ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

Rising Trend of Initial Coin Offerings

Nov
09

According to a report by Mangrove Capital, 204 ICOs have made a return of about 1,320 percent.

At the same time, investment banks and hedge funds have shown increasing interest in the digital currency with over 55 crypto-specific hedge funds. Before diving deep into why investors are showing greater interest in cryptocurrency, let’s take a look at what ICO is.

 

What is ICO?

Unlike conventional financial system, ICO or Initial Coin Offering is an alternative and unconventional way of crowdfunding. It has enabled a number of successful firms and projects to get the finance to start their business. New businesses and startups around the globe are getting millions of dollars in funds by issuing digital coins. The rising trend of digital currency has made people both worried and excited.

In ICO, the coins bought by investors are for businesses and marketplaces that are not developed yet. By purchasing these coins, they make a bet that a firm or startup will end up becoming successful and as a result, the coin will increase in value.

In average it takes about six months or a year to raise money with conventional venture capital (VC) system, but it is different when it comes to ICOs. In this token crowdfunding, you get to have a large crowd of engaging supporters who want to see you succeed. Not only do they campaign for you, but they are also your early adopters.

 

Growing Trend of ICO

Startups have raised more than 2 billion dollars since the start of 2017. It is a huge amount of funding, given the fact that not many people knew about it a few years ago. Businesses are making money via this mode of funding faster than usual.

In April this year, Gnosis (prediction market for Ethereum) managed to raise 12 million dollars in just ten minutes. In June, Mozilla’s founder raised 35 million dollars by selling Basic Attention Tokens in under 30 seconds for his new web browser startup called ‘Brave’.

ICOs have become the name of the game as they have left the venture capital market behind and are the biggest source of funding. It is a great option for those companies that are pursuing the application of blockchain technology.

 

Concerns by the Regulators

Despite the increasing trends of ICOs, regulators have shown serious concerns. They are warning investors that it is a high-risk investment.

Although, some coins value has dramatically increased, a very high volatility cannot be ignored. Some have also considered it a ‘speculative boom’, but that did not stop investment banks and hedge funds from showing their interest by making an investment in cryptocurrencies and ICOs.

 

Reason behind the Increasing Interest of Institutional Investors in ICOs

The digital currency market has made massive profits in the past one year or so. Initially, institutional investors were curious about what this is all about, but they started getting a hang of it gradually and became less apprehensive and more interested in this alternative investment. It is a kind of chain reaction that started with the rising interest among venture capitalists and now institutional investors, including mutual funds, investment banks, and hedge funds are following their lead. They have shown growing interest and are making an effort to estimate and grab the opportunities in the cryptocurrency market.

The reason why they are more interested in the new and unconventional currency is that it promises a higher return as compared to market averages. According to a fintech analytics firm, there have been at least 55 cryptocurrency hedge funds and a former manager at Fortress, Mike Novogratz, has recently announced a plan to use 500 million dollars for a new digital currency hedge fund. Blockchain Capital also made an announcement of raising 150 million dollars; a part of this fund will be for cryptocurrencies.

 

Goldman Sachs’ Approval

Goldman Sachs is planning to set up a bitcoin trading desk, as they believe that institutional investors are interested in cryptocurrency more than ever. The firm has reported it to be ‘a major milestone’. They believe that the investors need an over-the-counter brokerage platform where they can sell or buy as much cryptocurrency as they want. Goldman Sachs is of the opinion that it can take up this role, but there will be other issues, including market infrastructure and serious concern by the regulators.

 

If, however, ICOs becomes regulated, it will change the way how businesses raise money and will also impact the venture capital market.

Struggles of Entrepreneurs Based on Investors’ Perception

Oct
12

The first quarter of 2017 was closed with a total financing of $27 billion worldwide and the hot sectors in the world of Venture Capital (VC) have been fintech and technology. Despite the booming industry, VC has its own ups and downs.

 

Overlooking Entrepreneurs

Innovation has always been at the heart of the United States and the country has always encouraged entrepreneurship, yet, the ideas are often overlooked when it comes to immigrants and women in the sector.

