The second lecture of the Private Equity and Venture Capital syllabus at TalTech university focused on Venture Capital Strategies and Life Cycle. Lecturer Heidi Kakko, a seasoned investor and mentor, guided us through the maze of the VC role, investment strategies, portfolio building, fundraising, investment instruments and much more.
Heidi also challenged us with exciting scenarios of the future of VC and started her overview by saying “Everything I´m saying today, might not be valid anymore a couple of years from now”.
A selection of 10 interesting takeouts from Heidi’s lecture:
1) Welcome to the Land of Unicorns
- The impact of unicorns and their founders as future investors
- Estonia vs rest of the world
- Valuations on the rise, extensive growth in A and growth rounds
2) The Need for Venture Capital
- Narrative vs numbers – which one is more important and how does it change with the growth phase of the company? How do the life cycles of tech companies and non-tech companies differ?
- Which part of the world will lead the next development wave of disruptive strategic technologies?
3) Startup Financing Cycle
4) The difference between Venture and Growth Capital
A walk-through to give an insight into the most important differences between the two strategies is often confusing. Nevertheless, venture capital seeks start-ups with innovative products/solutions with scalable business models in need of funding and expertise to prove the product-market and business model.
Growth capital focuses on more mature developing companies' need for capital for the next step/stage of expansion with an already proven business model to scale and/or enhance products.
5) A Very Simplified Process Model of a VC
- Build thesis for strong value proposition - capital need/supply, timing, deal flow, team match.
- Define the winning strategy – focus (stage, geography, industry), fund size, number of portfolio companies, initial tickets sizes, the logic for follow-on investments, support services.
- Prepare all documentation and legal structures.
- Fundraise & close the fund.
- Invest to build the portfolio of 20-40 companies – ca 50% of the committed capital.
- Develop portfolio companies – help to reach next round fundraising and value increase.
- Make follow-on investment into better performers, leave the zombies.
- Start early successful exits to...
REPEAT the whole process again for the next fund!
6) What a “perfect” growth looks like to an early-stage VC
a. Customers generating revenue from day one.
b. 20% MoM growth.
c. Breakeven in 2-3 years.
d. Less than 5 million EUR financing needed to break even.
e. Path to 80% margin.
f. 15x revenue multiplier achievable for exit valuation.
g. Estimated year 4 exit value at 1 billion EUR.
7) Some basic terms to define and negotiate for a VC investment:
- Investment size, round size, stages.
- Structure of financing – convertible loan, equity, SAFE (Simple Agreement for Future Equity).
- Share of ownership / Pre-money valuation.
- Important decisions and investor rights.
- Investor protection & liquidation preference.
- Founder shares and vesting.
- Further capital rounds (option pool etc).
8) Home-runs matter - invest in each deal in isolation
- Failed investments don’t matter.
- Every investment you make needs to have the potential to be a home run.
9) The future of VC
- Diversity & inclusion
- Green & sustainable
- Deep tech & sovereignty in EU
- Web3 & DAO
- Evergreen VC funds
- Side funds
- Private market valuations exceeding public market
10) A selection of sources
- The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies by Mahendra Ramsinghani
- Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
- Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms