Venture Capital Is Just a Catalyst for Start-Ups, not a Milestone
I. The Role of Venture Capital
Venture capital is not equal to capital. Capital is essential to a company, and mostly comes from the company’s important shareholders. Venture capital, on the other hand, is only a catalyst, rather than a necessity, for a company’s development.
1. Venture capital’s role in an industry: Shortening the industry’s development cycle
When the group-buying trend first emerged in China, a large amount of capital was immediately injected, shortening the industry’s traditional life cycle of two to three years to just around six to twelve months.
2. The role of venture capital for enterprises: A magnifying glass for a company’s strengths and weaknesses
A company’s developmental shortcomings, whether they manifest as rifts between founders or flaws in the business model, will accelerate the collapse of the company when venture capital enters the equation. On the other hand, if the company has advantages like a strong technical background or talented founders, then venture capital will help the company to develop fast and seize opportunities more quickly. The key to success is to organically combine venture capital with a company that has lots of potential, while learning from others’ strong points to make up for one’s own deficiencies.
II. Analysis of Investment Institutions
1. An institution consists of two kinds of personnel: Partners and non-partners
Partners have direct decision-making rights, while non-partners do not, regardless of their relative position. But for many firms, it’s the non-partners who are most active on the frontline and are therefore closest to and know the most about the founders. So it is these frontline non-partners who are most likely to become the founders’ most ardent supporters. Founders should be genuine and be consistent in how they treat whomever they interact with, and avoid exaggerating and disingenuous behavior.
2. A fund only has two options: To invest, or to wait and see
Most people think funds only have two extreme choices to make: to invest or not. But even when a fund has decided not to invest, their true status is “wait and see”. The probability of success is only 10% at best for most investment institutions, so whether a fund invests in a project or not does not by in and of itself determine whether this project will succeed. Whether a fund approves a project only represents this institution’s viewpoint and does not determine whether this project is feasible. Founders should never take “successfully financed or not” as the sole criterion for judging whether a project is good or not. To the Founders, receiving funding is not necessarily a development milestone for the company.
III. Investment Decision-Making Process
1. Basic level
Investment managers judge whether projects are good or not through discussion, and report good projects to their superiors. Then, members of the Investment Committee will question and challenge the investment managers in detail. Finally, the Investment Committee will submit the project to the Decision Making Committee (CEO and partners), which will make the final decision.
Here, I would like to share with you my own investment framework, which can be standardized and applied universally, which I distilled from both my personal investment experience and classic, institutional investment methodology.
3 dimensions that investors value most:
Market scale (whether it’s large enough), market environment, and industry differentiators.
Whether the founder and team are professional and experienced enough.
Professionalism: The degree of research and acquired expertise. Professional and foundational skills, such as English ability, finance management, charisma, clarity of communication,
Whether the products and services are distinctive and innovative, and could transform an industry, as opposed to simply improving efficiency. Here importance is attached to being disruptive rather than merely micro-innovation. A start-up company’s development follows a consistent curve, while fundraising comes at discrete moments. Fundraising rhythm and momentum is usually more important than the financing scale or amount.
1. Don’t finance when you are short of money.
When under-financed, start-ups will be forced to discount their value and lose more of their initiative and negotiating leverage. From a tactical level, start-ups in this situation have very little leverage. From a strategic level, it reflects that the team is not correctly handling its project development.
2. Fundraise when you don’t lack money but expect to need money in the future.
Start-ups should always make their projections ahead of time and be prepared to address any inevitable gaps along the way, and start fundraising when fully prepared.
3. Have a reasonable grip on fundraising timing for start-ups
Angel stage: Can fundraise at any time, as long as the founder is able to answer any and all investors’ questions. In the Pre-A to A Round Stage: Start-ups at this stage have researched and developed relatively mature products or services, and said product has been validated for at least a small portion of the market.
There is a fundraising time window. Start-ups should complete financing quickly within a planned period. If it doesn’t work out as planned, the start-up should quickly re-focus its efforts and take out loans instead or adjust its business model, and avoid getting trapped in being constantly fundraising.
VI. How to Choose Investors and Investment Institutions
1. Investors are not the same as their investment firms.
Even within the same firm, different investors can be hugely different. Entrepreneurs should look for specific investors that match their project and requirements, instead of only relying on an investors’ popularity or how well-known their firm is.
A business plan is a stepping stone. Entrepreneurs should make sure they are intimately aware of every investor and investment firm’s preferences, personalities, areas of interest, etc. in advance, and send business plans to them individually.
3. The most effective way for your business plan to get noticed.
Recommendation by peers: recommendation from other venture firms accounts for a high weighting. Recommendation by FA or investment institutions, especially institutions with strong experience and reputation.
VII. How to Communicate with Investors
Simply speaking, one should be sincere, honest, and straightforward. Avoid exaggeration or over-embellishment.
Finally, I will share with you several key criteria from some other investors, for your reference:
“Do not believe in luck” “I am never going to be the luckiest person”
Never put your trust in luck, and never tacitly assume that you will succeed before you are intimately familiar with an industry. This is applicable to both entrepreneurs and investors.
“Never treat yourself as a typical user”
Entrepreneurs should not get bogged down with the day-to-day management of product details, but instead should always focus on the company’s strategic direction, instead of merely the product experience. It’s not as though every user needs to be a jogger before they could tell you whether a step-tracking app would be a good idea!
“Never say never, anything is possible”
Avoid decisions or comments that are too absolute. What people say or do each has its own probability and possibility of success, and nobody can guarantee absolute success or failure.
“Let people who know the truth make the decision”
Investors usually study business models and are rarely experts in the entrepreneurs’ specific industry. Therefore, when investors present their professional opinions regarding an industry, unless the investors happen to be industry experts, entrepreneurs should make decisions by following their own expertise and instincts, while nonetheless being respectful to the investors.
“Unknown numbers are more important than known numbers”
The predicted growth rate of users at the middle and late stages is more important than the growth rate of users at the early stage. Early-stage users are basically the core target audience. After this batch of users is covered quickly, customer-acquisition costs will rise quickly. Whether start-ups can continue to maintain stable user growth at these later stages is a key criterion for investors.
Sky9 Capital (www.sky9capital.com) is an early-stage venture capital firm focused on the Chinese market, with a focus on consumer internet, enterprise services, and deep technology.
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