Jerry Nemorin, the founder of LendStreet, is a fine example of that case. He initiated a company to support individuals who find it difficult to pay off their debt. He looks for people who are struggling with loan repayments, buy and consolidate their debt and refinance it at a fair rate of interest. Despite such a brilliant idea, he struggled with raising funds. According to him, investors recognize a defined pattern and the chances of funding the idea of a black person who is out to solve poor people’s problem are very low.

However, he is not alone. There are a large number of entrepreneurs with brilliant ideas who have been struggling with raising funds. Less than 1% investment in new startups goes to people of color, whereas, 10% investment goes to female entrepreneurs. Only 15% of the Unicorns that are making over $200 billion have made it to the real-world industries for day to day dealings.

 

Blind Spots – Another Cause Behind the Struggles

In an economy that promotes innovation, a lot of the best ideas are left out of the conversation due to blind spots.

  • Bias

Bias is the first blind spot that they face. Although, investors don’t do that intentionally, yet, it happens. Investors tend to invest in the ideas that come from people like them.

A study was conducted by the National Bureau of Economic Research in which it was identified that applications that read ‘Greg’ got more calls as compared to the résumés that had the word ‘Lakisha’. This is not surprising, because only 5 percent of the partners in VC firms are female, whereas, people of colors are significantly lesser than that, i.e., less than 1 percent. Hence, the distribution of funding is largely based on the decision makers who are investors in this case.

  • Availability Bias

This is another blind spot that comes in the way of funding the brilliant ideas. Investors tend to invest in the ideas that are closest to them, or the last good idea they heard, versus the best. Almost 80 percent of the money goes to the firms that are situated within 30 miles of the investors.

  • Two-way Thinking

Lastly, most investors have two-way thinking when it comes to funding the ideas. Many people believe that they should focus on making a profit from a business, regardless of whether it is good or bad for the society at large, while engaging in philanthropy and nonprofit activities for the benefit of the society without paying much heed to financial sustainability.

Jerry’s idea supports this ideology, i.e., making a profit from a business that helps people in paying off their loan.

 

Overcoming the Blind Spots

Although, these blind spots are deep-rooted, yet, people can overcome these obstacles if they make an intentional effort to welcome new ideas. Kapor Capital intentionally invested in LendStreet to support Jerry’s idea. As a result, an initial investment of $500,000 turned into a portfolio of 40 million dollars, which enabled Jerry to refinance the financial statements of thousands of families in the U.S.

 

These ideas are available in abundance, but investors have to look closely and more carefully to fund new startups based on the merit so as to reap substantial benefits.

Interest Rates and Venture Capital

Oct
02

The Venture Capital market has experienced a massive growth in the last two decades. Startups prefer to get venture capital funding instead of raising debt. However, when it comes to economic growth, interest rates and Venture Capital (VC) go hand in hand. VC boost entrepreneurial activities and interest rates are helpful when it comes to risk-taking activities for the wellbeing of the economy.

If the interest rate is low, it serves as a fuel for VC investment, but at the same time, it discourages venture capitalists to put their money in riskier startups that are young, in other countries and in less popular industries.

Typically, VC firms invest their money after comparing the profits they achieve with profits that are available to the investors somewhere else. However, the relationship between interest rate and risk-taking can change based on which investor’s point of view is considered.

 

Effect of Interest Rate on non-traditional Capital

When we talk about short to medium term variations in the interest rate, it usually affects non-traditional capital source, including hedge funds and mutual funds. Unlike conventional Venture Capital investors, who keep their money invested for 10 years or so, unconventional investors can put their cash in different baskets and spread it across different assets classes. They can quickly decide where they should put their money in order to reduce the impact of interest rate variation.

 

Changing Effect of Interest Rate on VC Investments

Over the last three decades, federal rates have changed from as high as 16% in the early 80s to as low as 0.09%. However, VC has evolved from a small industry into a $100 billion per year asset class. Venture capitalists are investing a massive amount of money every year. Therefore, it is important to understand the changing effect of interest rate on VC investments.

