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Part 3. Community of experts in venture evaluation

Friday, October 4, 2019

Read the previous part of the series of articles by Andrew Miroshnechenko about expert communities here:

Startup Jedi

We talk to startups and investors, you get the value.

Investments as a common goal

What do modern expert communities discuss? Starting from the mentioned before cryptocurrencies, codes, knowledge bases, professional, researching, technological, social and business topics? Actually, anything, as the results of such discussions can be implemented in real cases. There are a lot of intellectual topics worth being discussed. However, to my mind, there is a new topic, which will become truly super-relevant to the expert community that is forming. We are talking about the startup evaluation.

It is so because today an investment activity becomes a real social task, the same, which concerns the main current question of humanity — from the economic development and generating innovations to the new forms of social interactions and impact-investing. These activities require more and more intellectual resources.

Why the topic of startup investment evaluation will attract the attention of the great number of experts?

To my mind, it is because:

  • More and more money is being printed, there are fewer and fewer businesses with large incomes, more free and restless money keeps appearing in the world (that should be invested in highly profitable projects). Usually, owners of the abundance of money are giving them to the investment funds at a small interest with low risks. However, the success of unicorn startups with their profitability is making the appetites grow, so more investors appear which are ready to risk and to invest in the startups;

  • If a unicorn startup demonstrates a higher average income than other types of investment assets, then more people are ready to invest in these startups. Usually, those are the mid-sized businesses from the real sector. They know what is what in business and they are ready on the back of minimizing the investment risks in the startups on the early stages;

  • As there is more money, and investment funds compete for the startups on the seed-stage, where the risks are not quite high, it means that the other investors with the lower cheque are left with the riskiest investments in the early stages;

  • As soon as more and more investments are pumped into the sphere of startups, successful cases appear, then serial startuppers and mentors appear, who are focused on earning from raising startups to a stage which is promising in terms of selling a share. They create technical incubators and accelerators, generating more and more typical startups, and it means that they take into account typical startup risks;

  • The investment market is globalizing like no other, the movement of capital is becoming more free and open.. Countries are fighting for investment flows, financial and tax laws are being simplified, countries are investing in their own startup infrastructures. All this leads to the appearance of a large number of startups and the competition for them of freely moving capitals;

  • Crowdinvesting is also experiencing a big surge. Cryptocurrencies, even if for a short time, freed investors with a small cheque from a large number of legal and fiscal problems, thereby radically reducing transaction costs in investing, and the world has witnessed crowdfunding campaigns of an unprecedented scales during which startups are not even at the pre-seed stage, but at the whitepaper stage, raised hundreds of millions dollars. There are more and more crowd investing platforms that are trying to solve the problem of selecting quality startups on their own. The ICO-Era has shown that there are no time limits to start collecting investments;

  • In the world of stock trading, the era of automation and robotics has begun, when the effectiveness of the investment bot is no longer affected even by the algorithm, but by physical proximity to the exchange servers. The speed and analytical ability of stock bots make analytic activity inhuman. The investors can only rely on the investment companies and their technological development; for that they have to pay with low revenues. The early stages of startups, where everything is uncertain and depends more on the startup team, rather than on the market infrastructure, leave more room for human intuition and faith in the team’s potential or its product with the prospect of high profitability;

  • The institute of business angels is becoming more and more important in the venture world. The thing is that these people invest their own money differently from funds, and it means that they are ready to deal with higher risks than funds. They are ready to go against the rules, check different approaches for the choice and selection of prospective startups. The mischief is that one angel cannot invest in one startup. And he does not have enough money to support several projects at once. This is why angels have to enter alliances and syndicates with each other and make agreements about the startup selection criteria for the investments;

  • On the level of the macroeconomy, we can notice the reduction of business cycles, the reduction of time needed to the appearance and disappearance of financial bubbles, to which technological and investment cycles are tied. So it means that the intensity of launching startups is growing with the necessity of navigation among them in the early stages.

 Community of experts in venture evaluation



Long story short, there are appearing more and more individual investors as well as more and more startups, so the demand for startup selection and evaluation is growing too. So to say, we are talking not only about one stage of investment evaluation, but more about the emergence of the environment, where all the investment process participants will be able to interact during the launch of the startups. In other words, we are talking about the community, which aims at getting the ideal unicorn startup at the end of their working process.

It doesn’t matter if this startup appears in the process of selection, creation or opening of the new corporate direction. It is important that in the world of startups and investors there are too many people for whom good startup criteria is not only a task of money augmenting but initially the most interesting is the intellectual task, the solution of which will bring a lot of benefits to all of the investment process stakeholders.

