With cryptocurrency and Bitcoin going mainstream, venture capitalists are starting to adjust their investment and fundraising strategies. Last year was characterized by the Initial Coin Offering, where start-ups raised funds by creating and selling their token/coins, instead of their traditional method of offering equity to investors.
Initial Coin Offering started as a way for technology that does not have a business model to raise capital. The trend skyrocketed in June last year. Ninety- three percent of early adopters’ projects were funded. Some early adopters managed to raise millions of dollars based on a basic business plan (called a whitepaper in the industry).
Over the past few months, however, we’re seeing the rate of successfully funded ICOs starting to drop, with investors less likely to fund speculative projects. However, the adoption rate of cryptocurrencies is growing, as more companies are starting to have Bitcoin as a method of payment. Microsoft, Vargina, and Expedia all currently accept it, while Wal-mart and MacDonalds are expected to adopt it this year.
Venture capitalists are devising new ways to deal with the frenzy of cryptocurrencies. Instead of seeking equity in a firm, they are purchasing the rights to acquire coins/tokens ahead of ICOs via legal contracts.
Having a good team, good product and customers is not a guarantee that venture capitalists will invest in your start-up. VCs have been saying “no” to numerous good start-ups and founders. There are several reasons why VCs may decline to work with good start-ups.
Venture capital often invests according to fund strategy, meaning VCs invest in specific stages of companies. Idea stage companies that try to raise funds from an early stage fund are told to come back after gaining more traction. Early stage companies trying to raise capital from growth equity funds may also hear the same rejection.
VC can reject a start-up on the grounds of a “competing portfolio company.” Venture capital involves picking of winners. Once investors choose to invest in a start-up in a particular space, it is difficult for them to bring in another similar start-up. This is because the start-ups might end competing with each other.
Lastly, venture capitalist can reject your start-up because you are too late to the game. Trends come and go, and investment opportunities are not exceptions. As investment in social media continues to wind down, another investment may emerge as the next hot thing.
References Why startups get rejected by venture capitalists (and why Warren Buffett is involved) https://www.entrepreneur.com/article/243474
Contrary to popular belief, venture capitalists are not always looking for the next big thing. They also look for the next big team. A good team is the foundation of any successful company, the point from which all developments and ideas originate. Here are some qualities that VC looks for in a team.
1. Impressive talent.
Generally, late-stage companies have personnel in place that enables each business unit to stand independently. However, in the early stages, each member plays a critical role. VCs are attracted to a team of experts that can design, market and sell products.
2. Mutual respect.
Even if you and your team members are different people with diverse skills and backgrounds, you need to respect each other. VCs often want a team that overcomes problems quickly and work toward shared goals.
There is a great difference between founders with multiple firms on their resumes and those who are doing it for the first time. Michael Todd, co-founder, and CTO of Victorious is a good example of a founder who impresses VCs with his ability to leverage past experiences.
Therefore, before you start looking for venture capitalists, make sure you have the right team. You need people with good history, experience and ability to build a successful business.
References https://www.entrepreneur.com/article/241441 https://www.forbes.com/sites/georgedeeb/2013/11/26/top-4-traits-vcs-desir-in-startup-executives/#77fb0c8e58df
For interviewing and networking, venture capitalists want to be current on industry news. There are many relevant sites and newsletter. However, the following are the common highlights that VCs read every day:
If you’re a VC or a founder, you should read the Mattermark Daily. The site provides an in-depth look at the latest content from leaders in venture capital and start-ups. The site includes articles about fund management, tactics for giving back, managing LPs, diversity, metric measurement changes, is a great board member, explorations into new technologies and industries, and much more.
StrictlyVC provides a summary of VC happenings, from new firms to funding events to occasional juicy scandals. If you want to keep track of the personalities and companies that will shape the venture capital industry in the months and years to come, visit this site frequently.
In addition to being databases of companies and deals, Crunchbase sends an informative daily summary of start-up funding activity. This site is the destination for discovering industries trends and investments, learning about companies, and finding news about thousands of private and public companies globally.
