Ticket for Success Through VC Financing
“It is often said that raising money is not a success, it is not a milestone for a company and I think it is true.” — Mark Andreesen, Founder of a16z
Today the technological revolution has allowed the development of disruptive startups such as Cruise, a company based in San Francisco that focus on the development of autonomous vehicles to improve the user experience.
Cruise was founded in 2013 by Kyle Vogt and Dan Kan, who began their first steps raising capital from angel investors using the AngelList equity crowdfunding platform and also participated in the Y Combinator accelerator, graduating in winter 2014.
To date they have raised USD $ 7.3bn and in March 2016 the company was acquired by General Motors for an estimated amount of USD $ 500mm at a valuation of USD $ 1bn. This experience is common in early-stage startups and depending on the network of contacts and networking capacity of their founders, it is possible that the first investment ticket is sought with angel investors, accelerators and crowdfunding platforms.
Angel investors are usually individuals with great purchasing power and relevant experiences in the business world who invest in the early stages of startups in order to obtain a financial return, exposure in an industrial sector or favor the development of the VC ecosystem. They are usually businessmen or entrepreneurs who have had an exit or have grown their company significantly.
Angel investment tickets are typically around $ 10k to $ 100k for seed rounds. Angels support entrepreneurs in subsequent capital raising, business development, team hiring and are a kind of consultant / mentor to the founding team.
A favorable element of having angels is the potential development of the business, the agility in the disbursement of the investment and the credibility that they provide to the startup in the development of its operations. However, some disadvantages are their low capacity to invest in subsequent rounds unlike an institutional investor, their little participation in the monitoring and control of the startup and the fact that it is difficult to access them.
Accelerators are organizations that administer startup acceleration programs in order to encourage their growth and support them in the capital raising process. Accelerators can be generalists (Y Combinator, 500 Startups, Plug & Play, Techstars, MassChallenge), specialized by industry (The Kitchen focused on Foodtech in Israel, Startupbootcamp focused on Fintech in Latam, SKUx focused on Retail in the United States) or by geography (Startup México and Startup Chile). Among the most relevant startups that went through the Y Combinator acceleration program (with an initial investment ticket of USD $ 125k and a valuation of less than USD $ 2mm) are: Airbnb (NASDAQ: ABNB) that today is worth USD $ 120bn, DoorDash (NYSE: DASH) with a valuation of USD $ 65bn and Rappi which has raised USD $ 1.7bn from investors such as Sequoia Capital, Softbank, a16z and Monashees.
Generally, accelerators operate through “batches” throughout the year, where they provide knowledge about product, growth, capital raising, legal, business model, etc .; and consulting or mentoring the founders of the startups. During the program, startups can make use of the accelerator’s facilities. In addition, the accelerator can contribute a cash amount to the startup; For example, 500 Startups gives a ticket of USD $ 150k in exchange for 6% of the company’s equity participation and Y Combinator invests USD $ 125k for 7%. At the end of the program there is a DemoDay where the startup makes its pitch to a group of investors with the aim of raising capital.
There are also Venture Studios, acceleration programs without calendar restrictions to which startups can apply. Some examples of these are Science Studio or BootstrapLabs in the United States and Venture Rock in Europe and Asia.
If you are a first-time entrepreneur or you are going to develop an enterprise in a new geography, it is advisable to participate in an acceleration program. It is a good way to acquire knowledge and strengthen your business network. In addition, having participated in an accelerator gives you an intangible certificate that strengthens your reputation. Remember that an accelerator does not solve everything, it is important to consider the alignment between the entrepreneur’s expectations and the accelerator’s offer. Participating in a program takes time, effort, and sometimes relocating to a new city.
It is a crowdfunding platform where startups raise capital from a large number of investors. The ticket per investor can be small, sometimes from USD $ 5. In these platforms you can find startups in the pre-seed and seed phase with small capital raises from USD $ 25k to USD $ 1mm. In exchange for the investment, investors receive a percentage of equity participation, some compensation in kind, or both. These platforms earn a commission on the amount raised. One of the crowdfunding platforms in the United States is Republic, where in its early stages SpaceX, Robinhood and Carta raised capital.
One of the benefits of raising capital on these platforms is the concentration of investors in one place and the speed of the investment process through simple structures. But, some disadvantages of these platforms are the little proximity and added value of the investors, the commission that the platform receives and the fact that on many occasions you have to reach the goal of the raising to receive the capital.
If you find yourself raising capital for the first time, consider some of these three options. Companies like Revolut have gone through these processes with great success and to date has raised more than USD $ 900mm. Take into account the pros and cons of each of these options and use them to your advantage.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
Stay updated about Venture Capital, innovation, entrepreneurship and more! Sign up for AC Venture’s monthly Newsletter.
Follow us on LinkedIn: ACV_VC
Follow us on Twitter: acv_vc
Follow us on Spotify: ACV_VC