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June 11th, 2014 at 1:11 pm

It’s time to disrupt the venture capital world

monopoly

We are set to disrupt the way startup investments are made.

Billions of dollars are flowing through Venture Capital Companies into startups. And that is an incredibly important development to bring more innovation, disruptive thinking and many more businesses to life. However, the Kauffman Foundation, a pretty influential force in the VC world, has expressed their frustration in a recent report:

 

 

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“… It’s interesting that VCs have positioned themselves as supporters, financers, and even instigators of innovation, yet there has been so little innovation within the VC industry itself…”

Being on the taker side for almost three decades (As entrepreneurs taking money from VCs) and moving to the other side, helping startups to generate the much needed traction in order to get decent funding we discovered many issues in the funding process and understand the frustration of the Kauffmans.

The process for startup investments is broken!

We worked on processes and models and looked at the funding process almost like an engineer. We were driven by efficiency and scalablity. We knew that our vision, helping more entrepreneurs than ever before possible has it’s limitation in the scalability of the funding process.

We decided we need to increase the yield of the deal flow, not necessarily the deal flow itself. We decided that reading 1,000 business plans and then investing in 20 companies makes no sense from a sheer process point of view – let alone the loss of opportunities. We decided that the “invest, nurture, hope and potentially replace the CEO” model is not bringing any strong ROI to the investor business and we decided that the pattern recognition in a conventional angel and VC due diligence in an early stage company is just not what it needs to be. In reviewing the past 20 years: The most successful entrepreneurs in Silicon Valley had the hardest time to raise seed investments from VCs i.e. Salesforce, Facebook, Twitter, Siebel, Google, LinkedIn…. – and a huge amount of average Joe entrepreneurs received funding, then the CEO was replaced, the startup merged with another company or sold for the value of the team.

The result of all that: the “street” continues to beat high risk investments. In other words the ROI on standard low risk bluechips is higher than the high risk business that is supposed to deliver a higher ROI.

And as such we are set to disrupt the way startup investments are made.

Disrupting the startup funding process

1) Talent Scouting
Instead of reading 1,000 business plans we are inviting hundreds of startups to join our “Startup Night” events in San Francisco / Silicon Valley and Berlin, Europe to present their companies, teams, prototypes and ideas. Not only we judge their potential but the whole crowd who joins those events. Those who look for funding to grow will learn to complete their prototypes in bootstrap mode. With that process we increase the yield of the so called deal flow – instead of looking for a ridiculous increase in deal flow with the same inefficient process.

2) Entrepreneurship and traction Acceleration
Those who take their startup serious and are eager to keep their ownership as long as possible, join our Accelerator that is focused on traction and leadership development. The accelerator is not taking equity and actually asks for a fee to have skin in the game. We help the young entrepreneurs to get to market early, develop traction already with an Alpha product to get market validation and valuable feedback before they even put any finishing touch on the product. Instead of nurturing and developing young startups by investors or often associates from investors, startups get highly skilled before an investor even stars their due diligence.

3) Funding
After a rigorous 12 weeks traction development, startups can present a product that is vetted in the market, has feedback from that market and traction that makes it much more compelling to invest. After 12 weeks close collaboration with experienced serial entrepreneurs it is pretty apparent even for the entrepreneur whether they are ready for the fund raising process or not. The process makes it easier to analyze a startup and makes the due diligence more effective and provides most likely yet another increase in yield – versus trying to review even more startups.

4) Investment & Ownership

While the Accelerator is one investor in the best performing startups, other angels or VCs may co-invest in a company that is vetted and has a much higher chance to succeed. At that stage the entrepreneur may have not yet given up any equity and will get a higher valuation. While investors may need to pay a bit more, their risk is dropping considerably. In the end a win-win situation.

Summary

On the first glance, the entire process may look bizarre, but once dissected in all its details the entire process is more effective, more scalable and with the reduced risk it provides a higher ROI for investors.

Via S3 Academy

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