We talk to startups and investors, you get the value.
We talk to startups and investors, you get the value.
There is an evident startup boom in the market nowadays, the number of new innovative projects grows exponentially all around the world. But the truth is that all entrepreneurs are mainly looking for unicorns. This term was first mentioned by Aileen Lee (a U.S. seed investor) in 2013 in order to describestartups with a capitalization exceeding 1 bln dollars.According to Insider Pro, it took 2 years for WhatsApp messenger to reach the 1 bln mark, Uber did the same in 2,2 months. At the same time, typical companies from Fortune500 list need more than 20 years to have the same capitalization.
Startups’ capitalization increases times as fast as of “standard” companies. This fact attracts the most ambitious entrepreneurs in this field. Startup revolution keeps gaining momentum, innovative projects fundraised more than 140 billion dollars of venture investments in 2017. Quite an impressive sum, isn’t it? But it is a common knowledge that nearly 90% of all startups “die”, half of them closes during the first 5 years of their “lives”. Risks of managing or financing early-stage startups are very high.
It isnecessary to unify approaches and evaluation criteria of innovative projects in order to let investors understand if a startup is worth paying any attention to and to let the startup know the backer’s requirements at all investment stages. This is the global aim that Rocket DAO is working on, developing a decentralized investing platform.
Eventually, it will be a communication instrument uniting investors, startups and experts — the most important players in the venture ecosystem.
We have identified 10 key parameterscritical for startups:
PR and marketing
Resources and assets
So the question is: which characteristics should a startup have in order to be valued at 1 billion?
Human potential influences directly the project’s potential success. Independent blockchain consultant Sergei Lavrinenkodescribes the optimal team structure as follows:
— A perfect team should have a good combination of commercial, product and technology competencies. The higher the previous accomplishments of the team members are in these three parameters, the higher is the overall evaluation score. A one billion startup team should have a world-wide known scientist, responsible for the product, an experienced businessman responsible for sales and a proficient CTO who is able to turn an idea into a high-quality software. But the truth is that the number of such teams is very small (if they do exist at all). But still, such criteria and such parameters display the level and quality of competencies necessary for a startup’s success. Assessing these professional parameters clarifies which aspects should be improved.
A good product is the best marketing instrument. At the same time, a working and realistic business model is the guarantee that the project will be able to generate income. That is what TRIZ expert from EPAM Systems Andrew Kuryan thinks about it:
— Hamburg school claims that the only success criterion for any project is the measure of the public goodit generates. This public good is actually the number of people who directly or indirectly benefit from the company’s activities. In other words, this is the number of people who purchase or use products (or services) of the company. From this point of view, the company’s revenue illustrates the public good in quantitative measurement.
So what does a startup need to succeed?
According to Clayton Christensen, the author of the Disruptive innovation theory, clients hire a product for specific task performance (Jobs-To-Be-Doneconcept), it means that a product or a service should solve a specific topical problem of the target audience (for example, Gmail manages mailing operations perfectly well).
Products and services are to be created for a big number of people. The more users, the better is the overall worldwide impact of the product.
The company has to grow constantly. Jim Collins, the author of the work “Good to Great” says that a company may be become “great” only if it demonstrates simultaneous growth in incomes sales, the number of clients and ROI during 15 years and more. Such a trend proofs that the company keeps producing public good on а bigger scale.
The company should be profitable. In order to produce and spread products/services, a company has to purchase resources and hire staff. So a company has to earn more than it spends on resources and employees so that to create value in the long-term period.
The company’s activities should be cost-effective. If the company’s profitability is above average market indicators it will succeed in attracting investments necessary for further growth and development.
Summing up, a startup may succeed only if it has the right product and a correct business model. The right product will create value for users (p.1–2), while the correct business model (p.2–5) will provide the project with the instruments letting spread this value to as more people as possible and guarantee company’s growth.
Chief innovation officer in IsSoft, the author of the market potential and marketing policy evaluation methodologies Alexander Drobyshevski gives a clear explanation of the requirements addressed to startups:
— It is important to understand that startup analysis should be conducted from the investor’s point of view who has to take into account a wide range of parameters, including market, team, business model, risks, products, etc.
Assessing the target marketan investor should pay special attention to:
Market type (geography, sophistication, segmentation, rules, growth rate) and its growth potential;
Market size demonstrates how well does the startup team understands its target audience in each market region and segment;
Competition level — this parameter is to be assessed with the analysis of direct competitors only and products-substitutes; this will demonstrate if a startup team has a good understanding of the competitive environment and know how to protect their position under the competitive pressures;
Barriers (legal, technological, commercial barriers, access to clients): a startup should be able to circumvent market patent barriers and even have potential to set itself a higher technological barrier for new market players.
