Investment Search: Investor Tips
"Excessive money can kill a startup"
Maria Lyubimtseva, Slon.ru
Sergey Gribov, Managing Partner of Startup Access and Director of Minerva Capital Partners, held a master class at the HSE on "The process of finding investments: how much money and where to look for". Slon publishes the main theses of this master class.
In the West, it is customary to find one or two venture capitalists and go to them not for money, but in order to get some feedback: how good is your idea. This whole story is like an Olympic system: you get to know the investor, you have one minute to tell the investor about your project. If you are interested in him, you have passed to the next round, if you are not interested, he is lost to you. In the next round, you make a presentation and have to talk in more detail about what you are doing – if you were able to prove that your idea is good, you again passed to the next round. Perhaps then he will show you to his partners in the fund, and you will have to make a presentation for them. When you finally agree with them, you get a term sheet – a short contract in which the terms of the transaction are prescribed. Not exactly a legal document, since, by and large, it obliges little to anything. The point of it is to sign a paper that you will not talk to any other investor until they decide whether they are ready to invest in your company.
If they like your idea and they believe that you are able to implement it, then the next stage is due diligence: they begin to examine you in detail, check the company: accounting calculations, market research, patent situation and everything that may be relevant to the transaction. This process takes at least a couple of months, if everything is fine – signing papers and receiving money. Naturally, there are a large number of variants of this sequence.
How much money to look for?A few points to understand: the more people invest in your company, the more likely it is that you will earn a lot of money.
It is almost impossible to create a company worth $1 billion without venture capital money. On the other hand, the more money you raise, the less likely you are to earn anything at all. Imagine that a venture fund has invested $5 million in you. They come to you and offer to sell the company for $7 million. If you have already invested $ 5 million, then they will not let you sell it for less than $ 30-50 million. The problem is that your company may never reach such numbers.
People think that raising money is actually the success of a startup. While his success is when a successful business is built, everyone has earned, everyone is happy. To perceive the rise of money as success is wrong, thereby you cut off your escape routes, many opportunities. Excessive money can kill a startup. Example: the company grew, was successful, they were ready to buy it for about $ 60-80 million, and everyone would be happy. But investors came and gave about $ 20 million more to develop the company to a value of half a billion. To justify this investment, they began to disperse the company, push it to neighboring markets, expand. The business model used was poorly transferred to other segments, so as a result, the money was eaten up, and then the company could not be sold for $ 60-70 million, the moment was lost.
Listen to the pessimists!To calculate money correctly, you need to make a financial model.
The first year forecasts monthly, the next three or four - quarterly. After you have done it, look at it carefully and correct it so that it is realistic. Usually the initial plan is too optimistic. To make the model realistic, reduce your income by half, and increase your expenses by one and a half. This is usually true, because almost all entrepreneurs are super-optimistic. I highly recommend that when you start making a financial model, draw three scenarios: optimistic, realistic and pessimistic. Show your financial model to a pessimist friend who doesn't believe in what you're doing and listen to him.
When you calculate how much investment you need, stick to the most pessimistic scenario, count on the fact that you will work, and not search for money when they run out.
What kind of investors are there You yourself
You eat little, sleep little and work hard.
Useful at the zero stage, you don't need to raise any money. Do something yourself before asking for money – it's not worth going to an investor just with an idea. Positive: no share blurring, fast. Cons: the money is your blood. We'll still have to look for investors. But if you come to them and show that you have been sitting and making this product for six months, then this is called "Skin in the game": you are seriously engaged in the product. If you have an idea, you ask for money for it, but you are not ready to work in the evenings, invest something in it yourself, then for an investor this is an indicator that as soon as problems begin, you will immediately run away. No one will keep you in your project if you are not ready to fight for it. You have to get as far as possible before you go for investments. A plus can also be called the fact that you can do it in parallel with work. When you took some money, most likely, you will not be able to combine.
An investor is a shareholder of your company. Usually professional investors know that this is a risk. Venture funds are well aware that 70% of the projects they invest in will not pay off.
