Investment memorandum and how VCs make decisions, mistakes and biases

0:01 hi everyone thanks for joining my course of venture analyst today we have our second lecture it's a very important lecture because we will be talking about how VCS make decisions about their Investments how they structure information for investment committee right investment memorandums how they how VCS make mistakes and what bies do they have when they make decisions a couple words about myself I

0:32 I already talk talked about my background to my pre in the previous call and you can read it here but like I've been for for almost 10 years in MCH Capital I have an N Space Engineering background and a financial background I have experience priming and failing a startup and I'm a an industry expert in Industry 4.0 and I really passionate about space and for

1:02 last couple of years we've been developing with our friends and media projects bace ambition so you can go and check it out yeah so this is the disclaimer I don't do this course on behalf of ibf I do it on of my own and all the ideas and insights we have in this course is in my personal

1:32 opinion so let's start with the investment memorandum and how VCS make decisions so investment memorandum is a document an internal document of fund we write them to present the investment opportunity for the investment committee during this course we will have the case we will look look into the investment memorandums of best Venture Partners

2:04 so we will see how other VCS structure this information but you know long story short first of all when you prepare for investment committee you prepare a document either in ter in for in PDF I mean in in pptx so doing a presentation or in DOC format where you cover all the main top relevant topics explaining why

2:35 this investment opportunity is interesting for for us to to pop money in and you also add a financial model and financial projections and your calculations of the potential returns as well as you provide the the investment committee the term sheet you you will sign if the your approve the deal then there there could be other relevant documents like you know

3:08 client references or if you're doing a due diligence commercial proposal from due diligence providers and some other information which helps the investment committee members to better understand the investment case so here are more than 20 topics that you need to cover when you when you put together an investment memo and we will make a deep dive in it right

3:40 now so first of all you know people love stories and even if you make a presentation at an investment committee you're telling a story after all and typically take between like 20 and 40 minutes to make a pitch about the invest opportunity and discuss it internally so it's pretty long time and people could could be bored so to

4:10 tell a good story you need to say your main points three times first you do an executive summary like spend one or two minutes you know focusing the investment committee members attention on the main point points why you love the deal then you spend like 20 30 minutes you know discussing every single every single topic we will be talking later today and then you day

4:44 make the conclusion again repeating the main points while while you love the deal and giving the recommendation spoiler alert the recommendation should always be to make a decision because like to prep prepare an investment memorandum you need like to spend like 10 to 20 hours and do a business due diligence so it's a pretty int pretty expensive procedure for for the fund so like if you you know if you make an investment

5:15 committee you should be like 75 80% sure that the deal should be could be approved and you really like it so so you make the conclusion as well and give your recommendations and then you you can discuss with investment members how you could adjust this recommendations so so the first the first section or the first slide of your presentation should be about the executive summary of the main points why

5:45 you love the deal and it could for example look like that you can read it later on so you can first of all you're talking about what exactly the company is doing and how it's different from other Solutions then you tell about the deal like how many how much they raise where they in terms of the traction some deal terms and then you also say like why like where the company stands right now and where it will be

6:12 expanding after the round so that like we understand like where we heading into so then you you start explain each of the points in in in details and typically you start with a problem you try to to explain what is the target market and what is the target what is the problem the customers experience and try to share

6:45 to show that it's it's it's it's a painkiller not a vitamin so the the problem is really itchy and the clients are already paying for for for it or have a very strong intention to to to do so so you you try to show that the problem is real here then you make Market size an exercise we will have a separate lecture on the market sizing and you you you you will have the link at the

7:17 end of this lecture so first of all you need to to calculate the total addressable market and show that it's more than a billion dollars then you you know talk about the segmentation of the market because often times startups start from a small Niche then expend to other niches so you you show that as well then you talk about the key trends and showing why now is the right moment for the

7:48 startup and like two years ago it was too early for that couple of years later it would be too late for that and also show the drivers main Market drivers which will be driving growth during the next couple of years and what we want to show is that thanks to the market grow the revenue of the company will grow and the valuation the company will grow this is an example of an ex this exercise which we did for one of

8:19 the companies it was doing a solution for for con it was a construction company in the United States so what we what we did is first of all we looked into the global Global Construction Market construction market so the United States like is the second biggest Market China is the first biggest Market globally in terms of the spending on on the construction product

8:49 projects then but for for for whatever reason the startup we were exploring was going to devel was development solution in the United States okay the other thing we looked into is they will provide an nit solution some suggest like suppose some machine learning solution and we looked into the engineering software Market and and saw that the penetration of this software in

9:22 North America was 38% this on one hand that's meant that like an average worker construction worker and professional is using more It software more software than elsewhere in the world so it could mean mean two things first of all it could mean that it could mean that

9:57 like you you have a a more a tough competition or it could mean that that the your potential clients are more open to using some IT solutions for construction so in the case of that startup they have the second case so they didn't have a a very strong competition then we looked into various segments of the construction and we looked into the single family and

10:27 multif family residential construction ction you can see it on the you can see it on the on the pie chart in the middle in the top row so around 33 32% of the market is residential construction and the startup was saying that they they plan to start from this Niche and we were agree with that because it's like it's reasonable because it's one third of the market and they later plann to expand

10:59 to the other niches and also we looked into the like the square meters and the number of units built annually in the United States and we saw that this Market was growing so what it meant is that the niche were they they started from a pretty big Niche which was growing and the the penetration in this niche in this country was pretty big and we also validated that the total dress Market for in this case

11:31 was more than1 billion then when when you describ the problem of the client and when you described the neede you're addressing and calculated the market size then you talk about the product like what exactly the company will be doing and and the product is not only the technology stck but also the business model how you position and and how you position it because like

12:01 you can have a like a Cloud solution but you can position it for Enterprise you can position it for smbs and the product will be different in in some cases it will be more sophisticated with more Integrations and other cases it will be more more simple and for example like you everyone knows Salesforce so Salesforce was the first C Cloud CR and when they started they were on premise

12:32 Solutions like sap and Oracle which did the same solution and like probably they even were more or less of the have the same more or less the same sophistication in terms of like similar in terms of the sophistication of the product but the business model was different you could like in terms of Oracle and sap you you had to you know pay to system integrators to make the installation while in terms of Salesforce it was SES service

13:04 solution where he could play with the card and get the solution to and again when we talk about the business model we talk about how exactly startup earns because you can charge the client for example like again having the exactly the same product and ter of Technology you can charge them like on a monthly subscription you can charge per seat you can charge per per the volume of

13:38 transactions for example you can charge annually you can charge lifetime license sell life lifetime license you can charge for integration you can sell hard hard Pro like Hardware products Etc so in this in this subsection you describe exactly how how exactly you charge a client how and like what is the product you charge them for product or services and what is like the average check per client and like what is the

