STARTUPS FAQ’s

1.   What is a Startup?

A startup with Silicon Valley features is a training 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 Fintech companies?

FinTech is a young industry in which companies use technology to provide financial services efficiently, quickly, comfortably, and reliably. The word is formed from the contraction of the English terms finance and technology. FINANCE + TECHNOLOGY = FINTECH.

FinTech companies offer various types of financial services and operate within different markets. Some provide their services directly to the users of the financial system and others design solutions for other companies.

Types of Fintech:

3.   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 there is really a bet on the ability of these 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.

 4.   What is scaling up a Startup?

At this stage, the company is already billing and increasing its number of customers. This is the time to start diversifying regionally or targeting other markets or customer segments.

The most important thing at this point is the change in the team's mentality. In the first stages, the team should be entrepreneurial by nature. That is people who can play multiple roles and who are comfortable with a high level of uncertainty and long workdays.

In the scaling stage is when they should start hiring more specialists. For example: a CTO (technology manager) who improves the product architecture so that it can scale quickly and flexibly. Or an experienced and proven sales manager who can assemble and manage a team. Or a marketing manager who is focused on systematically generating customer leads.

5.   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.

6.   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.

7.   Revenue: Sales or revenue. How much the company sells in a given period of time. The terms used are ARR (annual recurring revenue) or MRR (monthly recurring revenue). Your goal is to generate ARR, which is what will allow you to improve valuation and attract new investors.

8.   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?

9.   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.

In Alpha Impact 8 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.

10. UX: is an acronym for user experience, formally it focuses on the interaction between real users and products and services or even machines such as computers or cars. In the world of apps and startups, it also has the name of user interface, the part of the application, page, or system that interacts with the user. If a developer says "UX needs to be fixed" it usually refers to the way it interacts with humans. 

11. Runway: It is the amount of time the company has before running out of capital and is usually expressed in months. The Runway is calculated by dividing the amount of money the startup has by how much it spends monthly. The runway that companies expect to have when they raise a capital round is usually 12 or 18 months.

12. Platform: It's an incredible word that has a couple of meanings that can be applied.

a.   It is the top of different layers of abstraction that allows you to go at high speed, a simple example is a road, if there was no high-speed paved road would not be useful to have a Tesla, you would have to go slowly on a dirt road. The same concept applies to software, programming languages are in themselves a platform and there are languages with higher levels of abstraction (platforms) that allow you to generate apps, pages, and programs quickly.

 b.   It is a program that has specific functions to which you can connect other programs and apps, Facebook in addition to being a program is a platform that allows other apps to make the validation of your credentials to enter another site. There are many platforms in this sense for specific functions, validation, payments (Stripe), communications (Twilio), etc.

13. IPO: When a company decides to go public, what is called an Initial Public Offering occurs. These are generally young companies with great potential and in a period of expansion and explosion. This step takes place when the general public has the opportunity to invest in the company for the first time, by buying shares that are listed in a stock exchange. This is generally a very good exit for shareholders since the market is what determines the price of the shares and they are generally higher than the last rounds of capitalization through private capital.

14. Disruption: A disruption is the interruption or rupture with the traditional way of doing something. In the last decades, the term disruption has been used in the technological and business sector to refer to the introduction of new processes, methods, or products that change the way something was traditionally done, adding value to the sector they are aimed at.

Disruption also implies that what was before becomes obsolete, since it is not adapted to the new business circumstances or consumption.

The term disruption only applies when that which is introduced into the market generates a significant change in the value proposition of what was established. 

This situation contributes to accelerate changes in business models, in the interaction with new devices or platforms, and can cause the disappearance or displacement of processes or products that were traditionally leading the sector.

15. Lean Startup: Lean Startup is a methodology for developing business and products. The methodology aims to shorten product development cycles by adopting a combination of hypothesis-driven experimentation to measure progress, iterative product launches to gain valuable customer feedback, and validated learning to measure how much has been learned. This methodology was developed by Eric Ries with influence from the Lean Manufacturing methodology created by Kiichiro Toyoda and Steve Blank's customer development methodology.

The central assumption of the lean startup methodology is that if startup companies invest their time in iterative building products or services to meet the needs of early customers, they can reduce market risks and avoid the need for large amounts of initial funding or large expenditures to launch a product.