Between the year 2000 and 2009, the federal fund rates and VC investments were parallel to each other. When the technology bubble was burst, the Federal Reserve adopted the strategy of decreasing interest rates so as to promote the economic growth. For venture capitalists, the environment was not as attractive as it was before and limited partners invested less in venture capital. The VC decreased with the decline in interest rates.

After the introduction of quantitative easing, this relationship between VC and interest rates ceased to exist and they became inversely proportional to each other.

 

Moreover, after the credit crunch, near-zero interest rate policy enabled financial institutions and brokerages to renew their balance sheets, settle their toxic assets, and revitalize their financial health. It also allowed the U.S. economy to recover from the after-effects of the crisis and enabled businesses to borrow capital at reasonable rates. During this phase of cheap money, technology sector, VC firms, and startups took advantage of the friendly valuation environment.

 

Federal Reserve’s Decision to Raise Interest Rates

By the end of this year, Fed plans to raise the interest rates. If the plan materializes, it will be  the first time in the past nine years that the U.S. will experience the increase in rates, which will bring the era of zero interest rate to an end.

Chairman of the Federal Reserve, Janet Yellen, indicated that the increase in interest rates will not be rapid.

It will be a gradual increase, which will not change the valuation environment of a startup and technology sector instantly. However, it will change along with a valuation environment of the stock market. The reason is simple; valuation multiples are indirectly correlated to interest rates, where in, the multiples decrease with the increase in rates.

 

It is important to observe the next move of the Fed and market reaction to changing interest rates, because it may affect the Venture Capital market.

ICOs Surpassed Early Stage Venture Capital Funding

Sep
15

New startups that raised funds through Initial Coin Offerings (ICOs) have now surpassed the early stage VC Funding for internet firms.

But before diving into it, it is important to know what ICOs are.

 

What is Initial Coin Offerings?

This is another way of raising cash.

Cryptocurrency and blockchain startup companies raise capital through ICOs by selling tokens of investors in exchange for equity funds. It is somewhat the same as Initial Public Offering in which stocks are issued in exchange for equity. Just like crowdfunding, ICOs provide a way to get funds from users by enabling them to have a share of the business. They get digital currency in exchange for the money they invest in the business.

 

Rising Popularity of ICOs and VC Funding

ICOs have gained massive popularity in the last few months among blockchain and cryptocurrency startups. In April this year, the total capital raised via these offerings was around $100 million and in May, the amount went up to about $250 million. The month of June turned out to be the biggest surprise when the total funding exceeded $550 million. According to Goldman Sachs, it was the first time that it performed better than seed and angel venture capital funding. Early stage and angel venture capital funding was less than $300 million in June.

In July, the offerings were a little more than $300 million, whereas, early stage and angel funding was just a bit higher than $200 million.

 

Popularity Among the Celebrities

ICOs have become so popular that even the celebrities, including Paris Hilton and Floyd Mayweather, have started jumping on board. In fact, Paris has been involved in it for over a year now and also met the COO of Ethereum last year.

 

Total Value of ICOs in 2017

The total value raised by 92 ICOs in 2017 is $1.25 billion. This is a really good number, given the recent boom of such offerings in the VC sector. There are so many firms that have used these offerings to raise money. For example, Tezos managed to get the capital of over $200 million by creating a new blockchain, whereas, another firm, Bancor secured $153 million via ICO.

 

Criticism and Scrutiny from Regulators

Despite the boom, this phenomenon has been under severe criticism and scrutiny from regulators and other authorities. For example, the Monetary Authority of Singapore (MAS) released a statement in which it was mentioned that these offerings are exposed to money laundering and other terrorist financing risks, because the nature of these transactions remains anonymous. Another concern raised by the MAS was the collection of large amounts of capital in such a short time frame, which makes ICO vulnerable to high-level risk.

On the other hand, the Security and Exchange Commission (SEC) said in July this year that the security law of the U.S. will be applicable to this cryptocurrency. The experts are also showing concern over its legitimacy. They have highlighted that the sale of a cryptographic token makes the investor entitled to a certain share of profit in the firm, which can be considered as a violation of financial rules and regulations. The People’s Bank of China and a lot of other government departments have released a joint statement that people and firms that have raised money through ICO should also make arrangements to return that capital.

