🚿 & 🙏 — Spray & Pray

Durante el siglo XX el mundo estuvo bajo el paradigma de la producción en masa. Lo importante era ser eficiente y trabajar duro. El siglo XXI nos trajo la economía de la información. Ahora lo importante es aplicar el conocimiento para agregar valor. Más que el trabajo duro, el éxito se consigue con el trabajo inteligente.

Este resumen es extremadamente sencillo, pero en general adecuado.

El punto es que muchas industrias han adoptado el paradigma del trabajo inteligente casi como una obligación, y no siempre lo aplican con buen criterio.

Por regla general podemos decir que importa más la calidad que la cantidad.

Hace poco Patrick Ryan, co fundador de Odin, publicó un artículo resaltando algunas de las conclusiones de una investigación realizada por Steve Crossan en 2018 y agregando algunos datos propios.

He considerado importante resaltar los puntos más destacados de lo postulado en estos textos porque suponen una crítica interesante al modelo con el que operan los fondos de Venture Capital.

Aumentando el portfolio

Los fondos de Venture Capital tienen en promedio de unas 15 a 25 inversiones en sus portfolios. Según Crossan deberían tener 150 como mínimo, pero se recomienda llegar a las 300.

La diferencia es notable hasta el punto que parece ir en contra del modelo de los VC. Si hay que agregar tantas inversiones entonces lo lógico es suponer que en cierto punto estamos sumando tratos de menor valor.

Y si nos guiamos por cierto sentido común esto es cierto.

Sin embargo, en las simulaciones realizadas se han advertido dos beneficios notables:

Reducción de las posibilidades de pérdida

Con una inversión de solo 5 empresas la posibilidad de perder dinero es del 40%. Cuando superas la marca de las 30 inversiones la posibilidad de perder dinero pasa de un 10% hasta casi un 0% conforme se suman empresas. Aunque las variaciones son menores luego de las 100 empresas.

Aumento de las posibilidades de mayores retornos

Con un portfolio de 300 empresas las chances de obtener retornos del cuádruple o el quíntuple de lo invertido son un 80% mayores. La posibilidad de obtener múltiplos superiores a 10 no disminuye.

Los fondos de Venture Capital tienen razones que la razón ignora

Al preguntarse sobre las razones de por las que los VC no adoptan una estrategia de inversión similar a la indexación surgen dos factores claves. Uno de ellos podríamos decir que es cultural y el otro práctico.

Va contra la premisa de lo que es un VC. Como hemos señalado en otra ocasión, la capacidad para realizar una adecuada selección es uno de los factores claves que distinguen a una firma de otra.

Un mayor número de empresas en un portfolio puede ser percibido como una menor cantidad de trabajo o valor aplicados en la selección. Decimos que la calidad es mejor que la cantidad. Pero el trabajo realizado demuestra que a veces se necesita más cantidad para obtener esa calidad. Cabe recordar que aún en el caso de los actuales portfolios, la mayor parte del retorno proviene de unas pocas empresas.

Es importante notar que para una reducida cantidad de compañías este modelo con un portfolio reducido parece funcionar bien. Estas empresas son las que actúan como entes aspiracionales y marcan el modelo a seguir. Un modelo que no funciona tan bien para el resto. Ryan cree que la insistencia de muchas empresas en este modelo es en parte una cuestión de ego.

En lo que se refiere al aspecto práctico Crossan advierte algunas falencias.

El modelo no considera la participación de varios VC en el mercado.
Supone un rendimiento del sector que puede no ser tan bueno en la realidad.
A esto hay que agregar que con unas 150 o 300 empresas el nivel del manejo del porfolio como la ayuda que la empresa puede ofrecer a las empresas será mucho más limitado.

Inteligencia y automatización

Crossan trabajó en el área de producto de DeepMind. Actualmente se desempeña como consultor en IA y tecnologías relacionadas. Obviamente el modelo al que apuntan sus conclusiones no es contrario al de la economía del conocimiento.

Pero sí es uno que parece necesitar herramientas más avanzadas para el análisis automatizado. Y la aplicación de sistemas automatizados podría no ser una solución tan simple y automática.

¿Es mejor? Tal vez.

