Criterios de valuación de Startups

En el artículo anterior describimos la creciente problemática en torno a las valuaciones de startups, cuestión a la cual se vienen enfrentando los inversores de capital emprendedor de etapa temprana.

Destacamos las principales causas y mencionamos la necesidad de formular algún mecanismo o definir parámetros que sirvan como una guía para lograr valuaciones más exactas y acordes a la realidad de cada proyecto.

A medida que nos adentramos en el mundo del venture capital y observamos las discusiones sobre valuación entre emprendedores y potenciales inversores, notamos que la valuación de startups está aún muy lejos de ser una ciencia exacta.

Si bien existen métodos de valuación técnicos, está claro que, por el perfil de negocio tan incierto y riesgoso, influyen innumerables factores más soft o de valoración subjetiva que pueden catapultar los números hacia la estratosfera o hundirlos al inframundo en cuestión de horas.

Aun así, en pos de lograr una industria de venture capital en el país más sana y madura, y así atraer más y mejores jugadores al mundo del capital emprendedor, creemos que resulta imprescindible salir del relativismo absoluto en este aspecto y comenzar a delinear ciertos criterios que conduzcan a mejores prácticas en el mercado.

El gran desafío es, justamente, definir esos criterios y estándares.

Presentaremos algunos de los elementos que sirven de guía. Aun así, llegar a la valuación correcta y cumplir con el principio de Goldilocks será siempre un deseo de difícil cumplimiento ya que ambas partes deben sentir satisfacción con los términos de la operación.

Aquí solamente haremos una mención sobre los elementos y de cómo ellos pueden ser tomados como criterio para evaluar, pero no ahondaremos en cada uno de ellos.

En primer lugar, porque profundizar cada uno de estos factores implicaría un desarrollo enorme , y no es el objetivo de este artículo; en segundo lugar, porque cada evaluador deberá darle la relevancia y hacer los ajustes que correspondan acorde a su perfil y al tipo de inversión que lleva a cabo.

Por ejemplo, un fondo de capital emprendedor que solo invierte en serie A y una aceleradora, definitivamente no deberán utilizar los mismos criterios ni darles el mismo valor ponderado ya que estos jugadores difieren sustancialmente en sus estructuras, dinámica de trabajo, objetivos y compromisos.

Tamaño de mercado

El tamaño de mercado resulta crucial a la hora de buscar altos retornos, uno de los objetivos de las inversiones en capital emprendedor, ya que este deberá compensar las inversiones de los proyectos que han fracasado en su portfolio. Aun si el inversor no tuviera un portfolio y fuera una inversión aislada, la ganancia potencial debe justificar el alto riesgo de este tipo de inversiones.

El tamaño de mercado definitivamente puede justificar valoraciones más altas, y muchos inversores definitivamente no invertirán si el tamaño de mercado no justifica el riesgo asumido.

Ingresos

Este es el elemento principal a la hora de hacer valuaciones en industrias más tradicionales. Sin embargo, ya que las startups suelen tener ingresos muy bajos o incluso no tenerlos en su estadio inicial, este parámetro no sirve como indicador de su potencial.

Compañías conocidas por todos como Facebook o Twitter no tuvieron ingresos durante largos periodos de tiempo.

De todas maneras, si una compañía muestra ingresos, es un indicio interesante de su capacidad de vender y de una necesidad de mercado, con lo cual vale la pena considerar este aspecto como punto a favor.

Pero,cuidado! No debemos caer en el error de tomar el nivel de ingresos como dato duro para arribar a una evaluación exacta.

Crecimiento mensual

Es un indicador esencial de la evolución del proyecto en el tiempo y un indicador del potencial, tanto del equipo como del mercado. 20% intermensual es una tasa estándar muy aceptable y, cuanto más consistente y duradero sea el crecimiento, mejor. Incluso cuando sea un producto o servicio que los inversores no entienden, si estas métricas son sólidas, será altamente probable que resulten atraídos a conocer más y avanzar con una inversión. Esta métrica es aplicable tanto a ingresos como a usuarios activos (gratuitos, pagos, etc.).

Usuarios activos

Si bien la definición de activo tiene varias acepciones, en este caso lo asimilamos al usuario que utiliza el producto con una frecuencia razonable, lo cual dependerá del tipo de producto/servicio.

Por ejemplo, si es un medio digital de noticias, un usuario activo es aquel que ingresa a diario, o al menos cada dos días. Los usuarios activos gratuitos son importantes, pero sólo en tanto y en cuanto tengamos claro el verdadero valor de esos usuarios, es decir, si aporta información, datos, o porque es un potencial usuario pago.