 

Firms Facing Increasing Risk of Getting Hacked

Despite all the boom and criticism, the risk of ICOs cannot be ruled out. A clear example of this is CoinDash that initiated an ICO, but ended up getting hacked in July. As a result, all of its funds got stolen. Although, it has gained popularity in the past few months, yet, the risks cannot be ruled out entirely.

 

Future of ICOs

The Chief Information Officer of UBS, Oliver Bussman, raised his concern and said that strict regulations and measures, as applied to IPO businesses, are required in ICO to safeguard the interest of investors. However, he is quite confident about this new mode of raising funds and expressed that such offerings will continue to happen in future. He said that as a new business model that is benefiting the blockchain technology, ICO will continue to sustain by combining hybrid equity ownership/currency and crowd funding.

Women Still Struggling in the World of Technology and Innovation

Apr
13

Although, it seems as if things are moving in a positive direction for female entrepreneurs, there is yet a lot to be done. Women have made accomplishment in every field, but they are still facing a number of challenges, especially when you talk about the increasing number of female startup owners and their ability to get funding.

David S. Ricketts, the senior innovation scholar at the Technology and Entrepreneurship Center at Harvard, said that this is the number one challenge they face when their businesses are experiencing growth.

 

Challenges Faced by Women Entrepreneurs in the IT Sector

Female owners of IT companies have to come across various obstacles when they try to raise capital from venture capital firms. This holds true in case of the Silicon Valley and tech hubs in Amsterdam, Berlin, London. Not only does it adversely affect the progress of women entrepreneurs, but it is also bad for the technology sector, because restraining their leadership and talent hampers the overall growth and impede innovation. Moreover, the gender gap is rapidly increasing around the world, with 90 percent of the venture capital going to male entrepreneurs and only 10 percent retained by female founders. In addition to that, only 10 percent of the strategic level positions in tech companies are occupied by women.

According to the report by the National Women’s Business Council, women invest half the amount of capital invested by men in the startup businesses. It was further mentioned in the report that firms with female founders usually get far less equity financing from venture capitalists and angel investors as compared to companies with male owners, i.e., 14.4 percent vs. 3.6 percent.

Furthermore, only 1.8 percent of the women ask their close family or friends to raise capital as opposed to 9.2 percent men.

 

Female Entrepreneurs in the European Market

A similar trend has been observed in the European market as well, wherein, the IT sector is on the boom, yet the percentage of women leaders is a lot less as compared to men and only a small percentage of venture capital is allocated to startups led by female entrepreneurs. The United Kingdom (UK) is the second biggest startup hub after Berlin. 86 percent of the startups in the UK that receive venture capital funds are owned by men. Whereas, the percentage of angel investment secured by men and women is 56 percent and 44 percent respectively. Unfortunately, even in the IT sector, the distribution of capital is not based on merit.

With such funding constraints, women owned startups in the UK only represent 15 percent of the entire sector. They either revert to self-funding or seek crowdfunding opportunities to survive in the long run.

 

Female Entrepreneurs Generate More Revenue than Male Founders

It is worth noting that female owner companies earn 12 percent more revenue as compared to companies run by men in the IT industry, and their return on investment is 35 percent higher than the firms owned by their male counterparts. If they are given appropriate support, not only do they give better performance, but also make exceptional achievements. This holds true for women living in any part of the world.

 

How Can Female Entrepreneurs Contribute to Better and Sound Economy?

According to one estimate, if women in the UK, who wants to have their own startup companies, get the right support, they can instantly generate more than 300,000 new businesses and create more than 400,000 employment opportunities. Moreover, female-led businesses can contribute to innovation and better quality products with great consumer satisfaction.

 

The U.S. Firms, such as Backstage Capital and Kapor Capital, and the UK firms like Albright are some of the prominent examples of women-led capital firms that have proven to be the game changers in the venture capital (VC) community. To let the innovative and productive ideas flowing in the IT market, VCs should open the doors to give female-led companies a head-start, because it is possible that the owner of the next big unicorn is a female entrepreneur.

