of the decade here and grew very rapidly in the form of buyouts, mezzanine capital private equity investing along the way. These are monies beyond venture capital did invest in private deals and are extremely large in pool of talent that began to invest in the later stages of startups. Instead of Justin a seed A, B, and C round of financing D, E, F, and G have occurred for these companies. And that's where these blue line people the private equity people come in. The map now is so filled with startups that have been valued at more than a billion dollars.

It's hard to read this graph along the way. And that's the point. There are many and they're arriving at the rate of two to three a month in 2017. Who knows what will happen over the next 10 years? Another set of words I think about is sectors wide range number of them, and look how software dominates. Point 1.2. Look how the other sectors are also their point number two, there's virtually no sector of industry in the world today that you can't find people willing to invest in along the way.

Financial Services and new FinTech, agricultural services and ag tech, educational services and edtech, and so on and so forth are all there and growing. The gorilla does continue to be software. Nonetheless, the deals done in 2015 show that along with biotech and media and entertainment, they're pretty big industries. You also have a large number of bars that aren't appearing large here, but The dollar amount is still in the billions. And that's plenty of money for you. What happened in the cycle of the 80s?

As I mentioned, it was simple cycles drive this world, personal computers, and genetic engineering, were those big two. And then along comes that internet era in the 90s. cycles are constantly happening like waves approaching the beach. The signals that things are starting, that is a new wave are evidenced by first a decline in the number of deals and the dollars per deal drop. That means new seed rounds are dominating. That's a new wave.

And then as the A B and C rounds take more money per deal, both the unit count and the dollars per unit rise. That's a signal things have changed. Learn to Read them. Why? Because It can be the next big thing that might be your big opportunity. This one, of course, was the internet era.

Watch out when mergers and acquisitions occur, because when they get large in number and dollars, it means a lot of companies have not been able to get to initial public offering in the new market categories. As a result, the category may be reaching a peak and soon crashing. When prices rise, as companies are sold, getting larger and larger, be very careful. Don't enter at the peak of a cycle. The result of all of this can be a pretty wild IPO ride from a small amount in the late 90s, all the way on up to a gigantic boom almost 10 times greater, and then crashing back down again. That's the kind of normal life you leave If you're in the venture community, volatility still is the word that I think describes best what goes on.

And you can be clear about a business sector within that. But overall, it can be up and down unpredictably. Earning money under those circumstances is quite a challenge. This is not easy work to be a venture capital investor. The red line is at a 20% return on investment interest rate per annum equivalent. And you'll notice the number of years people have been actively investing.

Some years they've done very well and other years, especially recent years, they haven't done very well along the way since that boom bust about 15 years ago of the internet. It's been a climb. recently that meaning in the 2016 17 era, things have brightened up considerably. Let's look at specifically an example of what I mean about being careful about trends. Fourth quarter 2016 KPMG. Enterprise publishes venture pulse.

That's the primary story. After getting a slow start in dollars, but rising numbers of startups, you'll find that the rise to a large wave in 14 and 15 occurred and then the decline both in numbers of startups and in dollars in 2016, was the pattern. The reason that $2,016 did not drop with the same slope as the number of startups is that those big unicorns still around are gobbling up a large amount of cash. While the number of deals is actually dropping for the smaller startups. The result is layoffs increased. If you're an employer, meaning a startup, that can be good news, because it may make recruiting much easier where you live.

It also presents opportunities. If you're positive in a negative world, you're the glass half Fold a real opportunity. Remember that the waves go through cycles. And wherever you are in the cycle in the industry you're in, is very important to think about. A new technology will trigger excitement, and rise to some peak of inflated expectations. Think about 3d television.

Then reality settles in, and we sink down to what's called a trough of disillusionment, this can't be real. And then finally, somebody figures out how to make something out of the technology first to get it right in the business and then comes to what we call a plateau of productivity. Think about it, the Gartner group has done a very good job of helping us face reality. The bottom line is that through all of that volatility, stick to the basics from boom to bust and through all the cycles and fads. The risk expectations and the research shows the ventures capital expected return on investment remain consistent. The ownership and personal wealth that come out of this is also pretty consistent over time.

So learn how to assemble an unfair advantage and tell your story to get this kind of money, regardless of what cycle phase you're in. The risk is enormous here. And the bottom you'll see the percent or portion funded that go IPO that got venture money from some of the finest venture sources in the world less than one out of 10 is able to get to initial public offering A typical firm that receives 1000 business plans a year that's about three partners worth will finance six of those in a year. pretty small, isn't it? I've also kept track of people that had an original idea and wanted to get it to a business plan to present to venture investors, less than one and 100 did that. If you put those odds together, you get the following idea to plan one and 100. plan to financing six and 1000. financing to IPO one in 10. your odds of going public with an idea are six in 1 million.

Those are lottery odds. Would you like to be a NBA basketball star? Well, if you're thinking about that, as a high school student, your chances are 35 times greater than getting your idea to go IPO. This is high risk, long term investing. This is evidence how risky it is a real portfolio from one of the top world class venture capital firms had 60% of the deals go bankrupt. That happens to be normal.

They got their money back or a little bit of a return from about 12% of them 10 15% overall, this is the rule of thumb here, but boy that gain and getting your money back does not compensate for losing all that money at the bankruptcy level. Zombies are too small to go public don't need any more cash. They're cashflow positive, and nobody wants to buy them. That's why they're nicknamed the living dead. They're very difficult to deal with. The solids and winners, however, constitute that 10% that made it public and they are able to Return enough such that the dollars that come in more than contribute to the losses with a leftover that's so large that you get 1.6 times your money out of this in over the time period invested comes to about a 19% 20% return on investment per annum.