El usuario activo más relevante es aquel que paga, ya que es un indicador directo de los ingresos del negocio, pero también es fundamental entender su nivel de compromiso o engagement, ya que esto es un indicador importante de la cantidad de bajas (es decir, la tasa de “churn”) y la tendencia creciente o descendente del revenue a futuro.

El modelo de negocio — ticket promedio, tráfico y tasa de conversión

Para que el proyecto sea escalable y con potencial de crecimiento exponencial, debe haber una lógica y coherencia entre el modelo de negocio, el producto y el mercado potencial (o segmento de clientes al que apunta).

En algunos negocios en particular, es muy importante poder medir cómo el tráfico de una plataforma se convierte en ingresos.

En el caso de un medio digital nos dice que cuenta con un tráfico de 1 millón de usuarios por día, y que el modelo de negocio es cobrar a los anunciantes por un “CPC” (costo por click), deberemos calcular la tasa de conversión entre el tráfico total (1MM) y los usuarios que hacen click en los anuncios. Con este dato multiplicado por el CPC, nos dará un indicio del ingreso esperado.

Un caso muy similar puede ser el de una plataforma comparadora de seguros, con un modelo de negocio de generación de leads, en donde cobra de la aseguradora por cada lead generado. En ese caso, es muy importante entender con precisión cuál es concretamente el lead según el emprendedor, ya que puede ser simplemente un click, un usuario que llama al productor de seguros o, quien termina contratando el seguro.

En los últimos tres casos, la acidez del filtro y la tasa de conversión será definitivamente distinta.

Lo importante es que no nos dejemos engañar por datos que pueden impresionarnos en una presentación ya que no necesariamente representan un activo monetizable. El tráfico, los usuarios o las operaciones de un sitio, tienen que tener un valor monetizable claro.

El Equipo

A pesar de que los emprendedores que llevan adelante el proyecto es el factor más importante, también es el más soft o subjetivo influyendo sobre la valuación. La aptitud y la actitud de estas personas determinarán la capacidad de una empresa para abrirse camino en el mercado.

En algunas regiones se valora mucho la formación académica, pero la experiencia en la industria del negocio en cuestión y haber atravesado el proceso emprendedor anteriormente son aún más determinantes.

Valuaciones comparables

Es útil mirar las valuaciones de empresas comparables en términos de la industria, el tipo de servicio, el modelo de negocio, la facturación, el margen operativo, la antigüedad y el tamaño de la compañía.

Pero jamás hay que olvidar en qué mercado está operando la compañía. El tamaño del mercado, las regulaciones de gobierno y otras circunstancias coyunturales pueden afectar significativamente la valuación que inicialmente parecía facilmente comparable.

Asimismo, es preciso tener en cuenta si se está comprando con una valuación en base a una adquisición o una inversión. La primera es una muestra clara de lo que un potencial adquirente está dispuesto a pagar, mientras que la segunda es en realidad una valuación sin liquidez, que muestra solamente un ingreso de capital, pero no un cash out.

Tendencia creciente del nicho

Analizar cuál es la situación del mercado de fusiones y adquisiciones y de inversiones de venture capital en compañías del mismo vertical es un indicio de que tan caliente está el mercado y cuál es la demanda por compañías de la misma industria.

Aceleración previa

Haber sido acelerado previamente es un factor a considerar, ya que seguramente los emprendedores recibieron cierta formación y capacitación, y el proyecto atravesó un proceso de validación.

Es recomendable pedir al equipo de la aceleradora feedback sobre el proyecto y los emprendedores, ya que seguramente habrán transitado un proceso de algunos meses de trabajo juntos.

Las controvertidas valuaciones de startups

Luego de varios años de trabajar junto a emprendedores e inversores de capital de riesgo (fondos de VC, inversores ángeles, aceleradoras, etc.) y, ante una creciente presencia de capital emprendedor en la región en los últimos 5 años, detectamos que la valuación de las startups se presenta como un problema cada vez más frecuente a la hora de avanzar con operaciones de inversión.

En el siguiente artículo intentaremos describir, de manera sintética, las principales razones que contribuyen a esta problemática con el objetivo de allanar el camino hacia una propuesta superadora con respecto a los mecanismos de valuación de compañías en etapa temprana.

Evidentemente, valuar este tipo de compañías requiere no solamente considerar elementos “duros” u objetivos, sino también elementos “blandos” o “subjetivos”, con lo cual definitivamente es un tema controvertido y no existe un método único y correcto para llevar a cabo una valuación acertada. No abordaremos las distintas propuestas o mecanismos de valuación en profundidad, ya que ello será abordado en detalle en próximos artículos que podrán encontrar en este mismo sitio.