European Startups Seeking Assistance of Family Office Investors

Apr
06

There have been a number of stories about the connection between family offices and startups. Family offices are basically private wealth management instruments that are formed by rich families. There are a lot of venture capital companies that established their worth through family offices, including Greylock Partners, Bessemer Venture Partners, Atomico, and Frog Capital.

There are so many well-off families that have built their empires via entrepreneurship or by making seed stage investment.

 

Rising Trend of Family Offices in Venture Capital

It has been estimated that family offices around the world have $4 trillion worth of capital available for investment purposes. Moreover, there has been a rising trend of family offices in the world of venture capital.

An increased appetite for venture capital has been found among these investors. Interviews with 300 family offices around the globe, revealed that 70% of them were either actively investing in the startups or assessing the investment exposure to technology VC. However, there is another group of investors who had mixed reviews. They were still in the process of either recovering from a sudden shock or were still unsure of how to go about investing in startups effectively.

 

Consequences for Europe’s Tech World

Venture capital firms in Europe have experienced a huge funding gap with the United States. There are more technology companies in Europe as compared to the United States with high production of developers, yet, startups in the European region only receive a small percentage of investment in relation to their United States counterparts. Unless there is an improvement in this section, Europe will always lag behind in the production of tech unicorns and famous brands like Google or Apple.

Apart from large companies, family offices that currently have $759 million in asset under management should also contribute in bridging this gap.

 

Higher Returns

If you look at it from a startup or venture capitalist’s perspective, the involvement of family offices is not a big deal. Having relatively relaxed procedures, family office investors have created a stronger network as compared to institutional investors with an ability to open more avenues effectively.

It is totally understandable if you look at it from another angle. For example, family offices always look for those investment opportunities that offer a higher return. They are moving toward riskier products that offer high yield, such as a venture capital opportunity to grab prospective profitable investments.

Moreover, there was a research where it was pointed out that those who are taking control of family offices have a natural inclination and a better understanding of small scale businesses in the technology industry with ground breaking and innovative business models.

 

Changing Perception

It is true that family offices alone cannot bridge the funding gap of Europe as it requires an alliance between city or national level governments, institutional investors, angel investors, and corporate sector alongside the richest families in the world. However, it is not easily possible as it calls for a shift in perception toward venture capital, especially in Europe because it is still far behind the United States in terms of progress.

On the opposite side of the Atlantic, there is a high inclination toward taking huge risks. It is beneficial in the long run, because venture capital generates value much higher than the basic investment. In America, everyone knows that talented entrepreneurs who couldn’t make it in the first attempt are actually winners in the making, who will definitely make it big next time. Unlike America where failure is considered a stepping stone, Europe takes it as a stigma, which eventually influences their decision of capital allocation.

With the rise of technology startups in Europe, risk attitude is gradually changing among private as well as institutional investors. It is highly likely that family offices will be investing in the next wave of European innovation and research and development. This leads to increase in the number of startups that will get to the point of escape velocity and will also thrive at growth stage and beyond.

 

If the tech momentum in the European market does not die down, family offices should make a heavy investment into venture capital or else it will be left behind from other regions as well, such as Asia.

Venture Capital and Equity CrowdFunding Co-Existence

Nov
17

It’s been more than four years since the Jumpstart Our Business Startups (JOBS) Act has been enacted, and its democratization has already started with a few Regulation A+ CrowdFunding (CF) offerings officially recognized by the Security and Exchange Commission to raise funds.

Given the increasing interest in Equity CF and reward based CrowdFunding, venture capitalists would find it hard to seize startups seeking investment opportunities as they prefer to raise funds via crowdfunding. On one hand, it has ignited the fear in some VC firms as they believe it could disrupt their industry by creating a hindrance to attracting young companies, whereas, other venture capitalists are of the notion that startups looking for both seed and later stage funding can utilize CF and VC funds alongside each other.

This gives rise to an important question

Whether Equity Crowdfunding and Venture Capital Co-exist or Not?

The answer to that is yes.

Despite the apprehensions raised by VCs, both the sources have turned out to be successful for startup businesses, as they offer two unique routes to raise funds. Although Venture Capital makes up a large part of the financing, yet, crowdfunding can add an extra element to it and help companies by allowing them to raise money quickly and in a more cost effective way.