14:11 repeatability of the sales so we try to understand like how and how much you can earn from client here then we talk about competition and that it's a really important topic because every startup has competitors and like an average startup has more than 10 competitors because millions millions of people across the globe work on startups and if the market conditions are right it's very likely that many people simultaneously come to

14:43 conclusions that they should start some sort of the startup but here we need to show that the market environment still can still provides the ability for our startup to become the player number one and that we are not competing against like Tech Giants and or some other monopolies and that

15:17 our competitors are more or less at the same stage or they have a very different value proposition and the pricing model and actually addressing another need and still we we like we have a strong differentiation from them we have a good like strong barriers to entry because barriers to entry like the harder to replicate the solution the

15:48 the higher margin you can charge from from your charge your client and we'll talk about this in our section in the com in the market analysis webinar and here is an example how you can do for example competitor analysis so I typically do it as in a in a table form where on the on the in in the columns you can see on the left the name like the startup and

16:22 then you see a couple of direct competitors and I see a couple of Market Alternatives and in a rows you can see a mix of Business and Technology parameters which are used to compare the solution and Below you can see for example the reasons why I decided that this is a good investment opportunities and please pay attention that some startups when when especially when you look into the

16:53 market Alternatives they they could raise like hundreds of millions of dollars and they could be on the market for five to 10 years but because of their like the different business model and the different neede they're addressing that's they they they wouldn't be our direct competitors and we still have a room for for our start a good example is hopspot I don't know if you use this CRM so despite

17:26 they were like big players like drive and Salesforce HubSpot has found the niche and because they they they did a more simple CRM with which was employ slightly different business model they they started as a premium and it was easy to implement it was focused on marketing professionals it had it has many necessary Integrations so

17:56 they they they they had a chance to build a big company and as far as I remember they are even public yeah so what I'm saying what I say is that if you if the in in many cases the market Alternatives could be well established companies but because of the different business model and the the niche they're addressing you have a chance to build a unicor then one of the things which is really important to think about

18:26 is the investment Trends in the niche because when we make a decision investment decision we're thinking about the exit opportunities so what would be the could can we do an m&a can the company go public if so like what what would be the potential exit opportunity I mean in terms of valuation and to do that we can look into some other deals which are which

18:57 have been done in in in exactly the same Niche both both companies go in public and going Acquired and by the way you can find many a lot of data about like m&as and multipoles for example at Peach Book they they get both public information and and their own estimates and why it's important because it also shows who are the active acquirers in N and it gives us the an idea how reasonable

19:31 is our estimate like of the exit value and the expected returns we could get from the deal so this topic is really important sometimes especially for new especially for new niches for example there are many niches in in blockchain you won't see many many m&as or IPOs or for example

20:02 in Quantum Computing like pretty new isue you can't see like exactly m&as and IPOs in in this particular Niche but you can find the niche which is more or less more or less you know similar to what what you're dealing with for example in terms of web 3 you can look into financial sector m&as and see what how big are the companies and who are the potential acquires in

20:33 terms of quantum Computing for example you can look at you know at the niche and an activity in the cloud sector or in artificial intelligence sector or in more broader it sector yeah so to give you an idea of a reference class you could look into then we we start to talk about the startup itself and initially you you talk about like the history when the

21:03 company was established what Milestones they achieved what is their revenue how the revenue grew like over years how many clients do they have and the historical financials and like the forecasted financials so like to set up the context where the company what would like what was their way before this investment where where they get now and where they plan to yeah and later we will were talking about where the company plans to get in the future then you you have a slide

21:37 separate slide of on financial projections typically people look at Revenue you I burn rates and some other metrics the the client grow like turns LT ltvs LTV C ratios so at this slide you try to understand like first of all see the historical aspect how how the company how the company developed business and then you

22:08 look at the projections for the next five five five to seven years and try to validate whether these metrics are realistic and you know on one hand they they should be you know aggressive but on the other hand they should be like realistic for example it's it would be too aggressive to suggest that the company will acquire like 50% of the market or 70% of the market so typically would look would suggest that they will be require around

22:39 10% of 5% of the market 10% of the market but on the other hand this Revenue in five to seven years should be like sufficient enough to sell the company like to reach for example hundred millions of dollars 100 million of dollars in Revenue or so on and given the multiple like five to seven like 5 S 10x you can sell this company like for $500 million a billion dollar and so on but we will talk

23:11 about the scenario analysis a little bit later then when you you you you made a financial projections you need to validate those financial for projections at least for the next 12 to 24 months because this is time span when you will be when the the startup will be spending your money and this is the the period which is more reliable in terms of the F

23:42 forecast rather than rather than like the forecast for like the the next five seven years so we pay more attention to the the first half of the year the first 12 months the first 18 and 20 four months of those forecasts and if it's a B2B company with a long pretty long sales Cycles then we look in the customer pipelines and we have a chance to talk to like to get the customer feedback and to to make

24:15 more com us more comfortable that given the feedback and the the customer Pipeline and the the number of customers which are like in the process of sign and the contracts that we can close we can we can meet the four the revenue forecast we did in the previous slide then a very important topic is the team and the team is crucially

24:45 important that see preced C in series a stages it's it's also it's also important on the on the later stages as well but like as the company grows it becom comes more sophisticated in terms of the management in terms of the like sea level managers operating and a later stage Investments are paying more attention to the financials rather than the team but team is really important

25:15 anyway a classical team at early stage is a combination of Hustler and Huer so the Hustler is a CEO who will be pitching like making sales pitching to investors partnering with other companies and so on and CTO is is a hacker who is building the tech it's not like having a h a CTO is not relevant for all the business models because in some business models for example if you're doing a machine

25:46 Learning Company it having a good CTO is crucially important while if you're doing for example a a a delivery service or or I don't know a car sharings company a startup for it's it's more important for you to have a good execution because it's a very operational model while you can use like third party Solutions for for

26:18 your Tech and in in this case you more you pay more attention to having good operational and marketing officers rather than good CD but anyway here is an example like kind of a joke how you can describe the how you can describe the team the core team members and first of all you of course pay attention to those people who have who have the higher the

26:52 higher share in the companies the co-founders okay then we talk about the current ground and first of all we talk about the round size the burn rate the own way and here we need to make sure that at least the money which the startup is Raising will be sufficient to support the company during the next 18 to 24 months and now

27:25 we're recording this video in TW in January 2024 so the the the VC Market is like in in the downtrend and VCS prefer to invest companies with the path to profitability and like priority prioriti prior prioritizing profitability versus growth at all costs

27:58 and here's a bad example for example a company is raising money which will be sufficient to support it during the N nine months and it's a very bad bad strategy because three in three months they will need to start Fund Raising but they won't have a sufficient sufficient Revenue traction to close the the new round and like if if they raised money sufficient for the nine months means that in nine