La problemática planteada gira en torno al momento en el que un emprendedor ya transitó la etapa inicial del levantamiento de fondos con las 3F (“friends, family and fools” o “amigos, familia y tontos”) y pasa al siguiente paso: presentar su proyecto frente a inversores ángeles, aceleradoras o incubadoras, o incluso algún fondo VC de etapa temprana.

Es esta etapa donde muchas veces la valuación propuesta por el emprendedor impacta en las expectativas y voluntades del inversor. En algunos casos, los inversores no presentan objeciones, quedan enamorados del proyecto y avanzan con su inversión ante cualquier valuación propuesta, ya que su objetivo quizás sea simplemente iniciarse en el mundo del venture capital rápidamente y plasmar una operación para involucrarse activamente en el ecosistema inversor.

En muchos otros casos, gran parte de los inversores ángeles, con disponibilidad de capital y, en general, con mucha experiencia profesional, cuestionan duramente las valuaciones propuestas. Esto ocurre, a tal punto que muchas de las presentaciones que inicialmente lograron captar la atención de un inversor terminan frustrando una negociación. Asimismo, probablemente ocurra que muchos de los nuevos interesados en invertir en esta industria -todavía incipiente en Argentina- salgan espantados por considerar que es un casino sin lógica alguna al momento de valorizar sus activos.

Una lógica distinta

Uno de los problemas principales reside en la falta de cultura o educación específica sobre capital emprendedor en los nuevos inversores del ecosistema. Las compañías de etapa temprana no deben ser valuadas con los mismos métodos ni herramientas tradicionales que se utilizan para compañías en etapas más avanzadas. El problema es que muchos de los inversores ángeles (y otros inversores institucionales) generalmente pretenden valuar a las startups no solo con esas herramientas y métodos, sino con la misma lógica y dinámica con que lo venían haciendo con otro tipo de negocios y compañías en su experiencia previa.

Esta situación se acentúa aún más en Argentina. En primer lugar, porque la cultura predominante es la de preservar el capital más que la de arriesgarlo, y donde la confianza sigue siendo un factor determinante a la hora de decidir dónde invertir. En segundo lugar, y sumado a lo anterior, porque si bien han existido algunos casos de éxito, aún no se puede afirmar que el modelo de negocio de inversión de capital de riesgo haya sido validado en Argentina, al menos a nivel institucional. Esto significa un factor de riesgo adicional para todo aquel inversor que esté dando sus primeros pasos en este ecosistema.

El método VC

Otra de las razones que influyen en la problemática mencionada, es el método de valuación del venture capital, el cual se pretende aplicar directamente al igual que se utiliza en un ecosistema inversor y emprendedor como el de USA, mucho más desarrollado y con realidades muy diferentes a la del nuestro.

Este método técnico parte del precio de venta de la compañía, teniendo en cuenta elementos principales como la facturación proyectada, los múltiplos comparables en la industria y el retorno que se busca obtener por esta inversión. Puede resultar muy eficiente siempre que se tengan en cuenta las particularidades del mercado y la economía en la que se está trabajando. Sin embargo, este mecanismo trae asociados riesgos muy significativos si se lo intenta aplicar directamente, sin considerar las circunstancias coyunturales que afectan el potencial desarrollo y avance del proyecto.

Además, generalmente las proyecciones que llevan a la valuación propuesta traen aparejadas una serie innumerable de hipótesis y se suponen datos difíciles de predecir con exactitud. Suele ocurrir que los inversores y emprendedores pasen largas horas discutiendo sobre hipótesis que, al final de cuentas, son apreciaciones con una altísima carga subjetiva.

En muchas ocasiones, los emprendedores manifiestan ante los inversores que ellos han validado su valuación con el citado método, y que dicha valoración ha sido avalada por alguna institución educativa o inversor de renombre. Si bien el método mencionado es técnicamente correcto y no podemos criticar el mencionado aval, vale aclarar que en nuestra opinión, sólo debe considerarse como un indicio o parámetro de la posible valuación.

Las valuaciones aceptadas en los últimos años

Desde hace aproximadamente ocho años se vienen concretando distintas operaciones de inversión de venture capital, y los jugadores más importantes que han impulsado este camino desde su incipiente comienzo en Argentina, son los que definitivamente marcaron el camino y las prácticas de la industria.

En ese camino donde transitan aciertos y errores las herramientas y mecanismos de trabajo se volvieron más eficientes. A modo de ejemplo, vale mencionar los instrumentos de inversión que evolucionaron desde la nota convertible, pasando por el SAFE y el KISS en sus distintas versiones.

