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Six Startup Lessons & The Essence of Venture Capital

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Lecture to Latvian IT and startup community in RBS.

Published in: Economy & Finance, Business
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Six Startup Lessons & The Essence of Venture Capital

  1. The Art of the Start Six lessons for startups Allan Martinson, MTVP Latvian IT Cluster/RBS, Nov 26, 2010
  2. Valley of Death Startup: A vehicle to drive thru Death Valley The One Million Land
  3. A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty Eric Ries
  4. My startup (and not so startup) life Baltic
  5. 6 lessons on how to grow your stupid little startup into SOMETHING
  6. How does a startup start?
  7. Lesson 1: It’s all about people
  8. It does not start from a business idea Incubation takes years 2 founder rule Leader Skeptic Multi-skilled talentsTeam & Values It starts from people
  9. Pick your friends wisely • Your future income will be the average of 5 of your closest friends Pick your friends wisely Your future income = average of your 5 closest friends
  10. Lesson 2: The origin of great business ideas
  11. Povarskaya St, Moscow March 1990 My moment of epiphany?
  12. This does not happen
  13. Three origins of great startups • Copycats: Copy existing business model to new markets • Evolutionary: Seek better solution to existing problems • Revolutionary: Seek unknown solution to unknown problems The best ideas come on cross-roads of trends and disciplines
  14. • The 30-seconds pitch: tell your granny – Who is your customer – What does your company do for this customer – Why are you better than competition • Do you pass the “Google test”? The What
  15. Why I will never invest in IT services any more 0 5 10 15 20 25 30 1 2 3 4 5 6 7 8 Sales Expenses 0 5 10 15 20 25 30 1 2 3 4 5 6 7 8 Sales Expenses Company 2: IT services Company 1: Platform business
  16. Lesson 3: The art of pivot
  17. The life of any startup can be divided into two parts – before product/market fit and after product/market fit Marc Andreessen
  18. Why pivot? Not a single great company follows its original business idea Failure is not a problem Slow failure is a problem
  19. The importance of milestones • MVP (Minimum Viable Product): 48 hrs – 3 months • Initial customer validation: 1 week – 6 months • One million something (users, $$$, etc): 1-2 years • You shall pivot if: – Your solution seeks a problem, not vice versa – Nobody wants to use your product – even you – You have ceased to believe into your company for >1 month
  20. Lesson 4: The Need For Speed
  21. Why speed? • Startups, by very definition, are probabilistic • Success seems intentional only in retrospective – impossible to compute
  22. Works in startups, too 20% of more effort will result in many times better result after some time
  23. In probabilistic environments, speed and focus are the best boosters of success rate And hunger is the best factor contributing to it
  24. The ultimate example of being focused “I was too busy, I didn’t do things like that… I just didn’t go and meet new people who were involved in investments.” Bill Gates on initially refusing to meet Warren Buffet Interview with Financial Times, Oct 2010
  25. Lesson 5: Importance of right signals
  26. Importance of the right signals • With whom do we compare ourselves? • What do our customers, investors, partners really think? • Are we insiders or foreign? • Nothing replaces human interaction even in internet era • Silicon Valley is the focal point of information, emotions and ideas • It is the mental state
  27. Being Latvian is a full-time job
  28. Lesson 6: Where to find smart investors
  29. Raising venture capital is the art of younger men seducing older men - Anonymous
  30. 9-18mo 18-24mo 2-3Y 3-7Y 0 + - 2 10 50 200 500 employees FFF $10-500K A-round $1-10m B-round $5-50m IPO or exit Typical lifecycle of a high-tech company
  31. Typical life cycle in figures Year 1 2 3 4 5 6 Phase Startup Early growth Growth Exit Revenues ($m) 0 1 4 10 20 30 Growth % 300% 150% 100% 50% Investment phase Angel A-round B-round Pre-money / exit valuation ($m) 0,5 3 40 150 Investment ($m) 0,4 2,5 25 Post-money valuation ($m) 0,9 5,5 65 150 Post-money ownership of founders 56% 30% 19% 19% Value of founders’ stake ($m) 0,5 1,7 12,1 28,0 IRR to angel investors 124% Money-back, angel 56 times IRR to A-round investors 102% Money-back, A-round 17 times IRR to B-round investors 52% Money-back, B-round 2,3 times
  32. What shall you know about VCs • Venture capital (LPs) and venture capitalists (GPs) are not the same • VCs are in the business of saying NO and then making money • You can divorce your wife but you cannot divorce a VC • You shall like, but not love each other • If in doubt, pick the smartest
  33. Thank you! allan.martinson@mtvp.eu

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