Given that fund raising is of particular interest to entrepreneurs, I have split out Money 2.0 from Bootcamp (kinda like a VC product extension…).
One of my readers in Germany asked:
"I have been enjoying reading your blog along with the blogs of a few other VCs and one question keeps nagging me. It appears as if the VC community looks primarily for investment opportunities in businesses where there is little to no competition and/or the core idea is quite revolutionary…[what about those that] focus on measured improvements."
The key driving force behind the early stage venture model is the need to hit a 10x return on capital if the idea works. Because about 60% of venture deals either break even or lose money, the winners have a significant burden to overcome. Around 30% of deals come in around 3-5x and it is the 10% (one out of ten) that drive the return and needs to be 10x.
As a result, early stage VC’s need to find opportunities which can swing for the fence. A company with a "measured improvement" unfortunately can not break out of the pack fast enough to garner market leadership and an exponential return. For new technologies to be adopted and to leap-frog incumbents, they need to be exponentially better (cost, efficiency, performance, etc). It is the only insurance policy. For service plays, the features and experience must be significantly better.
There is also an intangible factor that makes one deal backable and another not. I can’t quite explain it, but it usually revolves around the management teams aura and ability to communicate the vision. In the end, most venture plays rely on hope and aspiration to get launched. Just as there are some presenters who can wow crowds…Guy Kawasaki for example, there are some teams that are masters at sprinkling the pixie dust. I’ll save, for another day, what constitutes elements of a good pitch (big market, great team, super economics…simple right?).
As the firms get bigger, execution becomes more and more critical. Toyota, Apple, etc are examples of companies that, while not revolutionary per say, are masters at delivering great customer experiences. However, early on, it is hard to convey superior execution when all you have is a business plan. This is where "revolutionary" helps. This is why venture only makes sense for a small portion of new businesses.
Will you please mention the types of organizations that do fund measured improvements and then list some examples?
Will you please mention the types of organizations that do fund measured improvements and then list some examples?
This is usually where angels (some strategics) come in. Their thresholds are often closer to 3-5x. Finding a successful entrepreneur who made a boatload in your general segment is often a great way to raise. They not only understand the space/risks but have contacts and can help. Only the later stage VC’s will jump into measured improvement plays.
This is usually where angels (some strategics) come in. Their thresholds are often closer to 3-5x. Finding a successful entrepreneur who made a boatload in your general segment is often a great way to raise. They not only understand the space/risks but have contacts and can help. Only the later stage VC’s will jump into measured improvement plays.