Con respecto a las valuaciones a nivel local, los actores intervinientes en las primeras etapas tomaban como parámetro valuaciones que oscilaban entre USD 1.500.000.- y USD 2.500.000.- para aplicar al tope de valuación en las notas convertibles. Consideramos que esto es demasiado elevado si se lo intenta aplicar genéricamente a todas las compañías de etapa temprana que buscan capital semilla. A lo largo del aprendizaje de estos últimos años, algunos de estos jugadores han aplicado muchos cambios, y estos valores ya no son el estándar que utilizan para este tipo de compañías.

Con las citadas valuaciones (USD 1.500.000.- y USD 2.500.000.-), los inversores pioneros en las primeras etapas del venture capital en Argentina marcaron el estándar de la práctica en la industria y generaron que otros nuevos jugadores las tomasen como parámetro para aplicar a la mayoría de los casos, lo cual aun sigue siendo siendo una referencia para algunos de estos jugadores actualmente.

Esto conlleva el riesgo de que no solamente se genere una desmotivación y desencanto de nuevos inversores, sino que también impide la posibilidad de que las compañías consigan inversión en futuras rondas para crecimiento por no lograr justificar sus valuaciones que, naturalmente, deben ser sustancialmente más elevadas en la próxima fase de fundraising.

Definir la valuación comenzando por el cap table proyectado

A fin de fijar una valuación, muchos emprendedores comienzan proyectando las futuras rondas de financiamiento que deberían llevar a cabo, cómo se diluyen en cada una de estas rondas y consecuentemente, cómo quedará distribuido el capital de la compañía en el tiempo. Este análisis permite al equipo emprendedor entender como quedarán sus participaciones a futuro, fijando un porcentaje mínimo del capital con el que están dispuestos a quedarse, entendiendo que en ningún caso deberían quedar diluidos a un porcentaje menor a ese que fijaron.

Si bien este es un proceso muy recomendable y sano para los emprendedores, no debe ser tomado como unico metodo para fijar la valuación. Debe funcionar como ejercicio para que los fundadores planifiquen inteligentemente su estrategia de financiamiento en el mediano plazo, entendiendo las implicancias económicas, financieras y legales que ello acarrea, ya que sino, pueden desencadenarse una serie de consecuencias no deseadas como ceder más equity de lo que es necesario, levantar rondas de financiamiento a valuaciones fuera de los parámetros recomendables (ya sea muy alta o muy baja), o incluso perder la posibilidad de levantar capital en futuras rondas. Pero en ningún caso es recomendable caer en el simplismo de utilizar este análisis como único criterio de valuación, ya que es probable que el potencial inversor perciba que el emprendedor solamente está mirando sus propios intereses personales por sobre los de la compañía o quienes se asociaron a ella.

Conclusión y propuesta

Como mencionamos al principio, la valuación de una compañía en etapa temprana está definitivamente compuesta por elementos de muy distinta índole. Cada uno de estos elementos debería jugar como criterio de evaluación al cual el evaluador le asigna un valor ponderado y que, sumado al resto de los criterios, conforman un paquete de criterios que conducen a la valuación más acertada.

Qué criterios seleccionar y qué valor ponderado asignarle a cada uno de ellos será una tarea exclusiva del evaluador.

Tal y como dice Reid Hoffman, co-fundador de LinkedIn y actual partner de Greylock, encontrar el precio correcto para un acuerdo es solo parte del desafío de invertir.

Si analizo una cartera de 100 startups, probablemente 90 esten sobrevaluadas, y 10 esten subvaluadas. Y ese es el desafío para ser un inversor ángel o capitalista de riesgo profesional: tener la capacidad de discernir entre esas compañías.

De todas maneras, consideramos que existe la necesidad y es conveniente comenzar a fijar parámetros de valuación que representen un estándar a respetar por la mayoría de los jugadores relevantes en la industria. Dentro de la subjetividad que siempre conlleva una valuación -y esto aplica a todo tipo de industria, sea private equity, mercado de capitales, etc.- sostenemos que es posible desarrollar un esquema que, cuanto menos permita encasillar a las compañías en ciertas franjas de valuación en base a ciertos criterios que deben ser analizados al momento de evaluar y valuar una compañía.

Creemos que son los actores principales del venture capital en Argentina los que tienen la responsabilidad de llevar a cabo esta tarea diligentemente y, sobre todo, aquellos que intervienen en las etapas de financiamiento más temprano (aceleradoras, incubadoras e inversores ángeles), ya que son los que sientan los primeros términos sobre los que después deberán basarse y negociar los actores que intervienen en etapas posteriores del ciclo de financiamiento.