What is the mischief of existing startup evaluation approaches? It is in the fact, that venture funds in the search of the future unicorns are competing with each other, and that is why they hide their approaches from the external world. As a result, it is hard to imagine what their startup evaluation approaches are based on. Another thing is when we talk about a great number of investors who invest in startups. The world of the value investors has long ago worked out the culture of public discussion of any given investment solutions. Suffice it to recall the famous essays of Warren Buffett: lessons to corporate America in Berkshire Hathaway Inc.

Today, startups are becoming the subject of interest of too many people who do not have enough opportunities to independently search and select perspective startups. Moreover, the pragmatic interest (making money off a startup), as well as intellectual interest (creating a method for determining a unicorn in the early stages) are complemented by goals that are really important for the society. Let’s recall again the criteria by which backers, crypto-community participants chose projects in the ICO-era. Bitcoin, as a pioneer of cryptocurrency, appeared as a public response to the activities of the US Federal Reserve Bank, which created the financial crisis of 2008. Moreover, the mechanism of this decision made the Bitcoin management system decentralized, and therefore socially-managed.

Regardless of the blockchain-projects history influence on the investment industry, a short era of blockchain hype will leave in the history of the community the abundance of ideas how to solve a really globally important task of managing the world’s finances in a way, that the whole community acting through certain people, but not the institute of state, would be in a profit .

However, it is an example of the startups, which attracted general attention. Probably, I’m talking that investing as a phenomenon is such an important common task, which is needed being discussed and solved by the whole world. As soon as, the majority of people interested in investing will consentaneously start to create and develop the startup evaluation process, everyone developing startups will take that evaluation standard as an example. Then, the quantity and quality of startups will increase dramatically.

At this point, we face the classic question. How realizable is this task — to find a method for determining the future unicorn in the early stages? After all, a startup becomes a unicorn because it follows off the beaten track, it does not work according to the standard, creates disruptive technology that most people and even the startup itself cannot even dream of and imagine. Often, a startup becomes successful not at the point where it was planned. So how a potential success in evaluation can be detected where no one can assume it? However, first of all, this ambitious task is worthy of the attention of an entire expert community, and, secondly, even if the percentage of the previously detected startups by such an expert community is higher than random, this will already indicate that the community is beneficial.

 Community of experts in venture evaluation


How should the expert community for evaluating startups be organized?

Let’s imagine the processes around which the expert community for evaluating startups should be built.

From our point of view those are:

  1. Process of creation of the startup evaluation methodology.

  2. Process of appliance the startup evaluation methodology while evaluating real startups

  3. Process of developing the evaluation methodology.

  4. Process of using the methodology in other contexts: for acceleration, development or launching new startups

The first principle of the expert community for evaluating startups’ existence has to follow the rule: the good has to be profitable.

Without money, the community will lose the pull-power and will not collect the resources. However, we know that money is not the key motivator for the expert community (in the open expert communities, money is not even a healthy factor according to Gerzberg). More likely, that money will show the need for what the experts will do for the “external world”. The value, that the experts will create for each other, can be specifically defined by a token and shape it up to the “proof of brain” logic. There are many examples of such solutions.

Answering the question of how can the expert community make money, it becomes vivid, that it can happen thanks to the startup evaluation. It is approximately clear who can pay for such evaluation — an investor who wants to know the expert opinion about a particular startup or a startup itself, which after an evaluation wants to develop certain aspects of the project or get into the rating list of startups selected according to the standards of the expert community in order to receive financing.

The authors of the methodology can receive a commission for their methodology when it is used during the evaluation. Of course it is applicable for the case if this methodology is accepted by the expert community as an evaluation standard for the whole community.

Nevertheless, the main value for the participants is in something else. It is in the interaction with other experts, demonstration of your competencies to others who are interested in evaluation (startups, investors), and further interaction with them in the side projects. Of course, if we look a bit into the future, it will become obvious that the evaluation itself, the criteria of a good startup, are only some of the steps of the investment process. The other elements of this process can be implemented by the expert community. At least, imagine the experimental design of super-startups from what is in the immediate area of ​​expert community accessibility; or a comparison of the projected success of a startup with actual reality. Long story short, by comparing startup evaluations with their real tracking, the expert community members themselves can formulate a pool of tasks that they would be interested in solving as a whole community.

In the end, the desire to solve the mystery of an ideal startup (How to determine the future unicorn in the early stages?) can become a moving force of this community.

Whether such community will appear (or maybe it does exist already, but the author has no idea about it — let him know) or not — it is a question. Here we have presented the arguments why such a community cannot appear. In the end, we bet on the emergence of such a community in, and whether it will arise in real life or not — this is just the question of our expertise and those experts who have already joined us, whether we can create a community that we predicted or not ;)

If you want to participate — join us.


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