28:29 months you will be making a follow on investment because it's very unlikely they could skew money from external investors here is here is benchmarks here are benchmarks for funding round at preced to series B stages which are relevant as the end of for 2023 you can look into like how the company looks like what's error what

29:01 will be the error necessary for each stage what would be the valuation range and how will te a product look like and so on then we talk about the goto Market strategy for for the company how how they position their product how they plan what what the niche they first plan to address what will be the next Niche they plan to expand or there are often times especially in

29:33 South business companies sell some one module and then they increase out of the pocket expenses providing like additional modules and have the negative re Revenue turn because they increase because the increase out of the pocket expenses so at this section we discussed the like how the the goto Market strategy and try to

30:04 validate try to validate it try try to make sure that we believe in this goto Market strategy then after we talk about the business development we also talk about the product development road map because if you expand to the new Niche if you expand if you upsell your client you need like to expand the the functionality of your product and this is the section where you drive a

30:35 draw a gun chart and show like what modules at What stages you plan to you plan to to do yeah then you talk about the deal terms so again you say talk about the the the SI the Investments the your ticket in this round the valuation

31:05 liquidation preferences Etc how those money will be spent and so on for example here is the the deal examle for for for for an equity deal for example the around is $5 million three and a half are coming from the lead investor preone valuation is $20 million and there will be first closing and second closing for example the lead investor together with

31:36 some other investors will invest like I don't know four $4 million and you you can close make a second closing during the next six six months raising next one an extra $1 million yeah and for example you're building a bould board of directors and ideally the board of directors should have as like less less

32:07 members than like the less members the the possible so minimum investment board of directors is one representative of fund one representative of the company typically it's a CEO and one independent director which we both agree to hire own and typically this is an industry expert which helps us to get insights and balance our decisions and like the there could be other terms like liquidation

32:38 preferences but we will talk about this in in our next webinar where we'll be talking about term sheet then of course we talk about the return on on investments there are there are different ways how we can calculate that I show you but but typically it all it all involves various various scenarios and calculating

33:10 the irr for each of those scenarios this is an example of bmer bmer return investment analysis done for twitch you can click to to the link below and read the whole investment memorandum but as you see they have six scenarios and in each scenario they forecast the exit value the like

33:41 the the the the price at which they plan to to sell the company then they forecast the time like the date the year the quarter they they could they they plan to sell the company and then they they forecast the probability of this scenario how they do that I don't know exactly but I suggest like I suggest they do it the this way

34:13 baser has hundreds of companies in their portfolio they they seen like I don't know hundreds of thousands of startups over their long career and they have some historical statistics in their portfolio how this like How likely is the the scenario each of the scenario and I believe they also have some some researches in terms of like some averages on the market so they

34:43 they use those those probabilities for each of the scenarios and then they look into the terms of of the deal because in some in some cases you can have have participating liquidation preferences and some cases you can have some other terms which affect your the share the final ownership of the company you which you will have based on the scenarios which which which we which we

35:14 materialize and then they calculate how they share like they multiply the valuation of the company by the share they have an each scenario and the money they can get get by best in the terms and so they calculate the so they calculate the money they get during in their exit and then they calculate the irr based on the how many

35:45 years will will pass after their investment and calculate the error and then they calculate the average error and average cash and cash then we also show the cap table and we have a separate webinar on the cap table calculation it's it's not that sophisticated but you you need to account for many things

36:20 What what we need to make sure here is that the cap table looks healthy based on Depend and is is in line with the Benchmark for the existing for the current state of the company because at at each stage the start the startup Founders got diluted and have lower and lower share so we need to make sure that they have that their stake

36:50 is big enough to motivate them to build business and here is a bad example I've came across a business essential gets 75% of a company for $200,000 investment and even at like a preced stage the team has only 25% of the company and it will be diluted later so it doesn't motivate the founders to to run this business and work for it for for for the next

37:22 years here is the example of the cup table so we typically show for example like the the ownership the ordinary Shares are the shares of the are the shares which belong to the to to the founders there is a ISO this is an motivation option pool for employees and there are also the the the owner the the share of the seriesa investors and then we we do

37:56 the calculation this is in the second colum in the third column you see the ownership of the company before the series B investment in the last in the last column you see the ownership of the serious B investment yeah this tables they could be really sophisticated like with dozens of with dozens of rows and columns depending on how many the rounds of investment you had and why

38:26 it's really important to calculate the cap table because at some point at earli stages you have save notes and safe nodes and convertible nodes which which don't have which don't have share in the company but as soon as they get p in later they will be converted to to the to to to to the shares of the company and the the team will be diluted so you need to

38:58 understand what would be the future ownership of the team and the investors when this like conversion event happens then when you do a deal it's not relevant for preed deals but starting from seed and on typically at least lead investor makes a due diligence and it means that VC hires a legal and tax and financial

39:32 advisors which check your would make a due diligence on on your financials taxes legal structure Etc and also right to the transaction documents and for example it could take like the for example if you're doing a $2 million round the people could charge you the the the providers could charge you like 30 $40,000 per transaction so it it's a

40:03 pretty costly operation and when you you you're do du diligence you can also get the commercial propositions for various providers and also make a decision which which of the providers you will take which you will hire to to make a d and also the last but not the least all startups are associated with risks and and and you will always

40:38 have a risk reward map and and you you also talk for example why you believe this is this risk is acceptable or if this risk materializes how we will be managing this risk risk so what's your plan Plan B for example this is this is the example of risk risk

41:11 battle card from best Venture partner when they invested in twitch you can read it later and then we at the very end of the our presentation and on our investment memorandum we have a small subsection with our conclusions and recommendations where again we repeat the deal terms the key points why we love the deal and our

41:42 recommendations and of course our recommendation is to invest in a company because as as as I said it's really it's really time it's really time consuming to to put together a Mana but the discuss the discussion at the investment committee will be around the terms probably we can suggest like decrease the valuation or we could suggest you

42:14 know doing trench Investments and kpis or we can we can you know or we can suggest like which to decrease our exposure in the deal yeah so this is here we final

42:45 finalized this section now let's talk a little bit about the reason startup fails and here I take the insights from CB insights you can see you can check out later the whole report but if you look into into the this graph you see that the the the one of the main reasons is there is no Market need and the reason

43:17 for that there are could be several reasons for that for first of all it means that the startup is too early to invest on or it was a reasonable suggestion why it could work on but for whatever reason the market doesn't need a solution or the niche like the real the real Niche was way smaller than the investors

43:48 initially suggested or like the the average check of the of the market that average check was too small and too small to like to to to make the unit economic works the second reason startups fail is that they be they run out of money but typically it means that they have problems in terms of the developing business and the running out of money is

44:20 is like the the consequence and the third part the third reason startups fail is the problems in the team and it's it's a really stressful for for inter for for for VCS when for example CEO leads the company or there is an internal conflict and you need to manage it so and this is why especially at the early stages we see space so much attention to the