Lo propuesto aportaría valor a la industria de capital emprendedor, en primer lugar porque garantiza más previsibilidad y seguridad a los nuevos jugadores no acostumbrados al capital emprendedor, impulsando el ingreso de aún más inversores; en segundo lugar porque garantiza valuaciones más sanas y acorde al estadio real de su proyecto, sembrando mayores posibilidades de que los proyectos consigan concretar sus rondas de financiamiento a valuaciones más justas en las etapas subsiguientes de financiamiento.

En futuros capítulos ahondaremos en distintos elementos y aspectos que servirán como posibles criterios e indicios de valuación de startups.

Increasing Interest of VCs in ICOs

Despite the growing concerns of regulators over the ICOs, venture capitalists (VCs) have shown increasing interest in these offerings. However, what they are more interested in is the equity stakes rather than the proceeds from coin sales. Moreover, the growth of security tokens is expected as regulators intervene.

According to the statistics by CoinDesk, the funding has increased dramatically in the blockchain based firms, and startups have managed to raise about $434 million in just 3 months since December. Although, the token industry in the United States is under the scrutiny of the Security and Exchange Commission, piqued interest by VCs is an indication that digital currency business will experience growth.

Frank Meehan, the partner in SparksLab Group, said that if a firm gets an initial coin offering, the value of his equity will increase; this is exactly what it is all about. He also added that they have invested in 6 blockchain companies. In fact, the blockchain fund of 100 million dollars that was launched at the end of 2017 is a part of the Group.

Betting on Blockchain Companies

As discussed, investors have increasingly funded the blockchain startups during the past three months. CoinDesk data releaved that token sales have surged and startups raised funds of over $3 billion via ICOs during the first 2 months of 2018. It is more than 50 percent of what they raised in 2017.

According to the statistics by TokenData, last year 46 percent of the token startups either suffered from failure after the offering or could not complete funding. It further revealed that so far in 2018, a total of 50 startups have failed out of 340. There is no surprise as to why the failure rate is so high. After all, it is just a white paper and many of the products they are offering are not even functional – the technology has not even been tested on a mass scale.

VCs Are Cautious About Investing Too Much Too Soon

Therefore, some investors would wait for these firms to mature, while waiting for the decision regulatory authorities might take in future. Investors are looking for established companies, which means startups should raise money to fund their marketing and developing activities.

A managing director of Insight Venture Partners, Lonne Jaffe, acknowledged it by saying that it is a good time for them to be cautious, as they won’t be missing out on anything big. He furthered it by saying that they will start investing once firms begin to scale up; they have also been communicating with their portfolio firms about how they can serve the startups and use blockchain technology. He also revealed that they have a total of $18 billion in raised-capital for over 300 firms, which also includes Twitter Inc.

Pressure from the Regulators?

Although, there is a well-established regime by the regulatory authorities, the regulations for initial coin offerings are still evolving. The Treasury Department in the United States issued a letter on March 6, in which, it was stated that issue tokens will be considered as money transmitters; they will be required to follow the know-your-customer and bank secrecy guidelines.

Jay Clayton, the Chairman of SEC said that every offering he has come across is a security, even if token startups believe they are not. In fact, last month in March, Google, Facebook, and Twitter joined hands to ban advertisements for coin sales and ICOs. Also, the leading digital currency, Bitcoin, reduced in value by 8.7 percent.

Investors are interested to purchase security tokens with some kind of security attached in the form of equity or other assets as it will serve as a cushion in case there is some kind of regulatory shock in the future.

The co-founder of Securitize.io, Jamie Finn, has revealed that they plan to raise billions and have more than 100 startups in the pipeline. They provide a platform to issue tokens that have some sort of backing, such as company revenue or equity.

Currently, there is hardly any exchange that trades security tokens. An SEC-registered broker-dealer, Templum LLC, has been offering this service. It is an alternative trading system.

Besides, compared to a conventional startup equity that remains tied up for years, tokens backed by equity are traded more easily. Finn also added that after the end of lockdown, a person can even sell the equity-backed tokens. Moreover, one can easily purchase and sell them online. Similarly, family offices can directly invest in these securities rather than investing via funds.

Too Much Capital or Less Capital, that is the Question

There are so many entrepreneurs and founders who believe that injecting more capital means more success, but this is simply not true. The race to raising more capital leads to greed, which doesn’t end well if you don’t have a direction.

On the other hand, if your focus is to get less capital, not only does it make you rich as an entrepreneur, but it also enables your business to grow. The most prominent example of this case is of Zappos and Wayfair.

