How much do you know about startups? 8a terms you need to know.
September 8, 2020
By Carlos Ochoa
A startup or start-up is a company or project begun by an entrepreneur to seek, develop, and validate a scalable economic model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder. Startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential. To become an expert in startups, start here.
1. What is a Startup?
A startup with Silicon Valley features is a newborn company that has just launched and has a product that is generally related to technology that makes one or more verticals more efficient. When they arrive to Silicon Valley, they already have at least one MVP and have already raised some capital to start their business. The team is usually made up of 3 to 5 people and they are looking to serve a large market.
2. What are the stages of growth of a Startup?
One of the advantages of Silicon Valley is that the stages in which you can invest are already structured and startups must enter one of these stages.
Angel investment – The company is newly formed, its founders are looking for capital to start their operations, they probably already have an initial software or development and an idea of what they want to build, generally this round is known as Friends, Family, and Fools, people who already know the team invest with them to formally start their operations. They usually get up to $250K usd and tickets can be as small as $5K usd. If your company is at this stage, don't look for professional investors, you are still a long way to go. I invested in Suggestic at this stage and today it is already in Series A. The valuation in this stage if they're from Silicon Valley "born and raised" is $5M and it's much less when they're from outside the area, because you are really a betting on the ability of the founders to build something from scratch.
Seed Stage – These founders already have a 3-5 people team an MVP they have introduced to some customers, or already have some users. They are generally looking for up to $1M usd with tickets ranging from $50K. The model they usually employ is convertible notes, you lend them money that is converted into equity in the next round of capitalization or when they reach certain capital goals. They still do not generate sales. Their valuation is around $7M. We first invested in Bridgefy at this stage. This is the classic stage to enter an incubator and double the value of your startup.
Post Seed - If you already have a product in operation and your team is made up of 8-15 people you should opt for this type of investment. You must already have some sales even if they are small and customers or users who see value in you offer. Usually, the value of these startups is around $10M usd. Tickets at this stage are usually between $50K and $500K. The amount they usually look for is between 1 and 2 million per round of capitalization. When we invested in Arcus they were at this stage, doing an extension of their seed round. Today they have grown to B.
Series A - Here it gets interesting, these companies are looking for between $5M usd and $10M usd, they already have a product, a market, and what they are looking for is to grow, or explode commercially. They already have a proven model and are looking to attack the market aggressively. Their valuation is based on 5-year sales projections and discounts, we have seen inflation bring them up to $50M in valuation but generally, they will be at $30M. At this stage there are already company shares that you get for the capital invested, it is usually the first round in which shares are sold and investments range from $250K to $5M. Lenox Park an example of a company in this round.
Series B - At this stage companies are already generating profits or are close to break even. The reason why they are looking for capital is to expand their operation in other markets or to buy from competitors, increase their sales capability, or "onboard" customers. This investment is the last of what they call early-stage since startups have solid operations but need to consolidate their position in the market. Investors already see a potential exit through acquisition for startups of this level. They generally look for $12M and valuations are based on their projected sales minus discounts and yes, there is everything here, from $60M to $150M of valuation. Mpower Financing and Airtm are examples of companies at this stage.
3. What is an exit?
It is when you manage to sell your company or place it in the public market, the exit is held by an individual or a fund, a stockholder who sells his shares. To be a good exit is that the cost of the shares against the sale is several times lower and in the case of entrepreneurs is that they managed to sell their company and now have capital. When I say that Carlos Ochoa had a way out, I mean that we sold Sm4rt to KIO Networks.
4. What is Bootstrap?
When a startup tells you that they are bootstrapping it means that they have not raised capital, that the company was started by the founders with their savings, and that they expect the first sales to be the first cash inflow. It may be that between capitalization rounds, companies have bootstrapped for a period.
5. Monetize: Many times the startup manages to get users or customers who don't pay, think about Facebook or Twitter, Facebook had about one billion users when they started their monetization strategies, they focused on creating a product that people will use before they found out how to charge those users or the third party for those users. Twitter on the other hand with 320 million started to generate some sales and to this day still struggles with how to generate sales. How does WhatsApp monetize?
6. Why is the story of a Startup Founder so important?
When companies are just starting, it is virtually impossible to predict whether they will grow or disappear, some things you can look at is market size, look at whether their technology is well done, or if they are they are well organized. The reality is that in the early stages as an angel or a seed what you are betting on is the entrepreneur, the team, their talent, passion, and ability to adapt.
We use the term "true grit", which means that can see the problems as challenges and be passionate about solving the challenges, another way of seeing it is that the problem they want to solve is part of their problems, "personal pain", this means that they understand the problem because they have lived it and solving it is not for a business, it is for a personal need. The founding myths of the startups are the personal history of the founders and if one day you want to invest in a company in training, you have to know very well what is the source of motivation of its founders, which should be infinite.
7. What is a unicorn company?
A unicorn is a mythical entity that was originally seen only a few times per decade. It is the name given to companies that grew up with venture capital to be worth a billion dollars. Today there are more than 400 unicorns in the world, with one decacorn, including a hectocorn valued at over $100 billion.
The first 5. Bytedance ($140Bn), Didi ($56Bn), SpaceX ($46Bn), Stripe ($35Bn) and Palantir ($20Bn). Bn = One billion
8. How many startups come to Silicon Valley each year?
There is a 2018 statistic from CBinsights that speaks of 6,000 companies a year. Without having exact data of the total volume, we receive around 2,000 communications per year from companies that are looking for capital, many from the United States, many from Europe, mainly from Eastern Europe, several from Asia, and some from Latin America. Every fund I know here has a similar number of capital requirements and there are over 600 funds in the area. Do the math!
How much did you get?
1 - 5 Perfect tourist in Silicon Valley or 6 - 8 Now you can impress your friends.
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Un abrazo
Carlos