all Things Equity
No one can deny that high expected returns are a fundamental reason people invest in startups. However, the process is not simple and might come with many ups and downs beyond your expectations as an investor.
The first step is to find out what you should expect after backing a founder and its' startup, how you can prepare for this part of the process, and what you can learn from it.
Startup investments differ from others, looking more like a long process rather than a shortcut. Building a successful portfolio and understanding if the company you invested in is on the right path to success sometimes requires attention, patience, and time spent with founders and their teams. How about the process you are going through and what you should expect?
There are two core areas an investor focuses its attention on while helping a startup grow — to analyze its current portfolio to see how its recent investment will help it grow and portfolio diversification to spot other possible startups to invest in.
The success of an investor's portfolio lies in a few investments that will generate returns. It would be best if you took lessons from failed funding rounds to remember for future investments. When analyzing your portfolio, it is better to be conservative, giving each investment a lower than average chance to succeed and being sceptical about its chances. This would allow you to focus on finding its potential and chances of survival in any situation. This way, you will have a balanced overview of your expected portfolio performance and decrease the risks of making investments with negative results.
Look at each investment through the potential lens to better evaluate the chance of success. This way, you can see if the company has ways to mitigate and avoid potential risks and have a rational overview of how your current investments are performing so far.
Besides analyzing your existing investments, you are developing a diversified investment strategy across different sectors and industries also helps you hedge risks and avoid loss of capital.
You don't need to start the journey alone. You can always join angel investment networks, crowd and equity investing platforms, and co-investing with institutional investors, as the Seedblink platform allows you to do.
Let's go through some of the most common activities in which investors usually get involved by offering guidance to the founders or using their expertise to contribute as active investors to the startup growth.
"The biggest challenges regarding the investment portfolio begin when the "honeymoon period" is over, when milestones need to be reached, and when the investment is burnt.
The ups and downs in a startup lifecycle bring the best and worst in founders. Managing a founder relationship is the most challenging part for an investor. Founders are crucial in the early stages and must be very focused, persistent, and motivated. Sometimes, it's also the investor's role to keep the founders' motivation going on." — shared with us by Mateja Lavric, Managing Partner at Kolektor Ventures, in the Investors' Learnings Whitepaper we launched earlier this year.
Meeting regularly with the startup founders and the other co-investors will keep you connected to business operations and determine how everyone feels about the process. Try to leave the meeting with an understanding of what the founder is focused on and what the company needs to reach the next milestone.
SeedBlink regularly organizes investor-founder updates webinars to facilitate direct discussions.
As an active investor, you could stay close to founders and help them along the way, for example, by introducing them to potential partners, clients, or industry players.
If you already have a network of people significant to the startup, facilitate founders' connection with experts, advisors, or other companies who can be their partners or clients. In the growth phase, a startup needs highly skilled employees to fill management positions. You can help them during the recruitment process to find the best candidates.
We centralize job requests from portfolio companies monthly. You can recommend people for the roles to be filled; founders will appreciate the support.
Your recently funded startup has a higher chance of success if it's also empowered by skilled strategic investors who can guide founders with their resources and expertise. Do you have industry knowledge, or have you previously founded a startup in this industry?
We are building a network of mentors and advisors for the portfolio companies, and more are to be announced soon.
A dedicated investor takes the time to get to know the founders of the companies in their portfolio, talk to them, and learn their motivations and what makes them worry.
These small human actions will help the founders gain trust, build a stronger relationship with you, and let them know they have someone to trust and guide them when things get tricky.
SeedBlink Circle is a community tool where you can directly engage other investors and founders or in dedicated channels. Available for users with their identities verified on the platform.
Founders must know they can count on you but must follow a clear path. Offer them the guidance to stay focused on what matters more. The investors who supported the round receive regular updates on the company's status, key growth metrics, goals and milestones, strategic campaigns and actions results, team updates, and anything else that shows how the investment results are working.
A regular report will keep everyone on track about the startup's evolution, connected to what's coming next, and show how the investment contributes to the company's growth. Additionally, regular reports allow investors and other team members to give feedback and discuss unclear elements.
SeedBlink works with the founders to update quarterly, at minimum, the investors on business metrics and help needed - follow these reports and be proactive in asking questions and recommending solutions.
It is more likely that the founders will reach a point when the investment is used up, and they will raise the next follow-on funding rounds. As a previous investor, you have the option to join these new opportunities. Your decision should be guided by the potential of the company in the future and the results of the existing investment up to date.