44:51 team and the fourth reason is that the company was for all competed by out competed by the other players and especially this is relevant for the niches W with low barriers to entry and this is why we pay a lot of attention a lot of a lot of attention like what's your secret Souls how you different what are the barriers to entry yeah and there are like a set of other

45:21 reasons but they are less less relevant and here are the reasons for success of the of the company and the founder but typically it's Associated like with having a more experienced team with the with a team which is flexible which iterates fast which gets feedback makes PS and so on and you know there is always cool to look into some some companies

45:53 and especially how they fail because many people try to learn on the successes while in reality you need to to to learn on fails and here is a ex here is a company called Martin Mark it's a some some sort of data company providing insights about about about the startups so what I did is in you see the the green graph this is the head count of the company

46:25 and the yellow graph is the website visit so they providing a a B2B s solution web web based so like the website visit is proportional to the like the numbers of users and pain users so it's kind of you know shows the Dynamics of the business itself so what we can see here is that the company was alarm of Y combinator straight after the the the badge they raised $1

46:57 million then they raised in total $17 million and six months after they did series B they started to hire to fire people and we see that their revenue also there is website visits were also were also falling and and finally the company was acquired for $1 million so it means that like the investors didn't get their money back so

47:29 this is an exam I I I I I I didn't dive deeper into why the company failed but I believe that one of the reasons is that their their the the the data they were providing were not like sophisticated enough for for the in for for for for the users to pay for them yeah but this is my personal opinion as a potential

48:02 user of this platform because I used free trials but I never paid to them now we will be talking about the next subsection how investors make investment decisions and what they pay attention to so we will elaborate a little bit more in depth the top we discussed in our investment memorandum section and here I use I use the investment seed

48:35 framework you can see the link here because I I believe it's really it's really cool so we will go you know section by section And discussing everything in this framework so first of all the every it's it all starts with analyzing the the market sizing and you need to make sure the total addressable Market is more than $1

49:05 million doar and as you remember we we suggest that the company will you know acquire 5 to 10% of the market so it means that the company could build a business with a like 50 to 100 million dollar and could be potentially sold for like I don't know 50 $500 million to a billion dollar and so on so this is why it's so important to assess the total addressable Market the other thing we pay attention to is if the problem is real

49:36 and validated by customers because I've met start a startup who had several millions of users fre users but when they wanted to charge the the users $10 monthly like none of them subscribed because their solution was a vitamin and not not that essential to them to pay to pay for it so this is why it's really important to validate that customers are already paying either for your for your product or at least for solving

50:10 the problem you're addressing to they could be paying either the market to market Alternatives or you know your competitors and there is a reasonable suggestions that why those client will be paying to you but ideally you already have the paying clients then you also try to to show that like your the product is vitamine is not vitamine but a painkiller so it

50:44 means that like the clients arter need to your solution and a good example here and why it's important especially during the downturns because when clients optimize the costs first of all they like they unsubscribe from from inessential inessential Solutions and it means that your business will be at risk then if like if your solution is

51:15 not essential that it will be harder to sell the margin will be lower the marketing cost will be higher and the sales Sun Cycles will be lower and all in all unit economics will be more po will be poorer for vitamin products for versus painkiller products so this is why it we pay a lot of attention to that then there are a set of questions about the solution first of

51:45 all we ask question why why Founders do what they do how did they came across the problem ideally that the F Founders had experience experience in the field or this problem arose from their personal need why is that because they understand the they they better understand what they're doing and they are have a strong motivation to to do what they do because it gives us gives us like the perception that

52:18 that they will they they will succeed in it then when we talk about the solution is there an evidence that the customers like it ideally if they are already P paying for it if they pay and for example if it's a s subscription H what is the churn rate and for example if you have a like five five% monthly turn rate it means like it means that in six months you will 60% of the clients will leave you

52:49 and this is a it's is a disaster while if you have 1% churn rate for example monthly CH rate it means on that after 12 months you will have 88% of the clients using your product and this is a good sign so anyway you you try to to G G get here any validation of that client's lobia product then when when we talk about the competition and the product

53:21 there is a mantra that your your product should be like way better than some other Solutions like 10x better 5x better 2x better why is that because like if you're if you're more if you provide a solution which is more or less the same as your competitors then it will be hard for clients to switch for them like why why bother while if you're providing something which is really really gamechanging for a

53:53 client they are more open to to to to change their behavior to pay for it to switch from one provider to another so this is why we pay so much attention to that then I have a lot of people in this course who are outside the US and the problem with the the the many Geographic markets is that the local market is too small like it's way lower than1 billion dollar

54:24 and you can't build a unicorn on the local market so in most of the cases even in such companies like countries like United Kingdom you need to expand globally and when when you will be talking to a VC they will be asking you about like the next country you're you're going to expand to and ideally you you you need to have some first

54:55 signs of business development of those geographies or you could participate in some acceleration program which give you access to like potential clients in those those geographies so like you need first of all you need to to Target big markets and then you need to get to have the first science that of that you already did some expansion to those markets now there is a subsection

55:28 about the market as I said like again is the market like big enough to to to build a billion dollar company then we talk about the trends and the quick question we try to answer is why five like two years before it was too early to to start the business in this Niche why like in several years it will be too late to

55:58 to to run this business is the market are Trends are right just to to to to run this business right now is the market is crowded or is is are there very few players on it how fast is the market growing and so anything which helps to prove you that if you invest in a company in this Niche this this company would could become like a billion dollar company in 5 to 10 years again one of the most

56:33 important question why now is the right moment because there are two factors of success for for the for startup the right timing and the the the good execution of the team and many startups fail because of the like they were too early to the market or too to too late to the market so answering to this question is very important both for for entrepreneurs and for investors and and the last section is

57:06 what What's your go to market and what do do you have some advantages for example you have an exclusive partnership with a with a like some player or you have a an exclusive access to database for like your machine learning models Etc then there are some questions about business models the first one is how how you

57:39 how realistic are your assumptions in your business models because you know Founders are often op optimistics over optimistic and think that like they could absorb like half of the market while in reality like you know it's more reasonable to us to suggest that you can acquire only 10% of the market again Founders could be really optimistic about LTV Co ratios and

58:11 don't or very optimistic about about like the the the the the the the the check grow the you know that customer acquisition cost decrease about some other parameters in the financial model so you need to to to like to to validate all the parameters in in the forecasts then when we talk about

58:44 business model you know you should look into if the business model have buil-in Network effects so what is Network effect is it means that the product or service of a company has has more value like the value of the product grows with the number of the users and the classical the classical

59:14 Network effect is social networks the term initially started there because each the more more users a a social network has the more content is created the more friends friends you have which you connect with more people online and you can get more from this conversation from producing content

59:46 to that but there are business models other business models which have strong Network effects for example if you're a Marketplace you have very strong Network effects and having a strong Network effect results in building monopolies in some niches so this is why entrepreneurs this is why wec live that and building a monopoly as I said in my previous lecture means that you have a higher profit margin for a product but not all the business models are built have in

60:19 buildin Network effects for example if you're doing a Sal business CM for for example the network effects are are pretty weak so having network effects is is really cool but if there are not there are no network effects it's not like the deal breaker then there are a couple of questions about the current round first of all you you answer the question if this round is you know meets your

60:51 investment criteria in terms of the size the traction of the company the check Si you're you're you you're investing in the potential ownership of your company you will get for example someone would say I would like to have no a position in a company no less than 3% or 5% or 10% Etc then the question is what is the valuation or market cap and can we earn enough

61:21 because sometimes the market size is too small to build a unicorn or in in some cases like the valuation is too high and that means like you know is very low chance that you will double your valuation at the next round of investment then you you also talk about like subsequent funding requirements so for example in so you essentially try

61:54 to answer a question if the company needs the next round of investment after your round are there any investors which are which would like to invest in in the company and in many case like there are many niches for example 3D printing where it's so hard for for for for we for startups to raise money just because like the m is not in the niche and investors don't likeing it investing in it sometimes this changes for example for like for most of my

62:26 career I investing in drone Solutions wasn't sexy because like in around 2014 and earlier there was a you know there was a a big hype around drones then you know many like Dr Drone companies lost the competition to Chinese GGI and and others and the the investment idea didn't play out well and and in general it was so hard for

62:58 drone producers to raise money but during the last couple of years the idea is became more viable so the ties the ti sometime changes but when you make a decision you try to assess like if my company I I'm back in will need the next investment round can they raise it and if the answer is no then even if like the the even if the the entrepreneurs are good even if the

63:29 some other parameters are good probably it's a good idea to to pass on this investment but there is like no strong like you fin you decide for yourself but it's reasonable that you either make full own investment yourself if the like it's in line with your investment criteria or like you will end up in the position where the company will die will die because

64:00 they they can't get funding then we talk about value creation and like value creation means how much value the the users can get from the from from from from the product and how it will be and and like how how how how it it all results in the profit margins of

64:30 the company and like the the valuation at the exit so first of all you you try to understand if the company has some defensible technology some knowhow or patents or some Stellar team especially it's relevant for deep tech companies like someone who is doing like quantum Computing B Pharma bio and stuff like that because this this answer

65:02 to the question why is so difficult to replicate the solution then the other the other question is how the company can the company benefit from some you know existing Community for example if you know the story of Facebook they started expanding their their solution through campuses and colleges or if you're investing in

65:35 web three for example often times often times look in in in most of the cases all the products they have the communities which are like early adopters of of the solution and sometimes even you start your community first and then you build the solution based on the insights from the community and then we talk about how much value value can be captured from the solution so you know based

66:08 on the value how how valuable the product is depends like will The Client pay be paying like $2 or $200 for some for something and if if and there there is like the rule of Thum if you save like $100 or if you bring new Revenue $100 of new Revenue to a company then you can

66:39 charge 10% of that so you can charge 10 $10 so based on like the value you create most of savings or new revenue streams you create to the company you can assess like the potential ticket you can charge for your solution then again let's talk about competition first of all like

67:10 again the barriers to entry and there are many niches where the the barriers to entry are very low like for example scoter sharing and if the bar to entry are low that it means that the winner will be the company which raises like the most like the biggest rounds of investment and it's really hard for investors to pick the winner in this case and for

67:43 example when I was during my career I I I saw how the company Bert developed the company raised like billions of dollars and and last year it it went bankrupt so and this is this what means what could happen if the barriers to entry are really low and and the other question you try to answer are you not are you competing

68:14 against like big incumbent players like Amazon Facebook and others or you're competing against the like the many small companies or for example you know good markets for marketplaces is if the market consists of like you know thousands or like millions of small companies and there is

68:44 no clear winner here and then like platform like Amazon could aggregate the demand and and build a monopoly on the market so try to understand if you're in in in such position then we we answer the question like a set of questions about the exit so first of all we try to answer why the company which we we're building will be acquired for example if you're building

69:15 a Pharma startup probably like the in most of the cases your company will be acquired because of your unique team and I IP you created in some cases the companies are required for their business for example you have business in some geography and some corporate is expand to this geography so they buy Your solution for the for for for for business in this geography

69:47 in some cases company could be acquired for the product for example WhatsApp was acquired they yes they had a pretty big client base but first of all it was acquired for the product and meta and the The Meta was you know thinking that based on the the client base they have and the product WhatsApp provides they can scale scale scale this business dramatically in some comp in

70:19 some cases the companies are just acquired because of the because of the team for example it's typically an equ hire and it's it's a bad investment strategy to invest in startup be thinking that it was will be acquired for for the team because it's like the the lowest valuation you could get and in many cases for example if you're building an it or a m company in many cases

70:50 the IP strategy acquisition idea would be also not not not lucrative while in some cases like Pharma IP IP acquisition like is a you know is a standard for the market then when we talk about m&a we talk about what are what are the metrics which will matter to the to the investor and typically this is

71:21 a combination of Revenue and EB multiples sometimes portfolio of pattern portfolio matters some clinical trial Milestones some you know key clients something like that yeah then let's talk about the risk

71:53 profile there are many risks which are associated with the with the startups but one of the risks you always take is the business risk so the risk the market risk so first of all you take the if the re the market will grow or not this is this is just your judgment and then you like pay and pray and the other risk is is what you take is like the execution risk of the team

72:24 so you either believe in the team or not you can do something with this risk like you know discussing with a team that okay we will hire SE level managers which will increase like the chances of success but the you're you're limited here and you you you in general you always take this the business risk so the the risk that this business will work or fail some other risks like for example

72:55 regulation risk or you know ecological risk on other risks you you just assess them and you can proactively proactively Force the entrepreneur to deal with this risk for example if there is a regulation risk and you see that like some some points should be done then you can negotiate with the entrepreneur so that they either do it this like

73:27 you know f file some some documents and do paperwork after the round or prior to the round but anyway the one thing we need to remember is that we need to take risks and and sometimes there is a temptation to decrease all the risks but the problem with that is that yes on one hand you need to decrease the risk if you can if you can decrease those

73:57 risk and if it's reasonable to decrease those risk like for example a regul risk associated with regulations but in some cases you just not only can't decrease the risk like a business risk but you need you you should be willing to take this risk because if you remember from our previous lecture taking a risk that like you remember this risk reward curve so the more risk you take the higher the returns and if you der

74:28 risk all of the risks then you wouldn't like your returns will be small you will be actually not in the VC business so on one hand we we do risk on the other hand ask yourself do we take enough risk so that to get we could get exceptional returns and when we talk about the the risks we always ask ourselves are we in investing in the mood sh company for example think about SpaceX when Elon

74:59 Musk started SpaceX it was a crazy idea of building a private company which will be launching payload to space it was crazy because you were competing against government contractors against government companies but if it worked and they were like probably were reasonable reasonable ideas is why it will work in the future it could be a really huge company a really huge company and this so always think

75:33 about you know that always remember that venture capital is the business about outsized returns and huge risks so for you to understand like only 5% of the portfolio develops like exceptional re risk exceptional Rewards so you can get like from a single transaction you can get like money which will be two or 3x of your fund total fund and the single deal

76:05 significantly out of 20 deals you do in your portfolio only one deal makes a significant returns which makes like drives the return positive return for all of the fund then as again as I said we we p a lot of attention to to the te and that there will be three slides about that let's look into that in more details first of all we we try to understand like is this the

76:36 team number like like the exceptional team is does the team have unique advantages why they can over compete others so with all things equal we would put back the second time entrepreneurs like biggest experts in the sector people from VCS or Investment Banking who have brought broad network of experts who can hire

77:07 people who can raise money Etc the second question is do they have some Market insights some secret Source and for the industry experts it's in it's always the case for example you had 10 year or 20 years in in the industry you understand it like really well and you understand the trends and you understand some insights from the other industry players and you build business on top of that then

77:39 it's then the other question is do you as a VC trust to the people like to to the Dee of the of the startup you can't quantify this it's just the feel the gut feeling but when you spend your time like years of working in Venture Capital you this gut feeling will be providing you with more like relevant insights so sometimes even if

78:10 the te the team like pitches perfectly even if the other factors are are pretty well but you don't trust or don't don't like the founder for whatever reason probably it could be a good reason to not to close the deal the other question you you typically answer and personally myself I believe that building a startup just to earn money is not the like is not a good motivation you need you because like

78:43 it's a very tough Journey you will be building this business for more than 10 years and there would be there should be more than more than just earning money when you start your startup you should have some Mission you should have some reason you should have some Noble purpose why you're building this business and by the way I have a separate course it's a it's a it's a paid paid mentorship program when I help help people to find the idea

79:15 for startup and launch the startup so we do a lot of exercises which has at at the very beginning to find some idea which is in line with your personal mission and the business Trends and the Trends on the market and like and you have high chances of raising your money so when you when you assess why why someone is doing business try to understand his intrinsic his or her intrinsic motivation and on one hand

79:45 if the person is Mission driven it means that they will be you know running this business you know they will they will be they will try everything to make this like business successful but there is a flip side of course is that at some point you need to kill the business and if the person is like very Mission driven they will try to save the business like

80:15 even if it's time to to to Let It Go but all things said having a person which is strong motivated and have a reason why they're doing business this business is better than investing in someone who wants only earn money then we we need to answer a question like do the people have can can lead and can fire hire

80:48 fantastic people because it's really important when when you make your first 30 hires because this you know if you hire cool people which are joined with which like have like very very strong Mission then you you can you you will build a cpart culture which will drivve the growth of your company and those people the the startup Entre the startup Founders they will

81:18 need to scale teams like to hundreds and thousands of people and they will need to hire high quality professionals from corporates from you know so they should get like the exceptional talent and they should persuade them to to join your team and like for example like Steve Jobs hired John SC from Coca from the Coca-Cola

81:50 yeah so this is why like the leadership and like the you know the access to the talent pool and the ability to hire people is extremely important for the success of the company and you try try to assess if this person is capable of doing this or not the other question you answer are they commercial can they sell and typically at earlier stages the CEO of the company is the first sales representative and of the company and

82:23 you you try to assess like whe whether you believe or not in his or her ability to sell to the clients to sell to Partners to sell to other VCS and of course the indication of the sales capabilities are first of all the previous experience in sales or the previous experience of building a business or or if they could secure some good contracts some good Partnerships some good pilot projects

82:54 within the existing business you're you're backing the other question is like do they understand well the market and the competition the product they selling and you know the best entrepreneurs I I've met when you ask them anything about the market they have so many insights and when you to ask them about the competition sometimes they can even send you the peach decks of their competitors because they like they

83:26 they they they they try to deeply understand what's happening on the market who are the best players how they different like why they believe they will they will be better so they like they they very deeply understand what they were doing and the the the last question in this subsection is do they do they do they have big Ambitions because and and often times you can see those Ambitions when you look at the projections of the company

83:57 for example you see the projections saying that in 10 years we'll have $30 million in Revenue like $30 million is a is is not like a a high a high Revenue in 10 years but so but on the other hands you can see a person who says like we will have a billion dollar Revenue in four years this is also unreasonable so when you assess

84:27 when when you assess a team you try to understand like are they ambitious enough and are they reasonable enough in in the size of the business they planning to build and the the third subsection about the team is first of all do they like to the G as a group what what it means like do you believe

84:58 that they they will like the team will be sustainable and often times when you success successful teams the co-founders have a previous backgrounds of working together or building business together or studying together or like they have been friends since the their kids so some proofs that they they have they they they work well as a team then there is a diversity thing

85:30 one one one good thing about the diversity I mean the the the the people having the people with various backgrounds in the team is that people with various backgrounds have unique points of views on mer topics and the solutions they make they will be also more diverse and you know I I I once heard a good idea so if you want to get exceptional

86:00 returns you you you need to find outliers and you need to find a unique way to find those outliers and you know this diversity things diversity thing like having people with different backgrounds is also about getting outliers and getting getting some opportunities which others Miss so think about it not over optimize

86:33 about this diversity thing but think about it as well the other questions you answer try about the team is what are the gaps in the team what are the key hires you need to do after after the closing the deal and you and and here you you need need to discuss it with the with entrepreneurs how they plan to close those gaps are do they see those gaps themselves do they believe that they

87:04 need to close this and what's the strategy to closing them sometimes and VC help to hire to make key hires sometimes they can refer to some HR managers who could help to close those gaps sometimes you interview SE level managers together for example the entrepreneur picks the picks the person you he or she would like to hire and then say okay I

87:35 would like to this to hire this CMO and what do you think and Lead investor could also have a chat with a person and say okay y I'm okay with that it's not it's not mandatory that the VC puts freezes on the high or like you know know could ban some specific person it's just the second opinion and finally the last but not the least is how how humble and willing to listen the the

88:07 entrepreneurs it doesn't mean that like the entrepreneur shouldn't blindly do whatever you say to them especially as a VC because VCS are not entrepreneurs we is the investors after all and all of not all the like insights we have are f for the business but you know this ability of a person to listen to the feedback from The Real World and to reflect on that and to make decisions based on this feedback is a is a

88:35 crucially important it's a crucially important capability of a person and you know for example I I once talked to entrepreneur and I said like you know why don't you extend to this like Niche it sounds really interesting and the entrepreneur said you know I we haven't like I don't have a question the answer to a question right now but give me a couple of days and I'll come

