13 facts about venture capitalism for founders

The list of entertaining statistical facts is based on the entries from my Telegram channel Groks . The results of various studies described below once changed my understanding of venture capital investments and the startup environment. I hope these observations will be useful to you too. For you, who in the field of capital look from the founders.

1. Startup industry disappears amid globalization

Young companies less than two years old accounted for 13% of all US business in 1985, and in 2014 their share was already at 8%. More importantly, the percentage of private sector employees working for these young companies has fallen by almost two in the same time period.

It is getting harder and harder every year to compete for personnel with huge corporations . Quartz explained this phenomenon in more detail. I understand that statistics are given only for the “most free” ones, but I am convinced that to one degree or another this problem affects each of the capitalist countries.

2. Half of all venture capital investments do not pay off

At the same time, only 6% of all transactions give 60% of the total return, according to Ben Evans from Andreessen Horowitz. The topic of cash flow asymmetry does not end there. Thus, 1.2% of all venture capital transactions attracted 25% of all venture dollars in 2018.

Why is it important? Because founders should think like investors . And not only when they plan to raise funds, but also when for the first time they thought about implementing an idea. Although it is very difficult to think in such categories - only the best investment funds in the world made 100 Xs for the best companies in the world.

Dreaming, of course, is not harmful, but a more or less acceptable bar is 20% IRR or three x. Look at the growth rate, read something about the principles of evaluating startups by venture capitalists. Is the required rate of return real for your project?

3. The volume and quantity of seed investments are reduced

In 2013, the share of transactions at the seed stage in the total volume of US venture money was 36%, and in 2018 this indicator dropped to 25%, although the median size of the capital at the seed in percentage terms increased more than in other rounds. There is also data from Crunchbase, according to which the number of investments not exceeding $ 1 million has almost halved over the past five years.

Today it is much more difficult to attract investor attention to the project at an early stage . Big - more, small - less, as Marx bequeathed.

4. The gap between the rounds of financing is two years.

This fact is based on data on venture transactions for 18 years from the beginning of the two thousandth. Over the years, there has been a steady trend in the pace of raising capital. Fast-growing unicorns - dispersion. Knowing this, think about the budget and be careful with the costs , especially if you have already closed the round at an early stage of financing.

After all, the burning of existing funds is the second most common reason for the collapse of startups. And the point here is not that the unprofitable business has used up all the money it has. This is about cases of closing projects with a successful business model, when the founders were carried away by growth and hoped for a quick attraction of new funds.

5. Absorption is the most likely path to success.

97% of exits occur with M&A and only 3% with IPO. Exit is very important because at that moment you, your team and your investors are paid. Venture capitalists live in exits, but the founders continue to dream of unicorns, avoiding all thoughts of selling their offspring.

But one day it may be too late. Many entrepreneurs miss the opportunity given to them to take money, although a timely decision to sell the business may be the best solution . By the way, most exits are committed in the early stages: 25% at sowing, 44% - before round B.

6. Lack of market demand is the main reason for startup failure

Analysts at CB Insights conducted a survey among the founders of closed startups and compiled a list of the 20 most common reasons for the failure of new companies. I recommend to get acquainted with everyone, but here I will mention the main thing - the lack of demand in the market.

Entrepreneurs very often solve problems that are of interest to them, and do not serve the needs of the market. Stop loving your product, don’t come up with problems, test hypotheses . Your empirical experience is not statistics, only numbers can be objective. At this place, I can not help but share the Stripe SaaS business benchmarks .

7. B2C2B segment more than it seems

For every dollar that companies spend on IT solutions, an additional 40 cents is spent on direct acquisitions by senior management. The bottom line is that B2B SaaS can be focused not only on corporate sales, but also on a separate B2C2B segment (business-to-consumer-to-business).

And this model of software procurement is typical for most key departments in companies. Details can be found in the note by venture capitalist Tomasz Tunguz from Redpoint "Why bottoms up selling is a fundamental shift in SaaS".

8. Lower price - poor competitive advantage

Many are convinced that if they can offer a lower price, then they will succeed. But the times with bazaars are long gone. Customer service is the cornerstone of any product, and there are many competent articles confirming this thesis. Moreover, while you are trying to lower the price, your competitor can raise it, thereby increasing your revenue.

There is a perfect example from ESPN, which has lost 13 million of its subscribers, after increasing the price by 54%. And the paradox here is that ESPN revenue also increased by almost the same 54%. Maybe you should raise the price to start earning more? By the way, a higher income is one of the best competitive advantages.

9. Pareto Law applies to advertising revenue

According to a study by Soomla analytic company, 20% of users view 40% of ads and occupy 80% of the structure of advertising revenue. This conclusion is based on more than two billion impressions in 25 applications operating in more than 200 countries.

And among the two billion Facebook users, residents of the United States and Canada make up only 11.5%, but they bring 48.7% of revenue. ARPU in these countries is $ 21.20, in Asia - only $ 2.27. It turns out that it is better to have one user from North America than nine from India . Or vice versa - it all depends on the costs of attracting them.

10. In the club of millionaires, only a few thousand iOS applications

The App Store has more than two million available applications, and only 2,857 of them generate more than $ 1 million per year, according to App Annie. It turns out that on an apple display case, the probability of great success is approximately 0.3% . And we don’t know how many companies are behind these applications, but it’s obvious that there are even fewer of them.

I will also focus on the fact that we are talking about annual revenue, and not about net profit. That is, some of these applications may be unprofitable for their owners. Under such circumstances, vivid stories about the realization of the idea and power of Apple's viral machine are more like luck than the intended result.

11. Age increases the likelihood of success

Kellogg Insight considered that the probability of creating a successful company in 40 years is twice as high as in 25 years. Moreover, the average age of 2.7 million founders in their dataset is 41.9 years. However, more success often comes to young entrepreneurs.

The older you get, the more carefully you make decisions, but the more resolutely you give up risky ideas. In other words, the older you are, the less your entrepreneurial ambition, but the higher the likelihood of success. Also, this thesis is confirmed by another independent study from Nexit Ventures.

12. You do not need a co-founder

Contrary to the popular belief that luck often haunts organizations with several cofounders, the vast majority of startups who completed an exit had one founder , according to Crunchbase.

However, analysis of purely unicorns tells us that only 20% of them were founded by one person. But is it worth taking this value into account when every billionth company is a unique and inimitable story? In addition, a large statistical sample is always more accurate. The myth is destroyed.

13. Everything is in your hands ...

More than half of the billionth US companies are founded by emigrants. This means that no matter where you are, you have a chance of success. Everything is in your hands ... must want to buy . Investors - a share. Customers are a product. The main thing is to sell .

40% of European startups in the field of artificial intelligence do not actually use this technology, but they attract 15% more money. The main thing is revenue . 83% of companies that entered the IPO in 2018 are unprofitable , and the value of unprofitable companies after listing grows more than profitable ones. Money is where the risks are, the risks are where the venture is. Sell. Revenue Capital .

Many thanks to all for your attention. And special thanks to Denis Efremov, investment director of Da Vinci Capital, for his help in editing this material. If you are interested in such considerations that do not fit into the format of a full-fledged article, then subscribe to my Groks channel .

Source: https://habr.com/ru/post/462367/

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