 

CrowdFunding Provide Real-Time Feedback

Every VC investor seeks strong ideas that have a potential to provide high reward with minimal risk. With equity CrowdFunding, VCs have the advantage to get real time feedback as they observe the public response to see whether a product or service gain traction. According to an article by Deborah Gage on the Wall Street Journal, three out of every four startups (supported by VCs) fail. However, if it is supplemented by Equity CrowdFunding, the number can reduce to a minimum. As David Loucks, CEO of Healthios, rightly said that both the sources of investments complement each other. It can be seen as a sequence, wherein, CrowdFunding plays its part and then Venture Capital plays its role.

He further said that CrowdFunding doesn’t necessarily have to be restricted to the seed stage; in fact, startups can use it at a later stage to help strengthen their deal. He went on to say that instead of going to the capital markets, companies can turn to CrowdFunding in order to arrange funds around a specific initiative, as there is certainly going to be an investor in the market who would seek a partnership with a top buyer.

 

Challenges of VC and CrowdFunding Partnership

There is always a risk, to VC firms, of getting involved with scores of other equity investors. Loucks said that VCs have to be strict in ensuring the credibility of the sources of funds that a CrowdFunding platform represents.

Lynn said that there can be a situation where companies coming to the Venture Capital round, with thousands of shareholders if they find successful CrowdFunding offering, which complicates the capital structure, especially for Venture Capitalists who want to have a lion’s share in the business.

It also reflects a tough choice on the company’s part that seeks funds through CrowdFunding prior to attracting VC money.

 

Venture Capitalists Can Bring Their Own Skill Set

When it comes to CF, Venture Capitalists can go with the number of structures that allow them to co-invest in a company in tandem with new crowdfunding methods. For example, VCs might get access to preferred stock when CF investors may only get common stock. Moreover, VCs can also maintain control provisions, including anti-dilution measures so that rights attributed to them are not applicable to CF shares.

These arrangements can be quite fruitful for startups and investors alike, and in many cases, VCs can boost the overall value of an enterprise, while structuring arrangements in a way that meet their business needs. They can bring connections and market exposure to the table. As a result, new companies get to raise capital, Venture Capital firms get validation, and CF investors get the advantage of VC guidance and experience. Therefore, it can be fairly said that with the right strategy and partners, both the VCs and CF investors can co-exist.

Crowdfunding and Venture Capital

Nov
11

If startups manage to get funding from a venture capital firm (VC) or angel investors, they mark it as a successful milestone.

However, in the past few years, another investment vehicle has been introduced in the financial market to fund innovative ideas called CrowdFunding (CF). It has been changing the game ever since its inception and it is a new form of raising money to finance ideas. Unlike other forms of investments, such as, seed funding, angel investing, VCs or bank loans, CrowdFunding actually enables startups and entrepreneurs to invest in their business with a large amount of capital supply. Before going into detail, let’s look at what crowdfunding actually is.

 

What is CrowdFunding?

In simple words, CrowdFunding is a mean of raising money through a large amount of individuals, who are requested to fund an idea on a CrowdFunding website with a small amount of money. This phenomenon depicts the wisdom of the crowd, wherein, a business gets an opportunity to satisfy the market demand that was previously not exploited. Having this system in place results in creator getting funds to excel in his creativity and crowd getting a new product, which makes it a win-win situation.

 

CrowdFunding or Venture Capital – A Better Choice?

This can be a topic of solid debate if discussed in detail, because both sources have their upside and downside. In order to get a clear idea of which one of the two is a better choice, some of the key points have been discussed below.

 

  • Ease of Access

There is no doubt that it is easier to access funds via CrowdFunding than it is to raise capital via Venture Capital. You can meet your capital requirement with CF without having to build any connections, and instead, leave the decision to a large group of individuals. Sometimes, VC is hard to access. Despite having actual customers and real revenues, companies are considered small by the venture capitalists.

With CrowdFunding platform, it becomes easier to access a wide array of accredited individuals to fulfill initial capital requirements. On the other hand, regardless of how streamlined the venture capital processes are, there will always be more friction in terms of VC making inquiries and spending more time.