¿Es posible? Todavía no tenemos una respuesta.

Por lo pronto el análisis crítico de la actividad siempre es una buena ocasión para aprender y replantearse los principios que tenemos por ciertos.

Inversiones predeciblemente malas: Evidencia del Venture Capital

La gran mayoría de los inversores coinciden en que resulta relativamente sencillo encontrar buenas ideas, pero es mucho más complicado hallar el equipo adecuado para llevarlas a cabo. A tal punto el talento es concebido como aspecto clave que se piensa que un equipo excelente puede convertir una idea mediocre en un gran éxito pero lo contrario es imposible.

El hecho de que esta idea esté tan extendida y forme parte de los principios de tantos inversores nos hace pensar que ha sido validada fielmente.

Pero ¿Es realmente así?

Diag Davenport ha publicado los resultados de una investigación bajo el título “Predictably Bad Investments: Evidence from venture capitalists”. El trabajo supuso el examen de unas 16 mil startups, que en conjunto suponían una inversión de USD 9 mil millones.

El problema del éxito

Lo primero que vale aclarar es que las VC no están consiguiendo malos resultados. Y esto puede ser parte del problema. En general, los fondos de venture capital ofrecen mejores resultados que el mercado y al parecer también superan a los inversores ángeles. Esto último es atribuido a una mayor cautela y mejores herramientas de análisis.

El problema es que el rendimiento de las VC se sostiene en gran medida por lo que se consigue con la mejor mitad de sus inversiones. El estudio apunta que si la mitad inferior fuera reemplazada por inversiones en el mercado se conseguiría una mejora de hasta un 41%. Davenport sostiene que esto demuestra que existe un gran margen de mejora.

Ideas destacadas

El trabajo tiene dos ideas destacables.

La primera es la que da título al estudio. El 50% de las inversiones de Venture Capital son predeciblemente malas.

No solo malas. Predeciblemente malas. Esto supone que el inversor contaba con la información suficiente para darse cuenta de que debía haber dejado de lado la startup.

La segunda idea es que una gran parte de estas malas decisiones están vinculadas a un excesivo enfoque en el talento por parte de los fondos VC, y el hecho de que estas organizaciones no son muy buenas a la hora de identificar el talento.

Es como armar un equipo de fútbol en base a los jugadores y no saber cuáles son los que realmente juegan bien. El foco en el emprendedor va en contra de un examen más exigente del negocio en sí. Y este parece ser el punto clave.

Errores predecibles

Para demostrar que los errores en las inversiones eran predecibles, Davenport desarrolló un algoritmo de análisis que identificó los signos de éxito para las startups. Algunos de los factores destacados para lograr obtener un EXIT y resultados exitosos fueron la educación de los fundadores y las inversiones recibidas previas.

Una vez más nada que no se haya señalado previamente, pero precisamente ese es el punto.

El modelo elaborado fue capaz de realizar predicciones de EXITS y resultados exitosos. Curiosamente no fue tan consistente en términos de retorno obtenido.

Aunque el modelo no sea perfecto, es justo señalar que una vez más las computadoras nos han demostrado que pueden superarnos.

El problema del talento

¿Y por qué se le da tanta importancia al fundador?

Davenport señala que la perspectiva de los inversores está dominada por la imagen de los fundadores de los grandes imperios modernos: Apple, Amazon, Google, etc.

Pero este no es un fenómeno nuevo. Desde hace décadas los grandes emprendedores han sido vistos como héroes del progreso.

Poco importan las nada raras ocasiones en las que sus proyectos han terminado en trágicos fracasos. Incluso estos fracasos son vistos como parte del proceso que lleva a la grandeza. Por supuesto que queda mucho mejor cuando los fracasos son anteriores y no posteriores.

La idea de que una sola inversión excepcional puede compensar un portfolio con un montón de apuestas con resultados inferiores es casi inseparable de la del genio del que todos se burlan hasta que demuestra que tenía razón. Es una mirada romántica, ambiciosa y que fundamentalmente no está equivocada.

Pero tampoco es completamente certera.

Solo queda mejorar

En la era de las computadoras, los fríos y precisos algoritmos nos demuestran que no tenemos la verdad en nuestras manos, que todavía nos queda mucho por aprender y mejorar.