16. Growth Hacking: It is a discipline that seeks, with the minimum expense and effort possible, to quickly and noticeably increase the volume of users, or income, or impacts, of our company. The techniques of accelerated growth (in English, Growth Hacking) include a set of techniques used in marketing to acquire the greatest number of users or customers with the lowest cost and in the shortest possible time.

17. Growing Over their Margin: This should be the only reason to raise capital. When a company grows above its margin it means that it is generating more sales than it can deliver. That's where outside capital allows them to get those sales and keep growing.

18. Funding: Funding is when a person, business, project, or any institution gets the necessary funding. There are different types of funding, debt, equity, convertible debt, and venture debt. Early-stage companies should start convertible debt.

19. Minimum viable product: In product development, the Minimum Viable Product (MVP) is a product with sufficient features to satisfy initial customers, and provide feedback for future development.

20. 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

21. 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!

22. What is an early employee and why is it important?

Early employees generally describe the first employees in a startup, the Silicon Valley model which in my opinion should be the widespread model in the world gives the employees a share of the company depending on how much risk they are taking in working for a company that every 12 or 18 months can potentially disappear. In Google's IPO about 900 employees became millionaires. The way in which this participation is delivered is through options, from an employee stock exchange.

Venture Capital FAQ’s

1. What is a Venture Capital fund in Silicon Valley?

Venture Capital (VC) or "risk capital" is a form of financial operation where capital is allocated to startups and companies with great growth potential and high levels of risk, to obtain a percentage of the company in exchange.

In a venture capital fund, the investment partners, or LPs, of the fund, contribute money to the fund so that a managing partner, or GP, identifies companies in the seed or entrepreneurial capital stage, invests, and contributes to the development of the company.

The most famous funds are Andressen Horowitz, Accel, Benchmark, Index, and Sequoia.

2. Convertible Note: This is a form of short-term debt that is converted into equity, usually in conjunction with a round of future investment. The equity fund invests in a startup and instead of a return in the form of equity plus interest, the investor receives shares of the company after a certain time or when they manage to raise a certain amount of capital. The main advantage of issuing convertible notes is that it does not force the issuer or investors to determine the value of the company when there is really not much to base a valuation on. The notes have a maturity date, interest rate, rules by which an investment is converted into shares, a discount, and generally a "cap", which is the maximum value of the company at which an investment is converted into capital.

3. SAFE: (Simple Agreement for Future Equity). An agreement between an investor and a company that grants the investor rights to future shares in the company similar to a convertible note, except without determining a specific price per share at the time of the initial investment.

The SAFE investor receives the futures shares when a round occurs in which a formal valuation of the company or a liquidation event is made. SAFEs are intended to provide a simpler mechanism than convertible notes for new companies to seek initial funding. The SAFEs we have signed are 3 to 5 sheets and the notes are generally 5 to 10 sheets.

4. What is the valuation CAP?  It is when a company's value limit is applied in the event of runaway growth in a period between investment rounds. It limits the maximum valuation for the conversion of the convertible note or a SAFE. Then, investors can benefit from the advantage of their investment as they would with direct capital investment.

If the company has a valuation that exceeds the limit, investors with convertibles or SAFEs will receive the number of shares that correspond to the CAP. This means that they receive a discount on the price of the shares, which both depend on the value of the current company against the cap.

5. PRO RATA: This is a Latin term used to describe a proportional allocation. It basically translates as "in proportion", meaning a process in which everything you allocate will be distributed in proportion to the number of shares or money you invested.

In Venture Capital funds it means the proportional part of the Startup that corresponds to the fund according to the number of shares it has. The term also applies to the investors of an investment fund with respect to their shares with the fund. It also determines what percentage of the capital rounds you are entitled to contribute.

6. (LPs) Limited Partners: The money that Venture Capital funds invest comes from pension funds, universities, foundations, finance companies, family offices, and people with money in general. These investors are called limited partners (LPs). The word "limited" affirms their passive role in the operating activities of a fund. If you invest in a fund, you become an LP, the legal figure in the United States is exactly that, an LP (Limited Partnership).

7. (GPs) General Partners: As Venture Capital fund managers the general partners of the venture capital funds perform functions that depend on the guidelines of each fund. They look for investment opportunities, manage the fund's investments, conduct investor relations, and ultimately generate value for the investments. To these GPs, the LPs pay an administration fee for the investments.

8. Distribution: These are the returns that an investor in a private equity fund receives. It is the income and capital obtained from investments minus expenses. Once the cost of the investment has been returned to an LP, the additional distributions are actual earnings. In the case of Venture Capital, these distributions occur when one of the portfolio companies is sold.

