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How Do Investors Evaluate Startups? (Tel Aviv University)

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How do investors evaluate startups? This presentation was part of an event on January 12, 2015 in the Tel Aviv University

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How Do Investors Evaluate Startups? (Tel Aviv University)

  1. 1. Tel Aviv University How Do Investors Evaluate Startups? (and how you should evaluate them…) January 12, 2015
  2. 2. 2 46 Alumni Startups >$60M in total funding >70% raised follow-on funding, $1M average >20% of teams have a female founder Acquisitions by Google, Priceline, Gartner, etc Dozens of Fortune 500 customers and partners Largest community of entrepreneurs innovating between Israel and Silicon Valley
  3. 3. 3 Fund How Do VCs Make Money? Returns Exits $200M $600M $3B 3X 20% Equity * Few Investments per Partner
  4. 4. 4 How Do The Best VCs Reach 3x? Option A Option B Exit 1 Exit 2 Exit 3 Exit 4 Exit 5 Exit 1 Exit 2 Exit 3 Imagine you made 30 investments…. Returns = $600M Returns = $600M
  5. 5. 5 Implications * VC could agree to smaller exits if you are not going to be big as they had hoped, IRR & fundraising considerations, founding team really insist, etc Startup “I need to show potential for $50M in Revenues in Year 5 (or >100M users)” VC Partner “Should I bet part of my career on this startup?”
  6. 6. 6 VC Economics Impacts All Investors Large Funds Micro-Funds Angel Investors “I need large exits” “Small exits are unlikely… Need micro-funds to invest in my startups” “Medium-size exits are unlikely… Need large funds to invest in my startups”
  7. 7. 7 How Do Investors Evaluate Startups? Goal: Invest in high potential startups Investors differ in investment stage, domain expertise, required traction, points of emphasis, etc Subjective, far from exact science…. Look for signals / social proof in: Market Momentum Team
  8. 8. 8 Market 1. Size of Addressable Market 2. Level of Competition 3. Distribution Channels 4. Timing (e.g., Mobile Advertising) • Recent investments in this market: when, how much, by whom • How many have tried this before You can tell a lot by…
  9. 9. Momentum = f * “Perceived Momentum” has some value as well :-) Users / customers (number, engagement) Partners IP Advisors (industry, domain) New Hires Investment Commitment Thought Leadership (conferences, blogs) Press (credibility, not traction) etc Momentum
  10. 10. Team 1. Domain knowledge 2. Previous success 3. Team dynamics 4. Personal definition of success 5. Smart / Coachable / High Integrity / etc “Do I want to work with them for the next 5-7 years?”
  11. 11. 11 When Am I Attractive Enough? Attractive to Investors = Market Momentum Team “Market always wins” Cold/Lukewarm Market Super-hot Market When in doubt Show momentum (or find a new idea…) Strong team is the key (can raise with little proof) Examples?
  12. 12. Example 1: Startup at Prototype Stage Before • Ex-Checkpoint team, CEO sold first startup • Early prototype • No customers/pilots • No funding Next Generation Malware Detection And Protection Technology After • Pilots with four Fortune 500 customers in SV • Strong Advisory Board • Raised $15M from Tiger Global, Accel and others Confidential, proprietary and not for further circulationP12
  13. 13. Example 2: Startup with Early Product Before • Weddings-focused • No US customers • No funding Event Planning Tools for Event Professionals and Their Clients After • Expanded target market to include all events • Deep customer understanding • Raised $10M from leading investorsConfidential, proprietary and not for further circulationP13
  14. 14. 14 Do they know the market, customers, partners? Will they care about their investment? (e.g., size of fund) What is their follow-on record? Did top investors participate in their rounds? Ties to US? How have they treated founders of previous investments? (both failed and successful ones) Given their engagement style, do you want to work with them? Interviewing The Investors
  15. 15. Thank You gil@upwestlabs.com

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