89:06 up with an answer and he went did his research talked to his team members and said okay you know it's not viable because this this and this and that's that's what what a good entrepreneur should do we finished our second section and let's move to to the third

89:41 one this is a very important section because we will be talking about paradoxes and biases which venture capital face so Venture capitalists are also people and as with all the people we make mistakes and sometimes those mistakes are irrational so so You' better know about them I read pretty good article you can see the link here you can read the full article here

90:11 as well so as I said we as venture capitalist we like do many mistakes and one of the reason for that is that because we deal with extreme uncertainties and a symmetry of information and we need to make decision fast we don't have enough information to make those decisions but we need to to do those

90:43 decisions fast and for you to understand like you know out of 200 deals you get you make only one investment decision ision so you you need and like and for example white combinator out of 40,000 entrepreneurs choose 200 in a batch so you you need somehow to filter those immense flow of people and ideas and start and startups and this is why

91:18 vvcs often use various eristics so this is a like some rule some simple rule which helps you like split and filter out many deals and when those hor istics emerge they they are very very reasonable but sometimes the

91:49 like the situation changes and those istics also change so you you need to keep in mind that it could happen for example for for for for years like the common market sentiment was that now we don't invest in in the Drone companies and there was a the reason for why why was that because the regulation was not in place was and stuff like that but the last couple of years the

92:20 market conditions changed and now drone companies raise money and the other thing as again as I said we work in the environment with a strong symmetry of information the entrepreneur knows much more about the company than VC can ever get even if the Venture Capital do due diligence so this is the second Factor you need to understand and of

92:51 course this factor affects the the quality of the decisions we make then why then I I I previously said about this in our previous webinar but I want to stress that Venture capitalists have a very long learning cycle why is that first of all a TP typically a VC a partner of a Farms doesn't do many deals a year depending on the stages so if

93:24 it's a serious a investor like a partner could make one deal or two deals annually if it's a seed round stage a partner could do like five deals a year two deals a year like 10 deals a year but like 10 is a maximum then it takes you a couple of years to see the results so as I said the typically startup raises between raises each round in 18 to 24

93:58 months so you will the like the first results you will get faster in case the company didn't play out well but like finally you will see how the startup work if the idea worked out or not like in five years from your investment or in in seven years because the startup even can the next round but at some point something happens and the company dies and third problem at and

94:31 Temptation temptation is that entrepr VCS would like to stress their successful cases and often times they under underestimate the good luck that helped them to exit the company while to learn on to to to to to to really learn something you need to to to to learn on your failures and this is actually the

95:02 reason why this first the reasons why firsttime managers typically perform poorly compared to experienced vs and if you're for example plan to to build your own VC hire a person with experience in venture capital at least because they have already done they have already went through this learning curve and their decisions will be made better than

95:32 than you just because you you you just start your journey so let's talk about some biases so first of all there is an example so suggest that some person is very humble so very shy and don't like to talk to other people and suppose you you you meet

96:03 such a person the question to you is is this a person a librarian or a farmer and in making cases people will will say this is a librarian but in reality there are panics more farmers in the United States than Librarians and the farmers could also be shy could could also have this Behavior

96:34 so the first the first the first bias Venture capitalists have is ignoring this statistical information and the statistical information for an investor is that out of of 10,000 startups you can find only one unicorn one two three so and if you if you meet a startup and you believe that like this is the best deal

97:07 ever like in statistically it means that it will won't be be become unicorn it could be a good company you can sell it for hundred millions of dollars but like getting a unicorn is like is a very good luck so just keep it in mind when when you make decision and when you see like the best deal ever the the second the second bias is availability of the

97:39 information and what it means is that we tend to overweigh the information that comes easily to our mind and underweigh the information which is relevant but less exciting for example we see many times subconsciously ask themselves how this entrepreneur is similar to the entrepreneur which was successful in our previous investment so we are unconsciously

98:12 looking for for and make these judgments on the similarity basis or for example you love the idea so much and want to make the deal so much that you start to ignore the less exciting information like about like churn the bad High churn or you know losing a client or like negative feedback on

98:42 the something like that so make sure so when you make decision that you're not not underweighting these negative signals you're getting that your decision is not B based on emotions or not not not not doesn't have such biases the other the other bias is over confidence you know I've met many I have many smart people around me and a

99:14 smart PE person believes that he or she re is really smart and we tend to be sure in what we in in our judgment we are tend to be overconfident so the guys in this in this book in this article made a made an exercise so they took 51 VC and

99:47 they took they took real historical deals which were made they removed all the information so that people couldn't identify the company and then they they they provided this information to the VCS so they they made investment decisions and and they asked the question so like will you invest in in a company and how sure that you

100:17 are making the right decision so what you see regardless of what regardless of the fact that the company was successful or not successful and regardless of what they they made like the the right decision the the VCS were very confident in their decisions so so remember that so we can make make

100:50 mistakes and remember that you are not the smartest person in the room because otherwise you could like face problems of overconfidence the other question the other bias is information overload you know as I as again as I said like very smart people you know can reasonably prove anything any any they

101:22 believe and at some point when you make when you like make analysis of a startup you had so much information that any additional information doesn't make you decision better so at some point you just need to stop and make a decision while if you're like you can spend so much time like getting like deep deeper and deeper in your research

101:52 and it doesn't improve the quality of the decision you make the other bias I already told about it is the survivorship bias we naturally tend to look at the success stories and reflect on the success stories but in the the reality is that most of the stops fail and if you want to learn on something you need to learn on on the re like on those startups which failed and try to understand why they

102:24 failed reflect on that the other basis is similarity basis investors are human and as every every human we tend to prefer talking to the people we feel comfortable with tend to the PE talk to people which we like for example if you're a an an engineer you would prefer talking to an engineer if you're an MBA you would like think that MBA

102:56 people with MBA like are the best entrepreneurs and so on this is a hint for for the found startup Founders because all investors to are prone to this similarity Bas basis so if you are a St startup founder you could like approach the the partner in a fund which has like the most relevant background to you because of this similarity Behavior

103:28 buyas they would be more willing to take to take a call with you to talk to you but this place like this this decreases returns for for investors so remember about this don't underestimate the founders which have a very different background than yours the other bias we have is called confirmation basis bias so we prioritize the

104:01 information which supports our solution and like you know discount information which like makes us feel uncomfortable about decision we made why it's important because for example if you made an an investment in a company and the company underperforms and there are signals that the the signals that like it will end up badly and in somea in many

104:35 cases just because you already made a decision about investment and you want to you don't want to lose money you try to find positive signals some positive signals in order to like make a follow on investments and it all end UPS ends up in in many F on rounds which end up finally in like in the banks of the company so be beware about this bias and keep

105:05 this in mind when you you're dealing with the companies which are underperforming I'm not saying that you not you should be ruthlessly killing those companies because there are many cases when the company face problems and they survive like the and become successful but Beware aware about this problem and make sure that you're not discounting the negative information when you're making your like f f