Other sites that VCs visit are CB Insights and ProductHunt. CB Insights concentration on deep dives and cross-industry data while ProductHunt provides a daily list of new products with a very active community commenting.
References https://startupsventurecapital.com/required-reading-for-aspiring-vcs-1a40e6597400 https://mattermark.com/newsletters/ https://www.strictlyvc.com/ https://static.crunchbase.com/daily/content_share.html
Jason Green is the founder of Emergence Capital. He has many years of experience in the venture capital business. He has helped create over $100 billion in value and has taken a spot in FORBES’s 2017 Top 100 Venture Capitalists Midas List. He has also been an early investor in top companies such as Box, ServiceMax, Yammer, SteelBrick, SuccessFactors, Visual Networks, DoubleClick, and aQuantive among others. Here are three lessons we can learn from Green.
Go to places you feel excitement
The excitement of the dot-com boom drew Green to Silicon Valley. Green believes that investing in the wrong start-ups is one of the most frequent mistakes that venture capitalists make. Venture capitalists should invest in companies that make them feel excited.
Repeat a winning formula
Jason Green discovered a formula that worked for other investments. A product that customers like and a great team can yield great value. Emergence Capital prefers working with its portfolio companies to create their value over time.
Move from success to significance
Green has moved from success to significance. He loves what he does and the people he works with. He is also involved with non-profits that help entrepreneurs. According to him, every business has a responsibility to give back to the community.
References https://www.inc.com/peter-cohan/6-secrets-of-this-100-billion-venture-capitalists-success.html?cid=search http://www.emcap.com/people/jason-green/
Venture capitalists get paid well regardless of how well they perform. Despite the shortcoming of venture capitalists, they represent the most appealing and glamorous form of financing to many entrepreneurs. If you are an entrepreneur looking for capital, what should you look for in venture capitalists?
It is important to know the people or organizations that the VC know, work, invest or travel with. Relationship pedigrees that include successful entrepreneurial testimonials, major law firms, and happy institutional investors are very important.
Calibrating the ethics and integrity that define your venture capital firm is very important. There are always going to the untrustworthy and unethical people carrying out business in the world. Do background research about venture capitalist firms. Do they have any history of unprofessional behavior? The research could save your company from expensive legal trouble or an embarrassing scandal in the future.
Knowledge of Industry
Almost all VC firms have their area of expertise. For example, Tandon Group specializes in the consumer, defense, healthcare, EMS, and IT industries. A venture capitalist firm may specialize in industries such as cryptocurrency, or fintech. Knowledge of the industry is the starting point for finding an ideal VC partner.
References https://www.tandongroup.com/2017/09/04/what-to-look-for-in-a-venture-capital-firm/ https://www.entrepreneur.com/encyclopedia/venture-capital
Venture capitalist firms are paying close attention to the amount of capital that has been raised through initial coin offerings (ICO) in 2017. Some venture capitalists believe that ICO could disrupt the way venture financing is structured.
As of November 30, 2017, 228 ICOs have raised $3.6B, CoinSchedule reported. The capital raised via ICO overshadowed that of seed-stage VC funding for internet companies in 2017. The numbers have left many venture capitalist thinking about how initial coin offering might affect the traditional VC model. Similar questions were raised when crowd-funding platforms started to gain momentum 2008.
Currently, Ethereum is trading over 40x of its price at the beginning of 2017 and Bitcoin is trading above $11,000. Blockchain technologies have a wide range of potentially disruptive applications. They have also received plenty of attention in 2017, fuelled by the ICO phenomenon this year.
Traditional venture capital firms have invested little in either crypto assets or blockchain-related tech. Blockchain depends on a public distributed network that is kept by each network participant. It has the potential to cut the need for the middleman as the two parties involved in a transaction could deal directly with each other.
References https://www.pehub.com/vc-journal/what-cryptocurrencies-mean-for-venture-capital/# https://www.coindesk.com/how-cryptocurrencies-and-blockchain-startups-are-revolutionising-venture-capital/