Cuando los grandes maestros del Ajedrez y el Go fueron derrotados por las computadoras, las noticias recorrieron el mundo. Para muchos suponía el fin de una era, el cálculo vencía el ingenio humano. Mucho menos publicitado ha sido el hecho de que las computadoras se han transformado en herramientas de análisis extraordinarias. Han abierto las mentes y tirado abajo ciertas ideas previas, ofrecido opciones contraintuitivas.

Y los grandes jugadores de ajedrez y go han tomado ese conocimiento, lo han aprovechado y ahora demuestran de forma consistente un nivel superior, propio de una nueva era.

Criterios de valuación de Startups (Parte 2)

Valuar una startup en estadio temprano resulta muy difícil. Hay muchas señales para tomar en cuenta y procesar, incluso después de analizar cada una de ellas, termina siendo una tarea más artística que científica.

Es cómo valuar una obra de arte: hay algunos criterios que sirven para tomar una decisión con fundamentos pero no hay forma de saber si tomamos la decisión acertada hasta transcurrido un largo tiempo después de haber invertido.

En el artículo anterior mencionamos algunos elementos que pueden servir como ayuda para valuar una startup. En el presente artículo agregaremos nuevos elementos e intentaremos plasmarlos en ejemplos concretos.

A fin de analizar cómo funcionan algunos de los criterios que deberían regir la decisión, haremos el ejercicio de pensar en situaciones hipotéticas que se nos suelen plantear en la práctica. Cada uno de los criterios será analizado de manera absoluta y totalmente independiente al resto, como si fuera el único elemento a considerar.

Equipo fundador

El análisis del equipo fundador es una parte clave del proceso, ya que puede determinar el éxito o el fracaso de una Startup.

Este grupo de personas no solo tienen que ser capaces y contar con las actitudes y aptitudes necesarias, sino que también los valores, la visión y objetivos del proyecto deberían ser similares a los del inversor para asegurar que la línea de desarrollo y crecimiento van en la misma dirección y no existirá un conflicto en la toma de decisiones.

Quiénes son los fundadores?
Cuál es su experiencia en la industria y el mercado del proyecto?
Es comprobable este expertise?
Tienen experiencia los miembros del equipo emprendiendo? Cómo transitaron ese camino y cuál fue el desenlace?
Cuentan con mentores o advisors de renombre?
Son complementarios los perfiles y/o roles del equipo?
Cuántos de los miembros del equipo están dedicados full time al proyecto?

Estas son las preguntas básicas para conocer el equipo y para poder justificar una valuación superior o inferior.

Ejemplo

Un SaaS tiene desarrollado un Producto Mínimo Viable (MVP), no genera ventas y hay un mercado que parece tener potencial pero aún está sin validar. Dos de los founders tienen más de 10 años de experiencia en la industria, sin haber emprendido previamente. Sumado a esto, la compañía está acompañada activamente por un inversor ángel de renombre que ha invertido en la compañía.

Todo esto podría servir para justificar una valuación ligeramente superior a USD 500,000.-

Tracción e ingresos estimados para el corto plazo

En etapas tempranas, la tracción que puede demostrar el proyecto es otro de los puntos importantes.

Siguiendo con el ejemplo de un SaaS, si el proyecto solo cuenta con 3 clientes que realizan una prueba piloto, sin demostrar chances concretas de que se puedan convertir en clientes pagos, será difícil justificar una valuación superior a USD 500,000.-

Sería un caso muy distinto estar hablando de que cuenta con 50 clientes con prueba piloto, el ticket promedio que se le piensa cobrar a cada uno es de USD 1.000.-, y se estima que el 50% de los clientes se convertirán en clientes pagos, se puede empezar a pensar en una valuación más cercana a USD 1.000.000.-

En todo el análisis que se realiza con la tracción y los ingresos estimados en el corto plazo hay variables importantes a tener en cuenta, como lo son la cantidad de potenciales clientes y el ticket promedio. Si hay solamente un cliente y se estima que el ticket del SaaS será de USD 50.000.- mensuales, la valuación podría oscilar entre USD 500.000.- y USD 1.000.000.-, ya que si bien el ingreso esperado es similar al caso anterior, es mucho más riesgoso depender de un solo cliente.