105:38 investment decisions and there are some tips how you can how you can comp compensate on those biases for example you have a deal which all the like all in your room like like all all all all the VC all the investment committee members like and in this case you know you can use AE Prem morm approach so you say

106:10 okay guys we invest in this company and it dies like in three years we know that it dies and think about the reasons why it happened and this postmortem a pre premortem approach you know makes you be more creative and try to look for intrinsic risks which you didn't pay attention to it doesn't mean that you don't need

106:41 to you shouldn't invest in this company it means that you can identify those risks which you couldn't which you didn't pay attention to and then you can discuss in a group if those risks are acceptable and are you willing to pay to to take them or about you can discuss the mitigation strategy for to dealing with these risks the other the other tip is

107:13 the reference class for casting remember I talked about the the Dr the drones for example you can come across exceptional entrepreneur brilliant brilliant idea but you like if you look into the niche you see that there are so few startup Founders which became unicorns because of the intrinsic

107:43 problems of the market so how this works try to find a typical reference class for example the a startup game which is doing some B Marketplace okay you look how B2B marketplaces in for example in United States in general played out just look at like hundreds of marketplaces are there like billion dollar companies are

108:13 there like you know hundred million do companies which of them were successful then think about the typical outcome of the for this class so in case of the marketplaces yes like there will be definitely be unics if for example you're dealing with a marketing Tech startup and you look into those 8,000 like Solutions which are already exist on the market you will see that very very few of them like were sold for more than100 million so even if you're

108:46 investing in a brilliant company the chances that to becomes a unicorn are really small and then try to understand based on this information trying to understand what will be the like the potential outcome for your company your your planning to investing and try to try to think about the reasons if you believe that this it will be better than the

109:18 reference class try to like to to give the reasons why you believe so and the the the third but the third thing is use ristics wisely as I said ristics are very important because they help us to make decision fast and in many cases they work perfectly but sometimes hor istics change for example and they they they like they emerge because for some

109:49 reasons for some business reasons for some Market reasons but sometimes the premises based on which those hortic emerged they changed and over times you need to revisit them for example for for for many years it was a good idea not to invest in in the Ed tech companies but like if you looked into dur like into pandemics

110:20 deals there are many education deals done just because some premises changed so remember about this ask questions why we're doing something or we're not doing something why we are filtering out this type of the companies or that type of the companies revisit those premises and there are some other interesting articles I would like to advise and advise you to read and

110:54 talk a little bit so again as I said like if you're investing on a on a like similarity B set so typically your returns are lower so for example if you're backing a small group for example alumni of your University you're limiting like the you're you're limiting your flow the

111:25 flow of De the deal flow to like very small sub subgroup of people for example like the typical university has like 10,000 50,000 people like Alum like 100,000 people and on one hand the University made a filtering because like the acceptance race for for Stanford for example is half per of the people like so on one hand a university could be a good

111:57 filtering but on the other hand if like the university is small enough then you will be missing like like your the the the number of the deals you could be dealing with is is really small and your returns are going low and this is this is similarity basis is approach also makes the Dr slower in some other types of filtering for example if you're like invest

112:30 only in the like you know some ethnic groups it could if if the group is pretty big that will be your advantage but if the group is really small then you will be losing money and ex exactly the same the if you you're you know evaluating the startup teams back on back on the based on the background then there is a notion like you know you need to invest in

113:02 second time Founders and there is a good article where they looked into and compared second time Founders versus firsttime Founders and first of all even if you're investing in a second time founder the chances of their them succeeding succeeding in their next venture is not 100% like it's close to 30% just because of the nature of the Venture

113:34 business so they can fail not because they have poor execution but because they like it was not perfect timing even like serial entrepreneurs like not all of the the businesses succeed and if you failed your previous business actually the the guys in the in the article showed that the the chances of succeeding your next venture are more or less the same as you know as the

114:06 chances of the firsttime entrepreneur like it's probably contrary to intuitive but this is what the people learned from the from from from the data they get so not over overestimate this experience of being a second time founder then there is another idea especially among entrepreneurs then the stronger the brand of the of the VC the

114:38 higher price they pay for the for for the startup so the higher valuation they can get sometimes this is the case but in many cases the situ is right the opposite why is that because the the strong of the brand of a VC the more deal flow the bigger is the funnel of the deal flow and they understand that entrepreneurs would like to close the

115:08 deal and they like they negotiate the lower terms the more preferable terms for them and there is another article talking about like why you know invest in in in successful previous entrepreneurs is like could could have benefits so first of all if if an entrepreneur raised money

115:40 previously raised money and more or less was more or less sucessful this person already has a network and they can have get higher valuation because of like VCS believe that second time entrepreneurs some more experienced but essentially this person has a broader Network in of VCS so they they they have like they they can make a competive the the deal more competitive and it's actually mean that the

116:15 the like more experienced entrepreneurs they can raise money from from like the the added value which they get from from VC with strong brand is less relevant for more experienced entrepreneurs just because they already have the necessary Network and like you know Network to build a business it doesn't mean that they don't have the value of getting get G get of getting money from experienced from

116:47 from Top V but the value of it is lower for more experienced entrepreneurs then exactly like if you're an like well well-known person especially if you build a successful previous business like the world knows about this and yeah your your potential Partners know about this your future employees know about this business angels know about this so this gives you like easier access

117:17 to to the talent pool to the partner pool Etc and of course entrepreneurship is is like also you know is also the profession where you get skills as you go so the more businesses you do the more things you learn when when you do those businesses and the last question I

117:48 would like to cover here is how to invest in other geographies of course during pandemics investing abroad for for for us vs became more more acceptable but all in all typically Venture capitalists prefer to invest in Those comp countries they have a for like they have a person in so for example if a US VC would like to invest in Brazil

118:20 they at least hire one partner which is the which will be located in s Paulo why is that because first of all when you have a foot on the ground you know all the people you understand what's happening there then you make sure that you you you get the best deals ever because the best deal just because you see all the deals like available in this region while in contrast for example your your usvc and like some Brazilian

118:52 entrepreneur reached out to you you and you have never looked into this geography so you just you're just dealing with a random person and you know the chances that you're getting like the best entrepreneurs are pretty low and when and based on This research so if if you invest in other geography the inter the investors first

119:22 of all they would prefer to invest in syndicates at least with the funds like well established funds in those geographies because like those well established funds they better understand like the environment and can piak the entrepreneurs more W wiely then typically they would prefer to invest with the smaller checks in in other geographies and in some cases when it's possible they would invest in trenches so they der

119:52 risk try to Der risk those tremendous symmetry of information they have when they invest in in the other country okay so this is it for today these are my contacts please subscribe to me to L LinkedIn and x and looking forward to meeting you at our next lecture have a great day bye-bye