Venture capital investors consider the follow-on investment rounds as an option to protect their original investment and ownership. It's only normal to stay connected to the company if it is on a positive path toward the future. However, when engaging in the upcoming rounds, you and the founders need to analyze how this will impact the company's valuation.
SeedBlink negotiates to follow on rights for its investors and has built in the product the management of the process for investors to decide on exercising their respective rights.
This is when the investment process ends, and you, as an investor, close the relationship with the founders and the company. This is probably the most attractive part and the moment expected by investors.
When the moment of the exit comes, investors receive a return on their initial investment, which depends on the company's performance up to that moment. The exit can be through an IPO, an acquisition, a buyout, or in less pleasant cases, through a failure.
1. IPO
This is the moment when the company you invested in becomes public, offering shares through a primary market. In the venture capital world, the IPO is seen as a successful exit strategy for investors because they have the chance to sell their shares and cash out their initial investment.
Through the IPO, the company gets access to raise more money to grow and go on. The market participants will impact its current value from this moment on.
2. Acquisition
This type of exit happens when the startup you invested in sells a control or the whole package of shares to another entity, who'll also take control over the daily operations. This can take two forms in startups and venture capital: an acquisition or a merger.
The most common situation is when startups are acquired, which means that the initial company ceases to exist. In cases of mergers, the startup and the bigger company become one functional system.
3. Buyout
Similar to the acquisition, the buyout process means that a company is taking over the control of the shares in the startup. The difference between acquisitions and buyout is that both parties stay as individual entities.
The buyer takes ownership of the company and is responsible for its success and financial growth, but they remain two legal entities.
Here is what a successful exit looks like for a SeedBlink investor who shared a few insights with the community:
4. Selling your shares through a secondary market
A secondary market is a marketplace where angel and venture capital investors buy and sell shares they already own. For example, by using SeedBlink's secondary market, our investors may materialize their intention to sell their shares, either to mark their profit or acquire others to diversify their portfolio and accelerate its growth.
"The partial exit at KFactory went as I expected.
The company had a new round of financing at a new price. Some initial investors wanted to continue investing in the new valuation, and another part, including me, wanted to sell.
SeedBlink shared the intents of the demand with the offer: helping us to fairly determine the number of shares each seller could sell considering the offer, prepared the documents for signing, and communicated with all parties until the actual completion of the transaction. Finally, after a year and a half, I recovered the investment in exchange for about a third of the shares. I still own two-thirds of the shares originally purchased." shares Daniel Cirstoaia, Consultant SAP CRM, ABAP Program.
"You can talk in a grand fashion about a 20-year plan, but you also have to work on what 'his afternoon brings.
Having a sense of where your compass is set, then breaking it down into little steps – knowing they will change over time, but not losing sight – is what you need to build an organization." says Michael Moritz, Partner at Sequoia Capital.
Once you invest in your first deals, the next step is to check the performance of your portfolio from time to time. You can use two metrics in the private equity area to measure your investment returns in a startup. They are called Multiple on Invested Capital (MOIC) and Internal Rate of Return (IRR).
IRR (Internal Rate of Return)
IRR is the most informative indicator and includes how much you put in, how much you took out and when you did all of this. It takes into account the time value of money.
What does this mean?
It puts into a single number the intuitive knowledge that 5% return in a month is a better result than 5% in a year, which is better than 5% after three years.
However, understanding how this number is calculated and what it represents may be too complicated for non-financial people. Sometimes even specialists do not agree on the real meaning of it.
Use the IRR metric to compare deals, investments, and portfolios, as long as you're happy with the "bigger is better" approach. But do not use it if you are not prepared to spend some time reading financial theory to understand what you are seeing.
MOIC (Multiple of Investment Capital)
If IRR may seem complicated, MOIC is going towards the simple side. It just divides what you took out of your investment into what you put in and tells you how many times you multiplied your investment. No time influence here.
Use it as a rough indicator of "I lost / I won money," but also look at timing, even if not through a sophisticated indicator such as IRR.
For an investor, IRR merges the impact of a certain amount and the specific time frame it happened in, for example, $5.000.000 within five years. What matters is the amount you invested and the opportunity costs of anything else you could have supported the respective money in during those five years.
In the venture capital world, the founders of startups often focus their attention on MOIC, trying to offer a feeling about the company's growth to investors, while these focus mostly on IRR as a way to establish a hierarchy of the projects in their portfolio. As we already saw, the IRR differs from the MOIC because it measures the performance of your investments while taking into account a specific time frame.
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