Crecimiento y compromiso de usuarios

Ejemplificamos ahora con un proyecto de Mobile App.

En este caso, contamos con información y conocimiento previo que tenemos de aplicaciones de similares características, sabemos que un típico valor del tiempo de vida promedio de un cliente (LTV – lifetime value) es de USD 2.-

Si la aplicación ya tiene 10.000 usuarios y la base de usuarios está creciendo a un 15% mensual, suena lógico valuar la compañía entre USD 1.000.000.- y USD 1.500.000.-

Si la aplicación tiene 10.000 usuarios y está creciendo a una tasa de 30% mensual, sería razonable aceptar una valuación de entre USD 1.500.000.- y 2.500.000.-

Si la aplicación tiene 10.000 usuarios y la base se está achicando al ritmo de 10% mensual, una valuación razonable podría ser entre USD 750.000.- y USD 1.000.000.-

Tamaño de mercado

Es necesario entender cuál es el mercado potencial al cual apunta el negocio.

El proyecto puede apuntar a:

Un país
La región
Al continente
Todo el mundo

Conviene analizar ese mercado potencial con el sistema “TAM, SAM, SOM”, el cual analiza 3 aspectos que funcionan como embudo, desde lo más genérico hasta lo más específico:

mercado total direccionable;
mercado al que puede servir el proyecto con su producto o servicio;
mercado que razonablemente puede conseguir el proyecto.

Un aspecto interesante a tener en cuenta es el plazo estimado para atacar el mercado al que se apunta y la hoja de ruta. Es importante saber si los fondos de la actual ronda de financiamiento son suficientes para atacar el mercado potencial y, sino, cuantas más rondas de financiamiento se planean llevar a cabo, y en qué plazos estimados.

También es imprescindible consultar si la actual ronda de financiamiento en la que participamos como inversores, nos da el derecho a participar en la compañía global, o solamente en alguno de los países.

El tamaño de mercado resulta un factor determinante en compañías de etapa temprana, ya que al haber tanta incertidumbre sobre la mayoría de los aspectos del proyecto, funciona como principal indicador del potencial de crecimiento del negocio, el cual debe poder generar ingresos de crecimiento exponencial y retornos significativos para una inversión con este nivel de riesgo asociado.

Cuando el emprendedor hace su pitch, es conveniente analizar si hay una coherencia lógica entre el mercado que él declara como potencial, el segmento de clientes al que apunta, la propuesta de valor orientada a resolver un problema que ese segmento padece, y la estrategia de comunicación y marketing que planea llevar a cabo para aumentar sus ingresos.

Si la respuesta a todos estos puntos suena satisfactoria y atractiva, una valuación de USD 1.000.000.- podría resultar lógica, aun cuando el producto y estadio comercial se encuentren todavía muy incipientes.

Competencia

Este tema está estrechamente vinculado al anterior ya que, si existe competencia directa, la compañía en cuestión tendrá la dura tarea de competir por el mercado existente o diferenciarse para escaparse de su competencia con alguna ventaja competitiva o propuesta de valor superadora.

Un error en el que incurren muchos proyectos es el de subestimar a los jugadores incipientes de la industria y a quienes consideran como competencia indirecta. Estos competidores podrán superar fácilmente con una mera innovación incremental y escalar rápidamente en la curva de madurez del mercado en que nos encontremos.

Asimismo, aunque la compañía que estemos analizando corra con una ventaja competitiva sustancial, debemos consultar el camino a seguir en términos de innovación y los nuevos negocios que puedan llegar a surgir. No es grave si el emprendedor no tiene la respuesta inmediata, pero sí resulta determinante que el equipo transmita un perfil de innovación permanente, esto es lo que forjará una compañía que pueda trascender y sobrevivir.

Tanto este punto como el anterior, nos permiten conocer la cuota de mercado que apunta obtener el proyecto.

Modelo de negocio

En nuestra opinión, este es uno de los aspectos más relevantes para la correcta ejecución del plan de negocios. Si existe una propuesta de valor consistente y un mercado potencial atractivo, entonces debemos analizar si el modelo de negocio es viable, coherente con el segmento de cliente al que se apunta, con el contexto socio económico y, sobre todo, si es escalable para generar el tipo de retornos que esperamos en este tipo de inversiones.