Importance of Being Capital Efficient

Everyone in the VC world is aware of the success experienced by Zappos. They secured investment from some of the best venture capitalists in the market and made it big with an unorthodox approach. The company was later sold to Amazon in a deal between $850 million and $1.2 billion, wherein, the founder secured $214 to $367 million.

An even better example of e-commerce success was laid out by Wayfair. It was a brainchild of Steve Conine and Niraj Shah. Instead of raising external capital, they bootstrapped their idea and turned it into a successful business. They purchased a large number of SEO friendly URLs, generated huge traffic, and optimized against Google’s algorithms. It started generating money right from the beginning and despite many offers from venture capitalists, they refused all offers until they reached $500 million revenue.

In 2014, Wayfair went for its initial public offering (IPO) on the New York Stock Exchange. In fact, each of its partners made as much as all the shareholders of Zappos made. The secret to their success was a capital efficient business. They only raised money from the outside when their firm had become valuable.

The co-founder of Wayfair made 10 times more than the founder of Zappos.

Limit Raising Capital in the Beginning

Although, some might associate the Wayfair’s success to the size of the furniture market, yet, shoe market is basically a better fit given low shipping cost, repetitive customers, etc.

There is no doubt that industry dynamics also contributes to the company’s success, but Wayfair made it big by employing an effective capital strategy. They did not raise any capital at the beginning, nor did they ask for it to speed up the early growth despite having offers from venture capitalists.

The only time they went for external capital was when they wanted to expand on a massive scale. They did not hesitate to take a huge amount of money and gathered three times higher than what Zappos did. However, they went for it only when the business had established its name, had minimum dilution, and could generate huge profits.

Why Should You Secure Money Later rather than Sooner?

This is one of the most important question. From the two scenarios above, it is obvious that Wayfair made much more money as compared to Zappos. Tony Hsieh, the founder of Zappos, said that he sold the company to Amazon due to the pressure imposed by its shareholders. Despite making a lot of money, giving in to the financial decisions made years ago was quite frustrating. Hsieh might have made it as big as Wayfair did, if he had more control over the decisionmaking process.

At the time of the IPO, Wayfair founders owned over 50 percent of the business and had managed to raise capital on their own terms with very little dilution. This enabled them to exercise more control over the financial decisions, which is also reflected in the success.

Overcapitalization Leads to Limited Optionality

When it comes to taking a financial decision, overcapitalized businesses usually end up with two choices:

Take millions of dollars in investment and fail
Make money for venture capitalists or go bankrupt and fire your entire team

But Wayfair, on the other hand, made a lot of money due to the lean financing strategies of their founders. It also enabled them to retain their right of Optionality. This gave them a choice to sell on the basis of their risk appetite or business performance, and not based on their capital structure. Just because you have become a multi-million dollar startup, doesn’t mean you should not raise money down the line.

It is important to understand that raising too much capital has its downsides. Therefore, efficient decision making should be employed to be able to spend your money wisely.

Venture Capital Deals in 2017

2017 turned out to be quite a success for startups as they managed to receive over 67 billion dollars in venture capital funding, broking the previous record of 2015 by 5 percent.

Although, there has been substantial funding in Silicon Valley during the past few years, the overall investment has reduced since 2015. There has been a decline of 12 percent and it’s partially because of Uber Technologies Inc. and Lyft Inc. as these companies secured the maximum funding in 2017. Snap Inc. got a funding of 1.8 billion dollars, whereas Uber secured 3.5 billion dollars in 2016, and the value of capital received in 2017 decreased. Another reason was the fact that some of the major deals happened elsewhere last year.

The Value of Deal Based on Metropolitan Statistical Area

If you look at the trend based on metropolitan areas, San Francisco was in the lead, but as discussed, the overall value has declined since 2015. Similarly, the investment in Boston and Los Angeles has also decreased; it was 6.2 billion dollars and 4.9 billion dollars for Boston and Los Angeles in 2015, but in 2017, the amount reduced to 5.9 billion and 3.9 billion respectively.

On the other hand, the funding in New York, San Jose, Washington D.C., and Chicago increased. In 2015, Chicago secured 0.9 billion dollar investment, which eventually increased to about 1.5 billion dollars in 2017. Washington experienced a mild increased from $1.4 billion to $1.6 billion and San Jose increased from 6.5 billion dollars to 6.9 billion dollars. The investment in New York however, almost doubled since 2015. It was 7.8 billion dollars in 2015, but in 2017, the overall value increased to 13.3 billion dollars.

On the other hand, the funding value also increased in Miami, Philadelphia, Provo, Indianapolis, Charlotte, and Minneapolis. The biggest reason for the sharp increase in the funding value in New York was the massive infusion of money in WeWork Companies Inc. The company got a capital of about 6 billion dollars in 2017, which eventually led to the sudden increase in the overall funding.