  • Stability

Stability is a key to a successful business, but it isn’t achieved easily. Most of the startups do not show an incredible growth curve in the beginning. It takes time to find the product/market fit and to find out a scalable way to sell a product. It means startups would need extra time for which, there will be extra financing requirements. In case of CrowdFunding, there is no apparent deal with responsibility and resources to fill this gap. This is where venture capital partners can assist a business to maintain their focus on execution by providing enough cash.

However, it should be done based on TRUST where both the founders of a startup and venture capitalists feel that the investment was done fairly.

 

Venture Capitalists working with CrowdFunding platforms

Ron Miller, a CEO of StartEngine (CrowdFunding platform), venture capitalists are compelled to use CF, because it asks founders for revealing the strength of their teams and values in the marketplace. He further said that it shows that strong teams and concepts are likely to get exposure in the market, which will draw attention of the VCs and other investors to further invest in their ideas.

For Example, Oculus Rift, a virtual reality system. They raise $2.4 million through CrowdFunding, which gave them the opportunity to rise another round led by Andreeseen Horowitz (VC firm) to raise $75 million.

 

Both sources of funds have their pros and cons. However, some VCs are now turning to crowdfunding websites to get access to new deals. Having strict timelines, they use CrowdFunding to identify if the idea is worth investing time in.

Corporate Venture Capital vs. R&D

Nov
04

According to a venture capital database (CB Insights), the venture capital market invested $74.2 billion across North America in 2015. The Corporate Venture Capital (CVC) groups participated in 17 percent of the deals in that region, making up 24 percent of the total venture investment distributed to startups that have been fueled by VCs.

This definitely reflected a reasonable improvement in CVC activities as their participation was limited to 12 percent in 2011. Significant growth has been observed in this investor type as an alternative source of funding for new businesses, but only a few know what corporate venture capital is.

 

Corporate Venture Capital (CVC)

CVC is defined as an equity investment by an established company in a startup business. It can be put together as an independent part of a company or an appointed investment team that is off their company’s statement of financial position. The main goal of CVC is to invest in companies showing high growth prospects. Some of the marquee brands having venture presence in the technology and healthcare industry, include Dell Ventures, Google Ventures, Cisco Ventures, Intel Capital and Johnson & Johnson Innovation.

Corporate venture capital has been one of the most critical contributors in the venture capital ecosystem that has matured over time.

 

Research and Development (R&D) and Corporate Venture Capital

R&D and CVC are two prominent sources of creating new potential.

CVC can be used as a substitute for internal research and development in creating such opportunities or capabilities. In different theories proposed by Dushnitsky and Lenox (2005), Cassiman and Veugelers (2002), and Gompers and Lerner (2001), there was unanimity on the idea that R&D backs the increasing use of CVC, in contrast with CVC to be used as a substitute for internal R&D. However, not much consideration has been given to how different industries might affect the relationship between these two sources.

 

Preferred Use of Investment

With the rapid changes in the global market, companies have drawn their focus on research and development investment to strive for achieving short term targets, as VCs are considered too quick to get caught up in the latest thing. But it doesn’t have to be this way. A number of opportunities with the great potential to boost innovation already exist, except corporations are not able to make use of it. One of these means is to use corporate venture funds.

 

Corporate R&D – Slow and Expensive Investment

Research and development investment is mostly focused on perfecting technologies that are already used by the public. The United States has spent billions on gigantic science projects for years, but the commercial returns were not as expected. Cutting back on R&D is not the right choice either, as Kodak ended up filing for bankruptcy when they cut their research funding and focused on film, and Nokia is now being purchased by Microsoft as they tried to keep their focus on low-end phones.

 

Corporate Venture Capital – Quick and Cheap Investment

CVC, on the other hand, is better at identifying new regions and is quite flexible and cheap as compared to R&D. During the last 20 years, a number of CVC initiatives gave a boost to pharmaceutical companies that were struggling to catch up with new advancements in bioscience.