Es fundamental, antes de adentrarse en detalles, distinguir si es un modelo B2B, B2C, B2G, etc. Esto nos permitirá identificar con claridad quiénes son los usuarios y quiénes son los clientes (los que pagan), así como también cuáles son los canales de venta, cómo son los procesos de venta, los obstáculos que se presentaran, y corroborar si la estrategia de comunicación, precio y producto son coherentes.

Además, la distinción entre estas categorías resulta útil como indicio para analizar la potencialidad de que la compañía sea posteriormente invertida por fondos institucionales o eventualmente adquirida por una corporación, lo que seguramente nos dará una clara posibilidad de generar un evento de liquidez en nuestra inversión en los próximos años. Por ejemplo, existen fondos que excluyen de su tesis de inversión a los proyectos con foco B2G y B2C.

Otro aspecto muy útil de conocer el tipo de negocio es que nos puede indicar cuánto capital y que tan intensivo sería el uso del mismo, cuál es su velocidad de gastos y flujo proyectado y, consecuentemente, cómo serán las próximas rondas de financiamiento.

Por ejemplo, cualquier modelo similar a una red social cuyo objetivo es generar trafico masivo para luego monetizarlo con publicidad, seguramente deberá invertir en adquisición de usuarios y fidelización durante un largo periodo de tiempo para lograr empezar a generar ganancias con el producto o servicio. Tardará incluso más años o meses en lograr el punto de equilibrio operativo.

Otros ejemplos pueden ser compañías que necesiten alto nivel de inversión, ya sea para inventarios, almacenamiento, capital de trabajo, o mismo compañías que, por el perfil de sus clientes, deben transitar largos procesos de venta para ver sus primeros ingresos.

Existen innumerables ejemplos, pero lo importante es no dejar este aspecto al azar.

Estructura de capital

Si bien no es sustancial al éxito del negocio, es importante conocer la estructura de capital (cap table) de la compañía, y conocer cuáles son las obligaciones, pasivos y contingencias asumidas por la compañía y/o los emprendedores a nivel individual.

Asimismo, debemos conocer los términos bajo los cuales han invertido inversores anteriores. Todo ello nos dará una idea más clara sobre el tipo de derechos que podemos llegar a adquirir en caso de decidir avanzar con una inversión, y las potenciales trabas o riesgos que podrán surgir en caso de que la compañía resulte exitosa.Dedicaremos un artículo para este aspecto.

Como habrán notado, ninguno de estos criterios o aspectos sirve por sí solo para asignar una valuación a una compañía, pero poco a poco vamos obteniendo parámetros útiles para aproximarnos a una valuación más exacta y acertada a la realidad del proyecto.

A lo largo de los próximos artículos, intentaremos desarrollar un mecanismo lo más estandarizado y acertado posible.

Rising Trend of Initial Coin Offerings

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.

A Useful Funding Tool for Less Segregated and Diverse Communities

Communities with a mixed ethnic background and more diversity are likely to come up with new ideas. According to a study by the Yale School of Management, having people in a community with different backgrounds is beneficial for Venture Capital (VC) firms as it leads to economic development and innovation.

In various countries around the globe, communities, universities, and businesses are pursuing diversification. Apart from the immediate benefit of getting fairness, having multiple points of view and diversity of experience is very useful for the overall performance of these sectors.

Effect of VC on Integrated Communities

The study also revealed that VC investment is more beneficial for ethnically integrated communities as compared to segregated communities. The effect of VC on the integrated communities was 30 percent higher as compared to segregated ones, especially in terms of creating more wealth, jobs, entrepreneurship opportunities, and facilitating innovative activities. The startup businesses create more value and job opportunities that eventually lead to economic growth.

In a diverse community, you get to interact with people having diverse backgrounds, which leads to getting access to more resources and information as compared to segregated communities. In the past, studies have shown that economic vitality is enhanced as a result of social interaction within a community.

Implications of Social Interaction for Venture Capital

The purpose of the study in question was to identify whether a social structure is vital for economic development or not. The VC was the focus of this study, given the fact that it is a useful financial tool for high growth businesses.