Analyzing PR and marketing campaignsinvestor should, first of all, assess the overall approach of the team to these activities:
This function should not be supplementary (ballast) for the team member responsible for a different group of functions; this activity is very important for collaboration with professional media and final customers, so it takes time to perform it properly;
There should be a specified and timely performed plan of the promotion events with effectiveness evaluation;
Regular publications in the professional media are a good signal as well;
It is necessary for a startup to have communication platforms (like social media networks, messengers, blogs) for constant interactions with potential clients, a growing database of such clients will show that the product is in high demand in the market.
The sooner the startup has an established communication model with potential customers, the lower PR costs will be in the future.
The ability of the team to forecast and analyze its financial results is probably the first thing any investor pays the highest attention to. Sergei Mikhailov, managing partner in RegisConsult explains an important point on this matter:
— Talking about Pre-Seed and Seed startups one should understand that their valuation to a greater extent comprises a number of factors, including business idea, technology, team. It’s common knowledge that in most cases startups do not generate any revenue on these stages living on the FFF (Family, Friends, Fools — or the people to talk to first when pitching an idea and attracting first investments — Ed.) financing. It means that there is no operating profit yet. At the same time the income method uses this parameter for the company’s valuation deducting amortization from it (EBITDA).
Moreover, it is evident that forecasting and planning financials for operating businesses is much easier than of startups due to availability of all necessary historical data, regular clients, suppliers, and an established predictable market. But this is not the case for startups, as a financial plan of the latter is developed based on the founders’ judgments and their vision of the future only.
Consequently, the main question to be analyzed within this parameter is not something like ‘how to build a super financial model’, but ‘how to develop a financial plan which would allocate investments in the most effective way’.
Advice №1. While analyzing a startup financial model make an accent not on the financial numbers and results, but first of all on the calculations, preconditions, and assumptionswhich lead to such financial indicators. How adequate and rational are monetization hypotheses? What are they actually based on? Let’s take Total revenue as an example, a quantitative measure of this indicator is not enough. To analyze Total revenue more comprehensively you should study what it actually consists of (products and their prices) and correlate it with current market conditions, its aggregate demand and price level. Or for example Cost of sales, this parameter is mostly determined by personnel costs. So an expert should examine how many competent employees are needed and are actually engaged in the project, how competitive are their salaries, are there any avenues for costs optimization.
The same logic should be applied to any point of the financial planning.
And remember to make a summary analysis of how reliable and accurate the financial plan is as a whole.
Startup risk management principles are very similar to the ones in big companies, but with certain peculiarities of course. Unlike big corporations with risks departments or at least internal audit teams in startups all risk management functions are usually assigned to a CFO (at best) or to CEO. What is more, the level of uncertainty in startups is super high, this is so due to the fact that such projects evolve rapidly (well, it is critical for their survival), create an absolutely new product and form a new market.
Advice №2. As for this case, startups should determine basic (or fundamental) risks, choose the relevant means for their reduction and implement a permanent control system which would prevent new risks and monitor already existing ones. Such an approach will let startups respond quickly to any kind of risks taking place on their way. This is always a positive message for investors and a factor that increases its valuation.
It is quite common for investors to confront with legal problems when engaging with startups. Our expert and an experienced lawyer Vsevolod Sunchukexplains how a startup can avoid or at least minimize the number of such problems:
— Prior to attracting investments a startup should win the trust of the investor, demonstrate perspective financial gains and legal security measures that are in place. Investor needs to make sure that the startup is not a scam project, is not a subject to: sanctions by the state; lawsuits by team members and partners; disagreements between the founders, which can all lead not only to negative financial and reputational consequences, but also to the project’s breakdown.
It is necessary to comprehensively settle all relations legally in order to minimize the risks mentioned above.
The first step is to register a legal entity after that such a startup falls under the legal field of the country where it is registered what automatically makes all its activities legal and transparent. If there are several founders, it is necessary to regulate the order of decision-making and distribution of profits between them in the Charter of the company or in partnership agreements.
Another important point concerns taxation. An organization should be registered in the local tax authorities, properly pay taxes and have no arrears to them.
All relations with the team members should be legally formalized by singing labor or civil contractswith clear job description and a properly defined procedure of transferring intellectual property rights of the results of the work. Local regulatory (corporate) acts serve the same purpose.
Relations with contragents should be formalized with the help of commercial contracts.
Innovative companies should also register their intellectual property rights to means of individualization (brand name, trademark, etc.).
These minimum requirements can largely protect business owners from negative legal consequences and attract potential investors.
The world’s venture ecosystem is growing and developing quickly. The percentage of high — quality startups is increasing, while investors’ analysts do their work better and better. To succeed a startup should:
Follow all recommendations provided in the recent articles
Do not hesitate to ask mentors and experts for advice and support
Regularly communicate with potential investors
Constantly develop the project’s team, their skills and competencies
P. S. If you are an investor and you would like to order an honest evaluation of the projects; or if you are a startup seeking financing and preparing for a fundraising campaign; or if you are an expert looking for alternative expertise monetization instruments — Rocket DAO is the right place for you!