How VC works & Alternatives to VC

The mechanics of VC & Alternatives to VC

Transcript

1. Alternative Funding Sources to Venture Capital Cheryl Campos Director June 2020
2. Venture Capital
3. • Director. Previously principal on the investment team at Republic. Focused on reaching out to quality founders + amazing partners • Previous work experience: investment banking / private debt & equity • Harvard – Economics, studied abroad in Paris and Rio de Janeiro • Hates running but does it, cannot cook but trying, is approachable About Me Linkedin.com/in/cherylcampos @cycampos15
4. • VC firms provides capital to startups that exhibit high growth potential in exchange for an equity stake - $257 billion deployed last year yet considered a small niche asset class • Limited Partners, or “LPs,” are pension funds, financial firms, insurance companies, and university endowments - Expect a return of between 25% and 35% per year over the lifetime of the investment • LPs give their money to General Partners “GPs” that manage a VC - VC Funds need a 3x+ return to be considered a good investment - 95% of VC funds juggle between breaking even or losing money Let’s talk VC *Source: NVCA https://nvca.org/nvca-2020-yearbook-10-trends-to-watch-for-the-start-of-a-new-decade
5. Don’t hate the player… *Source: Harvard Business Review, 1998 https://hbr.org/1998/11/how-venture-capital-works LPs GPs YOU Customers (they forgot people here) Buyers Sellers
6. *Source: Ulu Ventures “Picking Winners is a Myth but PowerLaw is not: https://medium.com/ulu-ventures/successful-vcs-need-at-least-one-outlier-to-have-a-well-performing-fund And ”How to Win at VC” https://blog.usejournal.com/power-laws-in-venture-capital-why-the-long-tail-matters-22e057c6fa34 Two major factors that decide the return of the fund: • Law of Large Numbers: “The greater the number of investments, the greater chance of a positive return” • “Power law” or the 80/20 Rule: - Lion’s share of returns earned from a small number of investments - Among top performing VCs, 4.5% invested capital generates 60% of their funds’ returns …hate the game First, only invest in companies that have the potential to return the value of the entire fund… This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules -Peter Thiel, Zero to One
7. *Source: Ulu Ventures “Picking Winners is a Myth but PowerLaw is not: https://medium.com/ulu-ventures/successful-vcs-need-at-least-one-outlier-to-have-a-well-performing-fund And ”How to Win at VC” https://blog.usejournal.com/power-laws-in-venture-capital-why-the-long-tail-matters-22e057c6fa34 • VCs are looking for the following: - Scalable businesses - Large Total Addressable Market (“TAM”) - Revenues in the $100m+ & can reach a billion dollar valuation - Looking at a 5-7 year horizon - Will either be sold or get acquired • VCs asking themselves with every company: - Why this? - Why you? - Why now? Calculated Risk Current market: Looking for more sustainable growth Many VCs are focusing on their portfolio companies Valuations are 10-20% down for seed stage
8. *Source: OneThousand Angels & Republic Angel Investing Masterclass General Valuation Guidelines Round Pre-seed Seed Series A Series B Series C Round Size $250k-$1m $1-3m $3-$10m $10-$25m $25m+ Valuation $3-5m $4-12m $10-$30m $25-$100m $75m+ Most Common Capital Source Friends & Family, Accelerators, Angels, Republic Angels, Micro- VCs, Seed VCs, Scout Funds, Republic VCs, Republic VCs Growth VCs, Private Equity Firms Revenue Pre-Revenue $20-100k MRR $100k+ MRR $3m+ ARR $10m+ ARR
9. Alternatives to VC
10. Venture Debt Mostly if you’re generating revenue Lines of Credit Term Debt Equipment Financing Royalties
11. “Bootstrapped VC” Crowdinvesting (or Equity Crowdfunding) Friends / Family / Angels Grants / Competitions Fellowships Rewards Crowdfunding Microloan Crowdfunding
12. How Does Crowdinvesting Work? “Equity crowdfunding” under Title III of the JOBS Act lets individuals invest as little as $10 in private companies and accredited investors invest up to $100,000*. Private companies can now raise up to $1.07 Million* from anyone: family, friends, customers and supporters. Investors Startups *Recent inflation adjustments have raised the cap on fundraising to $1.07 Million and the cap on investments to $107,000.
13. Intersection of Financing and Marketing Financing Marketing Venture Capital Angel Investors Digital Marketing (Email, SEO, Social Media, Influencers) Rewards Campaigns Friends/Family Retail Investors PR / Branding
14. Startups can still raise venture… • Republic is complementary to other fundraising mechanisms – for example, most of our companies raise concurrently from VCs. • Running a crowdinvesting campaign does not limit other types of security offerings. • We've created a proprietary SAFE, a legal product that ensures a clean cap table with a single entry for all investors from your Republic campaign. Extendable Fixed conversion Limited rights Conversion to equity can be delayed. Conversion price is fixed with cap and discount. Crowd SAFE holders have no information or voting rights.
15. Portfolio Selection Overview • Over 150 companies (acceptance rate 1%) raised $45 million in capital –average raise in 2019 has been $500k • Backed by VCs / Accelerators: 500 Startups (10), Techstars (8), Y Combinator (7), MassChallenge (5), Village Capital (4) • Alums have successfully raised follow-on funding and customers directly attributable from their campaigns (ex: Sapient, Ample Foods) • 40% women,~20% Black & Latinx, from 28 states and counting
16. • Apply / Selection Criteria - “The 4 T’s”: Team, Traction, Tech/Product, Theme • Preparation: Form C, work w/ marketing and deal team to build pitch page, finalize video • Execution: Republic assists with marketing, fielding investor questions and keeping momentum • Success-based Fees: 6% cash and 2% securities commission from total amount raised during the campaign Raising on an equity crowdfunding platform
17. Next Steps
18. • Prioritize your goals: what kind of capital do you need (growth capital, bridge financing), do you want to market your product, or build a community? • Figure out if “The 4 T’s” apply to your startup – if you’re not sure I’m here! • Mapping out your financing plan: Game Plan • Before – to gain momentum + hit metrics / create hype • During – to remain flexible in fundraising goals • After – to top off the round and use Republic to usher the new phase of your company through marketing
19. Thank you and Q&A Website: republic.co Email: cheryl@republic.co Twitter: @joinrepublic @cycampos15 Newsletter: bit.ly/republicrepost