It was revealed that such relationships have significant implications when it comes to VC investments. VC investors put their money in new businesses that are in the close vicinity. They tend to rely on professional relationships and friendships for leads and information that cannot be received via cold calls or internet search.

VC investments were compared to aggregate income, employment, new businesses, and a number of patents. It was found that VC performed much better in less segregated and diverse areas, resulting in more patents, more jobs, and created more value.

Social interaction has benefited various communities. One of the many factors that led to high level of innovation in the United States is the increasing number of immigrants that bring diverse culture. When they interact with one another, it creates room for transferring valuable information and ideas, which leads to better economic outcomes. Besides, when people from different ethnic backgrounds live close to one another, it brings about healthy relationships and effective interactions that is favorable for the wider economy.

Diversity Leads to Innovative Thinking

Diversity is also very useful to promote innovative thinking that leads to success in the venture capital market. Any sector that does not have diversity or mixed race is very limited in innovative mindset and thought process. This results in similar thinking with not many innovative ideas. In addition to that, there is gender bias in the VC sector that restricts the overall growth prospects. It is a widely known fact that female founders represent the rapidly growing entrepreneurial group in the United States and their firm’s experience growth 1.5 times faster than the average growth rate in the market.

Providing Solution to Promote Innovative Decision Making

Despite the lack of diversity, it is quite likely that change is taking place gradually. An increasing number of entrepreneurs with diverse background are entering into the market. They are focused on providing a solution to the problem and make a profit in the process.

It has become really important to promote diversity in the communities and in societies at large so as to promote economic development and prosperity. Not only will it be beneficial for the venture capital industry, but it is also going to help the masses in getting equal opportunities in every sector.

The venture capital market has also derived benefits from diverse communities in terms of innovative thinking and plethora of useful information. To continue moving in the right direction, countries around the globe should embrace diversity in order to have successful businesses and create more job opportunities that will eventually bring economic prosperity in the long run.

Struggles of Entrepreneurs Based on Investors’ Perception

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

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

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.

Wave of Change in the VC Sector

Every day many venture capitalists invest in startups with the hope that it will be yet another unicorn. Venture capitalists are a type of investors who are also futurologists. They invest in new businesses with an anticipation that it will turn out to be the next Facebook or Uber and their investment will multiply several times.

A perfect example of such investment is the one made by Mark Tluszcz in Skype. In 2001, he invested $2.5 million and now is worth $250 million.

Investors have the chance of winning big or losing all of their investment. Tluszcz also shared his experience stating that 50 percent of the startups they invest in, end up as a failure; 20 percent of these investments only make as far as returning their investment money and another 20 percent increase their stake three times. It is the remaining 10 percent that makes it big, he added, and keep the venture capital (VC) firms going.

A Wave of Change in the VC Sector

Keeping all of this in mind, it is an undeniable truth that VC firms have undergone massive changes over the last two decades.

In the UK, the amount of investment by venture capitalists has increased from £453 million to £1961 million between 2011 and 2016. A number of these firms are filled with entrepreneurs who are passionate about building a business and not just a career.

Lack of Diversity

Despite all the changes, there is still a lack of diversity in the sector. Debbie Wosskow, a VC investor who was once an entrepreneur, came face to face with the harsh reality that 95 percent of all the investments made by venture capitalists go to male-led startups and most of these investments are made by male venture capitalists.

According to a research in Harvard Business Review, when it comes to female entrepreneurs, the focal point of venture capitalists is always toward potential losses, but with male founders, they look at it from the perspective of potential gains. Regardless of what the reason is, things have started to change in the VC sector.

Wind of Change — A Step Toward Revolutionizing the VC Sector

According to a venture capitalist, Suranga Chandratillake, said that those who present their ideas before a group of investors have to sell their idea of making it big. He further said that investors need a convincing idea that has a potential to generate good profits and not a presentation that just talks about becoming another unicorn like Uber. Investors need to see that entrepreneurs are not just into organic growth; in fact, they should be willing to take risks of revolutionizing the entire sector with a proper plan and potential to bring the right people in their team.

