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Let’s be honest. If you’re thinking of starting a business, you are more likely to find compelling reasons on why your startup will not be funded than reasons why it will. However, more valuable to you should be the thought process of a high level investor.
As a startup founder you are the biggest investor in your own ideas. Therefore it is crucial that you study and adopt the mentality of an investor that specializes in investing in businesses such as yours. Even if you never get funded.
This is investor type is commonly known as a Venture Capitalist.
Meet Bradley Miles. A young Venture Capitalist who worked his way up from being an intern on Wall Street, to working at a leading venture capital firm called Stripes Group. We had a conversation with him to find out the ingredients of a startup that’s worth the investment.
As a Venture Capitalist (VC) what do you look for before investing that determines whether an company has a high probability for success?
Generally a lot of it comes down to the product, the team and the customers. If you are a second or third time founder and you had exits in the past, that’s a big signal that the investment would be worth taking on. One of the most famous angel investors who has made over 130 investments, coined a method that involves yielding a maximum pre-money (before the VC invests money) valuation of $2.5 million.
The method allocates increments of $500,000.00 per key area that makes up a successful startup. So if the startup has a sound idea then $500,000.00 of investment is added. The second $500,000.00 is invested if they have a prototype. If the startup has a strong team another $500,000.00 is added. A lot of strong relationships in their industry guarantees another $500,000.00. And the last $500,000.00 is invested if they have sales.
Therefore, if your company does not have revenue at the moment, you probably have a pre-money valuation of $2 million. That’s provided you have all the other elements in place. There are other methods in the industry, but many of them revolve around a similar concept.
Based on this what should an entrepreneur who’s considering Venture Capitalist funding to launch or grow their business consider carefully in their business model?
When building your business model, you need to ask yourself if you’re trying to create an entirely different experience, or if you are just trying to create a “better type writer” or a “faster horse”.
If you look at a company like Open Table. The app totally changed the way we find and book restaurant reservations. Causing a complete shift in the consumer experience.
So really try to evaluate how you can create a new customer experience.
Also try to find out if you are benefiting from the growth of your customers. Meaning, can you use the social data collected from more people using your product/service to make the experience of customers even better as your product grows?
The most successful investments are those that create a marketplace where both parties are better off in terms of the buyer and the seller. Take companies such as Upwork or Fiverr for instance. As a buyer you are better off if you need quality freelance design work done at a reasonable price. And the designer, who serves as a supplier on these platforms, is finding opportunities that they otherwise wouldn’t have had, allowing them to create new income streams for themselves.
That kind of marketplace business model is creating a positive user experience for both the buyer and the seller. Therefore generating greater economic activity.
Because of that, your users are more likely to continue using your service.
If as an investor I have interest in starting my own Venture Capitalist firm, what channels can I use to raise capital?
There’s actually a company founded by Arlan Hamilton called Backstage Capital. They are essentially working on the model of advocating capital on behalf of angel investors. They prove that you don’t have to go the traditional route that venture capitalists take to raise money for investment in startups, which usually includes endowments and hedge funds.
According to research, 3 out of 4 Venture Capitalist backed startups fail. Why do you think this is the case?
A large number of people are trying to create companies whose revenue models are based on the network effect. They are trying to create the next Instagram or the next Snapchat. But if you actually look at how much these companies make compared to their valuations, it just does not make sense in the short term. Yet a lot of entrepreneurs still tend to go towards that model.
In reality there’s really no money in the network effect models. This is because you need tens of millions of users for them to be viable. Even though these models are important because they create value for users.
I would advise entrepreneurs and aspiring business owners to really focus on generating revenue from the first month. Set out what you want your month one revenue to look like and how you can get there.
You recently published a book that serves as a Venture Capital guide book. Please tell us more about it and what one can learn from reading it.
The book is called #BreakIntoVC: How to Break Into Venture Capital and Think Like an Investor Whether You’re a Student, Entrepreneur or Working Professional.
The book will teach you the different stages of venture capital investing. You will learn the difference between late stage and early stage investing. You will also learn more about some of the metrics that venture capitalists use to valuate companies. I’ve got lessons on how to reach out to venture capitalists. I’ll walk you through a step by step process of how to pitch a company to venture capitalists. The book also covers the fundamentals of accounting that every entrepreneur should know and understand. Lastly the book will teach you how to evaluate a company for investment.