FFF: friends, fools and family (friends, fools, family)Roughly speaking, you gather all your friends, talk about your brilliant idea and ask who can give how much.
Usually they don't collect so much, but it depends on what kind of friends you have. You can collect several million. If you are the sole shareholder of the company, then in the end no one prevents you from making any exit (exit – when you either sell the company to someone, or, for example, go to an IPO, that is, when you can make money on it).
This type of investor has its disadvantages. If you collect money from relatives, then you will have to explain to them why nothing happened. Positive: as a rule, friends do not want a large share in the company, and this is resolved quickly, without long negotiations: either your family and friends give you money, or not. If you can earn money for your friends, then that's cool. Minus: if you lose this money, you may lose your friends. In addition, as a rule, it is "stupid money". You can't ask such investors for advice, they can't lead you to interesting companies, and so on.
Total: be sure that you have explained everything honestly to them. Here it is important for you not to spoil relations with people, make sure that they know: this is a big risk, you can lose money. You need to agree on everything before you are given money. It is better to write everything down on paper so that there are no questions later. In case of failure, this will soften the blow. The last important point: try not to give them any special rights. You don't want to decide on hiring a programmer with your mother-in-law.
Business angels These are people who have earned something and are ready to invest this money in some projects.
As a rule, you can also come to them at a fairly early stage, they can usually raise from $ 50 to a million. This process already takes some time, it is unlikely that someone will be ready to give you a suitcase with money at the first meeting, although, they say, this also happens. The angels will want a substantial piece of the company. In the West – from 10 to 50%, in Russia usually not less than 25%. If you have a business angel among your shareholders, then most likely you will have to sell the company for at least $3 million.
I'm talking mainly about the right business angels, there are such in the West. Good business angels are smart money and help in the next round. Successful business angels are quite familiar with other investors, with venture capitalists. In addition, in the West, business angels take a small share for their money. In Russia, everything depends on the specific characters. There is no normal protection of minority shareholders in Russian legislation, and therefore investors want at least 25% from us. And often it's not the smartest money either. If an angel from the same field wants to invest in a website on the topic of cars, such an angel can be very useful to you. But if a person owns a business that is absolutely unrelated to yours, then this is stupid money.
If you take money from angels, it is always better that it is not one person, but two or three. They will balance with each other, keep each other in check.
There are groups of business angels in the West, they are easy to get to. There are 5 or 6 such groups in Boston alone. That is, if you know one person who invests, and you need $200,000, and he is ready to put $50,000, then he can recommend you three more people who will be interested in it. There are many such people on Facebook and various hangouts. Finding them is not so difficult. There are definitely one and a half hundred in Moscow – if you purposefully browse articles and events on this topic, you will be able to find.
As for stealing ideas: we once also made a social network website, but it didn't go. At that time there were two hundred sites very similar, but Facebook fired, although they were not the first to come up with a social network. This is proof that the idea is worthless. Who now knows the first website that implemented this idea? The winner is the one who has been able to do the right things for many years so that people go to him and not to someone else. Moreover, if you have come up with something that no one has ever done, it's worth thinking about: maybe this is complete nonsense.
Incubators
Incubators are not exactly investors, but they often give some money. As a rule, they are valuable not so much in money as in expertise. You spend 1-3 months with them, in the West they charge from 5 to 10%, with us – 20-30%.
To date, there are a lot of them in the same Moscow: when you get there, you are actively engaged, you are promoted and given some money. This is not a very large fraction blur, although it depends on the incubator. Pros: smart money, help with administrative issues. They help with the next stages of raising money. Cons: there is not much money, after leaving the incubator, you immediately need to look for them again. Good incubators are an important push in the right direction, not very good ones are just problems or a pointless waste of time. Statistics on incubators are tough, there are very few really profitable ones from the West: if venture funds are 25% in the black, then incubators are only 10%.