However, if one of those things becomes a wild one, that is, if one of the unicorns comes in here and reduces the bankruptcy level, you will end up five times wealthier than before investing in that portfolio. That 20% per annum ROI goes to 100% the multiple of 1.6 or two jumps five times to 10. That is an enormous financial wealth generation machine. You can see why venture investors are so passionate lust after trying to find unicorns? Do you want to be a venture capitalist? Well, beware.

It's not easy work. People who are veterans far experienced from you are facing 60% bankruptcy every day. That's not easy to handle psychologically. I admire those who have consistently generated far beyond that 20% per annum return, because even the finest struggled to do it. Want an example? Andreessen Horowitz, one of the greats.

Fund number one did very well 2.6 times their money in the top 5% of the industry far above the core tile. Second fund 2.3 times instead of 5.8, which the top 5% did whoa fallen behind. And then number three down to 1.7 compared with 2.3 For the top 5%, barely able to get a little bit about the top quarter doesn't mean they're bad just means that the long term investing is really tough as a venture capitalist. Also, you should keep aware that if you're going to get venture capital, your percentage ownership of the company is going to dilute very quickly. Although there are some significant historical exceptions, most believe that startups with venture money after the seed round will have to sell 50 to 30% of their company to get it. Then after the next run, called a round, there'll be down somewhere around the 20% level.

Then you have to give out shares for the employees and further dilute yourself with other rounds of financing. That resulting small 12% ownership doesn't sound big. But if that's 12% of Facebook when it goes IPO, that can be worth a personal fortune. The result is in In the venture capital world, they're trying to create this gigantic pie, and a small percentage slice of that makes you worth hundreds of millions of dollars. Now that's pretty lucrative. Most people think that's much more attractive than owning 80 90% of us business that's much smaller.

This is a big pond and a small fish game. It's not a big fish in a small pond game. So what's the name of the game for the venture capitalists, I want to find a big one with the unfair advantage. They're pretty passionate about that and working very hard to find it. The one with a grandma's secret sauce would get them so excited. They will sign blank checks to finance them along the way.

Perhaps yours can be one of those. Okay, few other sources here and then we've got it wrapped up with venture capital companies, corporations. Have venture arms in them. Qualcomm and Intel are pretty famous, very successful doing it consistently. Google's a little newer, but even the government been around quite a while doing this the CIA as an example, and there are others. In the mid 2000s 15 1617.

The companies and food have started a venture capital arm, like pharmaceutical companies have recognized startups are growing so fast and new sectors. The Giants can't keep up and would rather be able to invest in these diversify a bit and then perhaps buy them up later, rather than waiting till it's too late. crowdsourcing is a new way of getting some seed money, had got going to support a project I'll do this pretty artwork and give you a copy and then got into the gaming business online games with Which can be lucrative. You can't sell stock here you can only get cash, and usually is pretty small. Some people have tried to raise millions here for some of the games however, it is a few years old by financial history, less than a decade or so. And most of the projects are late and it can be abusive and fraudulent.

Few people have walked away with 30 thousands of dollars of money and have never been heard from again. crowdfunding is different this does raise millions and can involve stock ownership. It got going buying apartments as a syndicate in New York City and then began to grow. The rules and regulations now allow it to do it for technologies, other kinds of businesses. The angel syndicates mentioned earlier are simple examples. crowdfunding, multiple numbers of people in private equity coming together can be one of the sources that might fit your needs.

All of This is related to the JOBS Act of 2012. The regulations do open the door a bit and you're allowed to solicit various people credited investors being some and non credited others. In other words, ask your attorney before you understand and he made a mistake here. They'll keep you out of trouble in what you're trying to do. Some sources also that you run into as young people, particularly when you're at a school, university, college is this contest. And the school this happens to be Cornell I can put up contests though, and stimulate the growth and understanding entrepreneurship and we'll give out 1020 $30,000 kinds of financings.

But frankly, that will barely buy an engineer for a couple of weeks and you're going to tell your whole story to the public. And that may not be the greatest idea if you have the next Airbnb or the next doober is the door open to non Americans here, meaning in my country and not America? Well, the answer is sure. You can leapfrog over the ideas, Americans have the same cheapest, this experience that's gained secondhand. And the Japanese have a saying it's easy to stand in a gun, it's end. Once you learn the first time, global venture investing is spreading.

It's coming around the world. And there are a couple of laws that I mentioned before that in other lessons that I'll bring to your attention here. The global spreading is evidence in three simple examples here by different regions. It's hard to go in the world and not find someone doing the Silicon Valley style startups locally at least funded by angels. The law of nothing says that the startups that were successful were not there at the beginning. That is the ones that dominate at the top of a ride sharing world or a social networking world or companies that did not exist at the beginning.

That says you can succeed and do very well based on just playing historical facts. Another one is that each generation that is paradigm shift creates a flat plane surface and gives the advantage to you and disadvantage to existing players along the way. As you descend, from mainframes to mini computers, workstations, personal computers, smartphones out of personal digital assistants, and then clamshell phones, you get to apps. Every one of those is a paradigm shift that spawned larger and larger number of startups such as perhaps you've seen before, each one is a fresh start for you, spot the paradigm shift. Take advantage of it. That shift is very, very important to Excellent.

Well, that covers more sources of capital. Okay, well, no, yes, cut more sources and just venture capital. As a result, that's where we're going to head right Now and then look at that process for raising the money. That's where we're going to go. That's step four, the five snippets. So hey, let's get going, shall we?

That's where I'm going. I look forward to seeing you there. Bye for now.

Sign Up

Share

Share with friends, get 20% off
Invite your friends to LearnDesk learning marketplace. For each purchase they make, you get 20% off (upto $10) on your next purchase.