Thanks to 500 TukTuks and Disrupt Technology Ventures, I had the chance to attend Deal Camp co-organized by 500 Startups and UC Berkeley, a 4 day intensive course diving into all the nitty gritty details of Venture Finance with leading UC Berkeley Professors like Adam Sterling, 500 Startups (Christine Tsai, Amit Bahtti and more) and other prominent investors in Silicon Valley (Scott Kupor of A16z, etc). It was a great pleasure to hear from experienced players in the valley and I’d like to take this chance to humbly share some takeaways that could be useful to some of you from my week in San Francisco.
- My first takeaway is a simple one: “The modern VC game is still nascent”. This is especially true in emerging ecosystems. A lot of new players struggle to grasp the key concepts of Venture Finance especially those from traditional backgrounds as they are used to rigorous set standards and guidelines. Whereas in the VC game, many rules of the game are not set-in-stone, a lot of things are still up in the air and the market has not yet come to a consensus on the best practice on many topics and issues. Even in Silicon Valley, the market is still experimenting and searching for best practices on a number of different issues. A clear evidence of this is the various iterations of template agreements such as SAFEs and KISS (Template Investment Agreeements). So rather than trying to find a golden rule, it is better to use logic and common sense to come up with the best decision for your particular situation.
- Stay on top of your cap table: Plan ahead for your cap table. Be aware of the little things that could affect your cap table. Ultimately it is the equity % alongside the exit valuation that will determine how much you will make when there is an exit. Not paying enough attention to your cap table could prove very costly. As an illustration, stock option plans can affect the cap table in more ways than you think. Even though convertible notes do not immediately effect the cap table , it can have a huge impact down the road. Negligence of proper cap table management can result in disastrous results.
- Negotiate like a businessman: When negotiating investment terms it is important to keep in mind that the startup game is a marathon not a sprint. Those who negotiate with a short term view, trying to get the best possible terms for a particular round, will often miss the bigger picture and eventually pay the price. For example, as a seed investor, you might feel good successfully negotiating for 2x participating liquidation preference. But then what happens in the next round? The follow-on investor will likely ask for the same terms with senior preference to the seed investor and in the end, both the founders and the seed investor loses out. So negotiate like a businessman with a long term view. The objective should be to “come together with the terms that will ultimately lead to the biggest pie” rather than trying to get the best terms for that particular round.
- “If you want money, ask for advice” Money is not a constraint anymore (especially in developed markets), money is no longer scarce as it was 30–40 years ago when VCs first started off but good quality advice is. For founders, find out why $1 from a VC is worth more than the other VC’s. See what value they can bring to your startup whether it be expertise in marketing and distribution or expertise on the technical side of things etc.
- Not all startups are a good candidate for VC finance. Equity is an expensive source of finance. VC money is an expensive source of fund. VCs have strong expectations for companies they’ve invested in to grow fast and exit in the future. It is crucially important to understand the path you are heading down when choosing to take VC money.
- Spend time efficiently: Each VC fund have their own specific thesis, it is not difficult to do your homework and find out what their usual check-size is, what stage of startups they invest in, what geography they invest in and in which particular verticals. This does not take long at all to find out, so put in the time so that you meet investors whose thesis align with your startup’s characteristics. There is no point talking to an early stage VC Fund who usually invests $100k-$200k when you are raising 2m for your series A. Save both your time and the investor’s time.
- Strength> Flaws: For early-stage startups, almost no company succeeds without being great at one particular thing. VCs would prefer to invest in a startup that have some flaws but has 1 particular area that they are GREAT at rather than investing in a startup who is decent at everything. Good teams fail, startups need to be GREAT at at least 1 key thing in order to succeed. Greatness in a key area is more important than being good everywhere. Customers do not switch if you’re not 10x Better/Cheaper. So focus on an important area to be great in, one in which will help you win. By doing this , you are slowly creating your key “unfair advantage”. One in which others cannot easily replicate.
- “Team is most important, everything else is secondary” We hear this a lot but we cannot emphasize this enough. Ideas are cheap, execution is everything. When talking to investors, find a way to show why your team is best suited to tackling the particular problem you are trying to solve. The market, the business model and much more will change but the team, in most cases, will remain intact. VCs (especially early-stage VCs) bet on the rider rather than the horse.
- Traditional Corporates do not know how to value innovation. We know about the reluctance to take risks in corporate but why does innovation nowadays originate more often from startups than corporates who have all the resources that startups lack? One answer is that corporates do not know how to value innovation. Traditional corporate finance usually evaluate projects and its feasibility with the NPV method. If it is positive, it gets the green light, if not, it goes to the trash. For obvious reasons this works well for projects with predictable cashflow but does not work for modern innovative projects. “A startup is a temporary organization designed to search for a repeatable and scalable business model” How can you evaluate startups using traditional methods when things are changing all the time at a fast pace ? Imagine if VCs evaluate startups the same way traditional corporates evaluate internal projects, would any startup get funded ?
- Future for Thai Market: As with many regulatory issues, Thailand, as an emerging market, tends to follow more mature markets such as the US. I look forward to seeing local startups be able to raise funds via convertible notes and give their employees stock options in the future (hopefully sooner rather than later). There is a valid reason why more than half of early-stage startup investments in markets such as Silicon Valley is done through convertible notes. This is because it is much simpler and faster to execute than equity rounds but most importantly, it defers the negotiation of valuation to the next round (because how can you value a company with little to no revenue?). As for stock options, once we start to see some exits in the market, it should become more valuable in the eyes of the employees and can (hopefully) act as a mechanism for startups to incentivize and attract talent. This will be crucial in helping startups compete with corporates who have more $ to attract talent.
- Valuations: A hotly debated topic and a topic that needs a dedicated post on its own. In my next post, I’ll be diving in depth into startup valuations (valuation as a function of capital requirements, factors influencing valuation and methods to value startups) from my own humble perspective, so stay tuned !
As always, please please please do share any comments, thoughts, feedbacks and discussions. I would greatly appreciated it.
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