The large companies in a corporate sector stay cautious of CVC, as they have seen them distributed ineffectively. For a corporate venture to be a successful mode of investment, its goals should be in line with corporate objectives and the approval of funds should be done smoothly with the same compensation levels as offered by independent venture groups. If a company fails to provide a fair incentive, it is likely to face a consistent flow of desertion. Rewards should always be given if people solve a problem or launch a new product in the market, but they do not necessarily have to involve cash. Recognition can also be a significant reward for such efforts.

Traditional R&D are not good at pointing out threats from the competitors. Instead, it keeps its focus on a specific number of projects that results in ignoring innovative advances that happen outside the company. Whereas, CVC quickly responds to change and potential threats, which allows decision makers to withdraw from any investment that doesn’t seem to be generating revenue in the future. It is highly likely that a creation of the CVC fund would prove to be a breakthrough idea that changes everything.

What do Angel Investors Look for in Startups?

Oct
27

Angel investors have to look for a business that worth investing, but it is not easy to differentiate between a startup that has a potential to grow and the one that is unlikely to succeed in the future. Angel investments are the most popular form of injecting funds into a business, especially a startup. According to a research, business owners are of the notion that it is a plan that attracts the investment, but investors seem to have other priorities.

Angels go for the “Ideas and Founders” and not the “Plan”

An online platform, known as Company Check that provides data on the companies in the UK, conducted a poll where 3000 business owners were asked about what they think an investor looks for while making an investment decision. It was revealed that around 38 percent of participants said it is a business plan, whereas, 27 percent of them voted for sales figures, followed by the founder, business idea, and economy. But the owner of Company Check, Alastair Campbell, was surprised with the results. He recently got an investment of $1 million for his startup called Carsnip. He said that at an early stage, it is an idea and a founder of a business that angel investors tend to go for, and then comes the sales figures and plan.

To further confirm the reasons, another poll was initiated where investors were asked the same question. Most of the investors shared the same notion as expressed by Campbell. Rory Curran, an angel investor of StatPro and Ecodesk, said that after his experience of investing in about 15 early stage startups and going through failures over time, he believes the ranking should be a founder, an idea, and then a business plan (especially the technology). And then comes the question of whether it is scalable, or if it will need significant reinvestment at a later stage. Similarly, former head of global markets at KPMG and an angel investor, Neil Austin said that he goes for the idea, then founder and then a business plan.

Another investor, Rajesh Sawhney, who has invested in about 50 startups, including Little Eye Labs (later acquired by Facebook), said that he seeks an exceptional founder with ingenious ideas and profound execution capabilities. He believes that angel investing is basically about recognizing and nurturing a unique talent.

“Experience” Matters

The chairman of Wyldecrest Parks and investor, Alfie Best, said that he considers cash flows to be a key factor, but when it comes to investing in startups, the experience of a founder along with the companies that are willing to purchase their products is what he evaluates.

Another angel investor from Silicon Valley, John Rampton, said that for a founder to make an impression, it is important to show that a team is backed by experience and credibility, because he believes it is a team that is going to make an impact and not merely the idea.

High-growth Business is a Potential Investment

Angel investors tend to go for startups with high growth prospects as compared to the ones that are likely to grow at a slow pace with modest profits. They hold their expectations high and seek a higher return than they can possibly get from a stock market. Allan Riding, an expert on angel investing and a professor at Carleton University, said, ““For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years.”

An entity is likely to win an investment if it builds a business with sound future prospects. According to AngelBlog, angel investors are more likely to invest at pre-money valuations between $1 million and $3 million. By this point, it is probable that a startup has succeeded in establishing itself as something, having a real customer-base, fair valuation, and real revenues. Moreover, at the time of making an investment, they also look for an exit strategy to take a smooth exit.

Scalability

Another key factor that every investor looks for is the scalability of a business. They prefer to invest in startups that require a minimum viable product to get to the market and can scale quickly. For example, the largest taxi company in the world, Uber, does not own any motor vehicles. Similarly, a well-known retailer, Alibaba, holds no inventory. These companies scaled very quickly as soon as they entered the market.

It is important for entrepreneurs and startup owners to value the motivation and concerns of angel investors, because these investors take a significant risk when they invest in businesses.