What does startup need? The insights from Artem Kovbel
As once said by Peter Thiel, founder of PayPal and co-investor of many world famous billion-dollar startups such as Facebook and Space X, in general there are two types of startup strategy: vertical, when you create something radically new and moving from “0” to “1”, and horizontal, so called a copycat start-up, when you copy a product already created by somebody else.
Statistically, it is most interesting that the pioneers of new markets and products as a consequence cover on average about 7% of the market, the rest is taken by the copycats. The lifecycle of a startup goes through a series of stages, from the emergence of an idea to its implementation and monetization. After all, the realization of the idea is what will determine a startup’s success.
Startup – a company with a short operational history that seeks
a scalable business model.
There is no single compliance rule in the implementation of a startup; many stages can be done in parallel or even excluded.
According to the statistics, only 30% of startups undergo the so-called pre-seed stage that is divided into: feasibility study (analysis whether the product is needed, market feedback) and concept proof (approval of the concept and product promotion channels). At the same time, 70 % of them go to the “valley of death”.
About 40% of the remaining 30% actually reach the seed stage (product development), and only 5-10% – actually reach the final mature stage, when the product is launched and successful scales, increasing in market coverage and further monetization, full or partial sale of the project to investment funds, investor, public offering (IPO, SPO), etc.
Among the most common problems that startups face:
- Lack or absence of capital for startup launch;
- Loss of product relevance due to late startup funding or lack of demand for the product outlined during the feasibility study and concept proof;
- Lack of competence in the calculation of key financial indicators during the formation of the financial model and, as a consequence, wrong calculation of future cash flows from product sales, the payback period, return on capital investment that even when having a good product can play a cruel role in the negotiation process on the value of the business to potential investors. Conclusion: do not be stingy and hire a consultant who will accurately calculate everything.
- Lack of strategic thinking when developing a product, like “I know how to do it, but didn’t think how to monetize it”.
- Crowd funding platforms like “Kickstarter”, “Boomstarter”, “Indiegogo”, “TechnoFunding” and others, are platforms where you can attract funds to realize your ideas through private individuals.
- Startup accelerators and incubators are widely involved in supporting startup projects of young entrepreneurs at all stages of idea development, from concept to product commercialization.
- Professional startup conferences.
- Business angels are private venture investors providing financial and expert support to companies in the early stages of their development.
- FFF (family, friends, fools), typically provide financing to a startup at their seed stage.
- Private equity funds and venture capital funds tend to engage when a startup is already launched, thus avoiding the lion’s share of risks associated with the pre-seed and seed stage of a startup.
- Professional players of financial markets such as investment bankers, lawyers, auditors etc., by the nature of their activities most frequently interact with financial institutions, businessmen and private equity funds.
- Oddly enough, it is the idea itself, startup type (vertical or copycat), its relevance and market opportunity at the time of product release.
- Charisma of founders and their dedication to the project. At the first meeting, almost always the investors pay major attention to the presenter’s enthusiasm and energy, the passion of the team, and finally what are their goals.
- Knowledge of the essence: the presence of a product presentation that describes the business model, potential customers, markets for their monetary value, product relevance, and the startup’s clearly reasoned assessment of its idea.
- It should be an obvious thing that all investors want to engage into a startup with maximum discount and exit with maximum returns. That is why they will do everything possible to pay less and get more, so they will challenge the idea from different perspectives and try to bring down its cost for the most comfortable equity or provision of debt financing on more favorable terms for them.
- One of the most frequently asked questions that I have personally heard many times from investors was, “How much personal money was spent on the project?” Very often this question allows investors to see the level of the idea-owner’s involvement, and how loyal he or she is towards his or her idea.
- When entering capital with a significant proportion, over 25% of the capital of the company, investors tend to appoint their own chief financial officer and avoid cash-outs for startups, but they truly appreciate a cash-in, in other words, to attribute money to an equity company to control easily, in order to easily monitor how reasonable were the expenses.
However, among the listed factors the most crucial is the problem of finding the means to implement it, because only in rare cases the idea generator is the source of monetization for this idea.
So, where do we get the money?
Even if you manage to find an investor, how to interest them and finally get them as a reliable financial partner for all stages of your project will be worth paying attention to.
So, what are the things investors pay attention to most?
These aspects and some others, like a SHA (shareholder’s agreement), you should pay the highest priority, especially when you are at the earliest stages of your startup adventure.
And most importantly, you need to remember a few rules:
- Never fall deeply in love with your startup, as sooner or later you will have to say ‘goodbye’ to it, and it’s very important to leave it when it has reached its peak
- Never be greedy: it is better to be a shareholder of your offspring at 30% with a value of $100 million, than a 100% shareholder of $100 thousand value.
Artem Kovbel, Partner of Kreston GCG