2017 Top 10 Deals

After WeWork, the second biggest deal in 2017 was Lyft in San Francisco, the company secured 2 billion dollars in funding. Other deals in San Francisco that made their way to the Top 10 included Uber with $1.25 billion, GRAIL with $0.9 billion, and SoFi with $0.5 billion.

Beside that, Admiral Permian Resources in Midland secured 0.6 billion dollars, Magic Leap in Miami got a capital of 502 million dollars, Outcome Health got 500 million, and SpaceX got 450 million dollars. Another company in New York that made its way to the Top 10 was Compass that secured a capital of 0.55 billion dollars.

All in all, startups in many regions of the U.S. managed to get funding as compared to 2015. In 2017, around 141 metropolitan areas got capital in a total of 48 states, whereas, it was 119 areas of 43 states back in 2015.

Size of Deals

The value of investment received by companies also increased over the years. Although, the total number of deals has declined since 2015, the overall deal value increased by 3 billion dollars. If you look at the average size of a deal, it was 25.5 million dollars in 2017. This has been the highest so far in history. The average size in 2015 was 21.5 million dollars.

The average size of a seed stage investment was also high, i.e., 13.8 million dollars in 2017. It was $11.9 million in 2015. The early stage deals represented almost 33 percent of the total venture capital volume. The value of late-stage deals, however, has declined since 2013.

Number of Initial Public Offerings (IPOs)

The number of IPOs deals around the world was the highest since 2007, but there were only a few IPOs in the United States that were backed by the VCs. There were only 28 companies that went public in 2017, which was quite low as compared to 2015.

Moreover, some of the biggest companies couldn’t perform well in 2017; the 3 largest IPOs showed negative returns. Snap Inc. , the second biggest IPO, showed very poor returns.

To summarize, the VC environment has experienced ups and downs over the years, but the overall trends have been declining with the passage of time.

2017’s Industry Recap and 2018 Hottest Industries for Venture Capital

According to KPMG´s Venture Capital market report, it experienced the highest amount of investment in the U.S. in 2017. The total amount of investment in this sector was over $84 billion last year. Although, the deal value increased from $21.24 billion in the third quarter to $23.75 billion in the fourth quarter, the overall deal volume experienced decline as it fell from a total of 1997 to 1778 deals. The reason for the decline was growing interest of investors in smaller companies with profitable prospects instead of placing bigger bets on large companies.

Sneak-peak at 2017

The investors in the United States were mainly focused on late-stage deals during 2017. This eventually lead to the decrease in deals with other funding levels. Seed and angel deals were the ones that got affected the most as they suffered a decline from 50 percent in 2016 to 47 percent in 2017.

Biotech and healthcare were two sectors that stood out among the rest, especially during the fourth quarter when a number of large deals were successfully completed. Healthcare sector was also at the top in terms of exits, which triggered an increased activity overall.

The late-stage deals hit $250 million in the last quarter of 2017, which was very high as compared to $135 million a year before that. Companies that raised funds of over billion dollars were Cancer-screening biotech Grail Technology that raised $1.2 billion and Ride-hailing company Lyft that managed to get $1.5 billion.

Expected Trend in 2018

The trend seems quite optimistic as it will build momentum, especially via strong exit markets in Mergers and Acquisition and Initial Public Offering (IPO) for companies backed by venture capital.

At this time, it isn’t sure whether 2018 will have a record number of IPOs as experienced in 2015 or not, but this year will definitely have an increasing number of IPO activities. The co-lead partner of KPMG VC practice, Conor Moore, was of the opinion that as more firms are deciding to remain private in the long run, the secondary market is sure to experience more growth.

Following are some of the prominent sectors investors are likely to invest their money in:

Blockchain Technology

Instead of investing directly in the cryptocurrency, investors are inclined to invest in underlying blockchain technology. The reason is simple; the prices of digital currencies have skyrocketed. Investors are trying to find creative ways to make profitable investments.

A partner in Canvas Ventures, Rebecca Lynn, is looking for firms that use blockchain to build their infrastructure, especially the ones that store health records and track trademarked and copyrighted licensing rights and content.

Artificial Intelligence Businesses

Investors are searching for tangible business ideas. For example, David Pakman, a partner in Venrock, is in search of startups that will be using Artificial Intelligence so as to assist companies in making decisions that were previously taken by the people; it includes preparing manufacturing instructions for machines, sales planning, and the hiring process.

Pop-up Stores

With the rapidly increasing concept of driver-less cars, startup companies are in for a treat. Venture capital firms, such as the Fifth Wall are offering a short-term lease for pop-up stores, including parking lots. Some startups that can benefit from this are Katerra (a construction company), Kasita.com (the firm that makes modular housing units), and Factory OS (a company that makes modular buildings).