Self-awareness — A Trait of Successful Entrepreneurs

Another venture capitalist, Jillian Manus, believes the best ideas come from those startups where one partner has a sales and operation background whereas the other one is into technology. They come together as a team to sell their idea along with a well-devised plan of how they will achieve their goals. She added that a founder must be honest with exciting ideas as the most important question she asks the entrepreneurs is to tell how they failed. Those who say they have never failed are either hiding the truth or they lack self-awareness.

To secure an investment, a founder of a new startup should show that they have learned from their mistakes and be honest about it as it enables them to identify a problem ahead of time. All in all, venture capitalists do believe that honesty is the best policy when it comes to investing in new startups, because if an entrepreneur needs a venture capital, he or she must tend to scale up and expand their business quickly.

Venture Capital Ecosystem – Now

The current Venture Capital ecosystem has begun to revive and experienced growth in the last two-quarters. Let’s take a look at the situation of the venture capital ecosystem to evaluate the liquidity and investment position in the market.

Overview

In the first and second quarter of 2017, VC sector continued to grow despite the rolling financial market in China, Euro crisis, UK’s exit from the EU, controversial election in the U.S. and obstructed technology IPO market. Although, new uncertainties have surfaced, investors have learned to adapt and adjust. Whereas, the profits made in the first quarter further increased in the second quarter.

Funding Activity at a Global Level

The number of deals around the world has also increased. Equity funding rounds in the second quarter of this year increased by 5.7% as compared to the first quarter, adding about 300 rounds. This change took place as a result of angel investment and seed stage investment.

If you compare it with the second quarter of 2016, the overall growth in the funding rounds was about 8.8%, which came about as a result of early stage firms.

Dollar Volume

According to a report by CrunchBase, the overall investment increased by 16% in dollar terms, which is an increase of about $6.6 billion in the deployed capital. There was a fair distribution of gain. Late stage startups, early stage startups, startups at the seed stage and angels received about 20% funding in the current quarter as compared to the previous one. The only thing that faced a downturn was a technology growth rounds.

However, the global VC market is not yet restored. In the second quarter of last year, the total investment amount was $51.5 billion, but this year it was $47,8 billion, i.e., 7.2% less than the previous year. On the other hand, technology and seed sector experienced growth by 10.75% and 16.5% respectively.

Leading Investors

In a CrunchBase report, a total of 3200 VC rounds was analyzed during the second quarter of this year. During the first quarter, it was Tencent Holdings, Sequoia Capital and Accel Partners that secured the first position, wherein, each had a total of 9 rounds. In the current quarter, however, Tencent led 11 rounds, whereas, Sequoia and Accel led 14 and 20 rounds respectively.

In this quarter, some newcomers were also in the leading position, including Samsara, Grammarly, and General Catalyst. SoftBank also formed part of this list in the second quarter of 2017 along with True Ventures. Some firms dropped down from a leading position, while other newcomers made it to the top.

Technology Growth

Growth capital in the technology sector is also known as a growth equity in the business. Technology growth rounds have been defined as private equity rounds in the CrunchBase report. In these rounds, some VC investors from the previous rounds also participated as a continuation.

The dollar and deal volume also increased in this quarter compared with a volume of the same period last year. The overall increase was about 32%. The increase in dollar volume was of $160 million. Although, the deals in the current quarter were two times more than the deals in the previous quarter, the total value of funds was 45% less than the last quarter. This downfall represents the decline in round sizes over time.

Initial Public Offerings

The second quarter of 2017 experienced a small increase in the technology initial public offerings (IPOs), both in the United States and the Europe. This toned down the speculative noise that IPO window was closed for everyone except the big firms.

No significant regulatory filings or announcements were made in the third quarter of this year. Redfin, a real estate brokerage, filed documents with the Security and Exchange Commission, showing its interest to raise $100 million. And so far, it has managed to raise over $167 million from investors like Tiger Global Management, Draper Fisher Jurvetson, and others.

Although, the global VC market experienced a severe decline at the end of last year, the second quarter of 2017 was relatively better. Growth was observed in the dollar and deal volume for two-quarters back to back. Rounds are also experiencing growth; some venture capitalists doubled the bet on their investing activities. If the upward trend continues, the third quarter will bring the market back to normal after full recovery.