9. Calls for Capital: When an investor decides to participate in a Venture Capital fund he makes a commitment to invest. The fund requests the transfer of the committed money through "capital calls; the amounts, issues, and conditions of the capital call are agreed upon from the investment commitment. In other words, when you invest in Venture Capital, you do not send all the money, you make a commitment of how much you are going to invest and the GP makes capital calls when required, the investment period is generally 2 to 3 years and the term of the fund is 8 to 10 years.

10. Multiple (X): Multiples reveal how many times the investor has gotten his money back or is likely to make a profit on his investments. It is the sum of the residual value of the portfolio plus the capital distributed.

Formula:    Multiple (Distribution (%) + Residual Value (%))

100

11. Liquidity Events: It is an event that allows the founders and the first investors of a Startup to receive part or all of their shares. When your company receives money from Venture Capital, the commitment you are making is to generate a liquidity event, that is, to sell your company once certain objectives are achieved. The capital is not for you to achieve a stable operation, it is to grow so much that your company is an attractive asset for other investors, companies, or the public market.

12. Convert: Refers to the conversion of an investor's preferred stock into common stock with a pre-established conversion ratio, or the conversion of convertible notes into preferred stock with a conversion ratio based on the issue price of a future round of financing.

13. Write-Offs: This is the term used in Silicon Valley when a Venture Capital fund loses part of its investment because one of the startups in the portfolio stops trading and closes down permanently. In accounting terms, it can be defined as the recognition of the reduced or zero value of an asset.

14. Bridge Financing: Bridge financing is an unofficial investment round of a Startup. It is intended to "bridge" the gap between a Startup's current situation and its next round of investment. It is usually a short term loan that will eventually be replaced by permanent capital in the next round of investment.

 15. Dilution The reduction in the percentage of ownership by current investors, founders, and employees caused by the issuance of new shares to new investors.

16. Capital: It is the money obtained from investors in a Venture Capital Fund to make investments. Capital can be expressed as liquid money ready to be invested or as the shares held in each of the Startups in the investment fund's portfolio.   

17. Convertible Debt: A convertible debt is a flexible financing option for startups. Convertible debt offers investors a type of hybrid security, which has characteristics of a bond, such as interest payments, but at the same time provides the opportunity to own the shares. The conversion rate for this bond determines how many shares you can get when converting a bond. For example, a ratio of 5:1 means that one bond would be converted into five common shares. The conversion price is set when the conversion rate of a convertible security is decided upon.

18. NET IRR/Internal Rate of Return (IRR): This is the most appropriate benchmark rate of return for private equity investments. In simple terms, it is a time-weighted return expressed as a percentage. The IRR uses the current sum of cash contributed, the present value of distributions, and the present value of unrealized investments and applies a discount. This amount should exclude any carry-forward/performance charges accrued and include a carry-forward provision for unrealized investments.

19. Total Value to Paid (TVPI): Total value to be paid is the ratio of the current value of the remaining investments within a fund, plus the total value of all distributions made to date, in relation to the total amount of capital paid into the fund to date.

20. Residual value to be Paid (RVPI): The residual value to be paid is the indicator of the part of the capital corresponding to the investors that is still linked to the capital of the investment fund.

21. Distribution to Paid (DPI): Distribution to Paid is the indicator of the accumulated capital returned to an investor in relation to the capital they invested. 

22. First Closing: This is the name given to the closing of the first round of investments that a fund makes.

23. GP Contribution: In a Venture Capital investment fund, the general partners commit to investing some amount into the fund usually 1-2% of the overall investment commitment. The money invested by the general partners goes primarily to the Venture Capital fund’s operations.

24. Capital Commitment: In the world of private equity, money committed by limited partners to a private equity fund, also called committed capital, is generally not immediately invested. It is used and invested over time as investments are identified. The first year that the private equity fund draws down or calls committed capital is known as the fund's vintage year.

25. Called Up %: Indicator of capital raised in relation to capital committed by limited partners (LPs).

26. Churn: The dropout rate, also known as the attrition rate, is the rate that shows how often clients stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given period.

A high dropout rate could negatively affect profits and impede growth and is especially important in industries where revenues are heavily dependent on subscriptions, such as the telecommunications industry. In most areas, many of these companies compete, making it easy for people to transfer from one provider to another.