If you have no or very little business experience, an incubator is really useful. You will be introduced to the right people, trained, pumped. The difference even in a week is significant. In Russia, an incubator and a technopark are often confused. If you are provided with offices, and that's all, this is a technopark. If they are engaged in parallel with you and try to help, this is an incubator. Of course, it is useful to rent an office cheaper for a startup, but this is a slightly different story. If they take a share in the incubator program, they are more interested in your promotion. Incubator, accelerator, catalyst – the same thing.
Venture funds You should go to most venture funds when you already have something.
Venture funds most often want to get into business when you have a product. They are not interested in investing less than half a million dollars. For most, an amount less than $500,000 is not interesting. If you are looking for $150-200 000, do not send your executive summary to venture funds, you will lose time. The process with venture funds usually takes six months, the share is also quite substantial. A small exit will not do, they will push you to much more.
A venture fund is serious money that will last for a long time. Good funds are very useful, these people have a lot of connections and experience, they have created some companies themselves, they have a lot to learn, they help in the next rounds. Minus: you will be seriously unwound, you will have to give a serious piece of the company. If the venture fund agrees to 25%, then get ready for the fact that in the next round they will pour even more money into you and take a bigger piece. There is no need to be afraid of this, the fear that you will be kicked out of your own company is superfluous. A company is primarily a team, an investor wants to make money on you. If the investor sees that your presence in the company is harmful, then options are possible. But the task of expelling you in any case is not worth it.
The downside is the loss of control, and you will have to make the output much higher. When a venture fund invests money, they expect to earn 10 times more. Out of ten companies they have invested in, at best one will shoot, so they are looking at the potential to earn 10 times more. Example: they invest $2 million, get 50%, expect to get $20 million back, that is, the company will have to be sold for $ 40 million. You will not be allowed to leave the company until it reaches such capitalization. Of course, they will agree in principle to sell for $ 20 million, but the task is $40 million. They will push you into a riskier big market, etc. High risk – high reward.
You should treat any investor as a necessary evil. It is very difficult to create a large company without serious money and serious connections. The main thing for the company is to make money. No traffic will replace this.
With any investors, it's like getting married, you have to live with them. If it is unpleasant for you to communicate with this person, it may be worth looking for another investor. Because you will be tied up for many years. And there are practically no divorces here: in a problematic situation, it will be impossible to find another investor.
How to find an investor? Go to parties, events, contests.
Get acquainted, collect business cards, tell us about your company. Explore social networks – Facebook and LinkedIn. You can send an email to an investor, but don't be offended if investors don't respond. There are just too many of you. The same goes for the venture fund. They receive such an amount of executive summary per day that they physically cannot answer everyone. If you have found the investor you need, look for a mutual friend.
Standard etiquette in the West: if your project is not interested, they simply do not answer you. Not because they do not respect, but because unnecessary correspondence will start. But you don't know if you're not interested or if you haven't been read. If an investor writes to his friend and asks him to study the project, he will certainly read it. It's definitely not worth shoving 20 people into the addressees and sending an executive summary to everyone in a row.
Look for investors who understand your field. Prepare very well, you have exactly one chance to make a good impression, and it lasts 30 seconds. Polish everything you want to say.
Don't make an executive summary longer than three pages. Even three pages are rarely read by anyone. Before going to investors, find a blonde, show her your summary and make sure she has read and understood everything. If you don't do this preparatory work, you will burn all your contacts. Only when you see that people understand what you are doing in 30 seconds without explanation – you are ready to go to the investor.
Know your investor. You have to do your homework: find out the most about him before you go to him. If you go to the foundation, you have to find out who its key partners are. It's not enough for you to like one of the foundation's partners, if you have convinced one of them, he will show your project to the others, and everyone will decide. You need to find out at what stage this fund is at (advanced funds are unlikely to invest in new projects anymore), what its specialization is, what happens to its invested projects. Almost all the necessary information can be found on the foundation's website – do not be lazy, study it so as not to waste your and others' time.
Portal "Eternal youth" http://vechnayamolodost.ru21.09.2012