Voice-centric Devices

These devices have taken the market by storm. This has encouraged startup companies to seek new opportunities to use voice, including advertising. It has been predicted by WIRED that new firms with creative solutions are expected to do really well in 2018, which makes it an attractive sector for venture capitalists.

Subscription-based Products

In the last few years, VC firms were drawn to digital media startup companies, such as Vox media, BuzzFeed, Mashable, Mic, and many more. However, some of these companies have undergone layoffs in recent times. This has eventually made the investors move on to subscription-based products, such as Patreon. In September last year, this company raised around 60 million dollars.

Another example is Medium, which raised over 130 million dollars from VC firms. This company has shifted to a subscription-based model just recently.

Venture Capital Sector Facing Challenges in the Era of Cryptocurrency

In the past couple of years, cryptocurrency has experienced a sudden boom and is now making news in every sector. In the beginning, when bitcoin was in its initial stages, everybody was talking about Venture Capital (VC) and how it is going to benefit the small businesses.

So many venture capitalists made money by investing in innovative ideas that eventually materialized into unicorns. Instead of investing in the digital currency like bitcoins, investors preferred to invest in the companies, such as Coinbase or 21.co.

Bitcoin Price at All Times High

Some of these firms performed better than the other. For example, Coinbase ended up being in the first place in the app store of Apple last December as a result of hype over bitcoin. On the other hand, 21 kept changing its names and business plans. Back when Coinbase got its first round of funding from VCs, its price was about $110. However, recently, it has managed to reach $19,000.

An investment associate in the Digital Currency Group, Travis Scher, was of the opinion that had investors invested in the cryptocurrency instead of investing in digital currency firms, they would’ve gotten much higher returns by now.

VCs and the Increasing Trend of ICOs

This isn’t easy to grasp as it complicates the core idea of VCs.

The conventional way of making an investment was to find out the rising trend in technology, identify the targets that were in line with those trends and were in a better position to make it big, and then taking a profitable exit as soon as those companies were either sold out or went public.

But it won’t be an effective strategy for digital currencies like bitcoin. In fact, as more and more cryptocurrencies have entered the market, it has become even more confusing and complex. The community of dreamers, and entrepreneurs have been raising money via ICOs (Initial Coin Offerings), wherein, they create their own digital currencies, sell them for money and trade them in the open market.

When it comes to venture capital firms, they offer the investors an unrestricted access to private companies that are not publicly listed. Therefore, the question is, where will these venture capital companies go, if ICOs become a strong medium for people to get a bit of hot technology.

Venture Capitalists and their New Tactics

Venture capitalists have been devising new tactics to deal with the frenzy of cryptocurrency. Instead of seeking a stake in the digital currency firm, they have started purchasing the rights to acquire tokens ahead of initial coin offerings via legal contracts. In addition to that, they are improvising conventional equity deals, offering guarantees to investors in terms of getting tokens if a startup company goes for ICO in the future.

Some investors have also invested directly in bitcoin for years. The founder of VC firm Social Capital, Chamath Palihapitiya, said that he, along with his partners, invested in 5 percent of the bitcoin in circulation and still hold a reasonable stake in the currency.

Increasing Risks Faced by Investors in the Digital Currency Market

Although, the cryptocurrency market is rapidly growing, yet, it is not without risk. In fact, so many investors have suffered from hacking attacks and have also been threatened physically.

Threats are very real and harmful, because bitcoin will be lost forever if somebody steals it.

Cryptocurrency Hedge Funds and Futures Tokens

So many VC firms, including Sequoia Capital, Union Square Venture, and Andreessen Horowitz have made an investment in digital currency hedge funds in order to benefit from the boom without worrying about managing these currencies. They earn profits by trading dabble, litecoin, ethereum, and bitcoin in the ICOs market.

Some of the big names in the world of VC, including Bain Capital Venture, Union Square Ventures, and Sequoia Capital, have entered the deals to acquire digital tokens. For that, they are using legal agreements called “Simple Agreements for Future Tokens” also known as SAFT. Andreessen Horowitz is also taking steps to include provisions in standard contracts for investments in order to properly address ICOs.

According to a research website, in 2017, startup companies made about $3.6 billion in ICOs. This, however, is nothing in comparison to the $52.6 billion earned by VCs from around the world, as stated in the report by CB Insights and PricewaterhouseCoopers. Despite that, investors are inclined toward ICOs as it enables them to make millions in short span of time as compared to VC investments, which take years before you can reap the return.

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.