The growing trend of investing in startups
This article was originally intended to be read by investors, but it will be interesting for those who want to create their own start-up or is already in the process of its creation. The author describes well the trends in the world of startups that will be useful for beginners. — Approx. interpreterY Combinator
the Venture Fund Y Combinator to date has funded 564 startups including the current batch of startups 53. The total estimated cost of the 287 startups that were evaluated (as a result of raising a round of financing, acquisition anyone or closing of a startup because of something) is about $11.7 billion. Prior to the current batch of 511 startups together totaled approximately $1.7 billion. [1]
As a rule, these figures are formed due to the leaders list. Top 10 startups of these accounts for 8.6 11.7 billion. However, they are followed by a group of younger startups. There are about 40 more that are going to become really big.
the Situation got a little out of control last summer, when the party was 84 companies raised strap evaluations, to reduce the size of this list. [2] Few journalists have tried to interpret this as proof of a certain invented macroprocess, but the reason had nothing to do with any external trend. We just realized that the used algorithm n2, and we needed to buy time to fix it. Fortunately, we have invented several methods of distribution of Y Combinator, and the problem now seems solved. Thanks to a new more scalable model and a small number of companies, to work with the current party now seems simple. I think we will be able to increase the number of startups in 2 or 3 times before we will again have to change something in our algorithm. [3]
Trends in the world of start-UPS
One of the consequences of funding such a large number of startups is the vision of the trends at an early stage. Since fundraising is one of the main things we help startups with, we are in the fortunate position that allows us to see trends in investing.
Change funding
I'm going to talk about where these trends lead. Let's start with the basic question: is the future better or worse than the present? Investors will earn generally more money or less?
I think there's more. Various forces, some of them will reduce profit, and some will increase. I can't say with certainty what forces will prevail, so just describe them and you can decide for yourself.
Changes in the financing of start-UPS for two reasons (forces). The first is the cheaper cost of launching a startup, and second, startups are all plugged into our lives, becoming commonplace.
When I graduated from College in 1986, I had only two choices: to get a job or go to graduate school. Now there's a third: to form their own company. This is a big change. In principle, his company was establish in 1986, but back then it seemed unreal. it seemed Possible to establish a consulting company or a company offering a niche product but not the company that could become big. [4]
This change, when instead of 2 options there is 3, represents a major social shift, which happens once in several generations. I think this shift has only just begun. It is difficult to imagine how big it will be. As big as the industrial revolution? Probably not. But enough big to amaze all that always make major social changes.
change the number of start-UPS
One thing is certain: the number of startups will increase substantially. Monolithic companies with significant hierarchy of the mid-twentieth century replacing networks of smaller companies. This process is happening not only in Silicon valley. It began several decades ago and even in the automotive industry. He has a long way to go. [5]
the Increasing control of the owners over companies
Another important change is the reduction in the cost of launching a startup. In fact the two forces are related: reducing the cost of launch is one of the reasons for the formation of startups everyday.
The fact that startups need less money means founders will become large masters of the situation in contrast to the investors. You still need the same amount of energy and imagination, but they no longer need as much third-party money. Therefore, the proportion of founders in their companies and control over them will increase.
Does this mean that investors will earn less money? Not necessarily, because the number of good startups will grow. The total amount requested and available to the investors shares of startapov is likely to increase as the number of popular startups will probably grow faster than decrease the share sold to investors.
the change in the percentage of successful start-UPS
The business of venture capital is that in the year really successful becomes approximately 15 companies. Despite the fact that many investors unconsciously consider this number as the cosmological constant, I am sure that it is not. Probably there are speed limits, which can develop technology, but now is not the limiting factor. If that were the case, every successful startup was founded would be in the same month, when it became possible. At the moment the limiting factor of the big successes is the number of sufficiently good founders, runs the company, and this number can and will increase. There are still many people who'd make good founders, but never took it. This can be seen by how accidentally had some of the most successful startups. A lot of the biggest startups have not been fully implemented, so it should be a lot of the same good has not actually been implemented by startups.
Might have 10 or even 50 times more good founders. As soon as more of them will move forward and establish startups, here are the 15 most successful a year can easily turn into 50 or even 100. [6]
And what about profit? Are we heading towards a world where profits will rise and rise? I think that the top firms will actually earn more money than in the past. High profits are not the result of investment in the company with the lowest estimated cost. They are the result of investments in companies that do good work. So if every year such companies will become more and more, those who learn to make the best choice, waiting for increased success.
This means that the business of venture capital will become more diverse. Companies that will be able to consider and to attract the best startups will be more successful because it will increase the number of startups that can be considered to attract. At the same time, bad companies will be to waste now, but will pay them a great price.
I also do not think that the preservation of the founders in control of their companies will remain an issue. Empirical proof of this has already emerged: investors make more money by serving the founders than commanding them. Humiliating, but it's actually good news for investors, as the founders of the service takes less time than the control of each step.
Business angels
What Biznes-Angeli? I think there are a lot of possibilities. As an investor-angel I had failed. It is impossible to get access to the best deals if you are as successful as Andy Bechtolsheim, and when you are investing in a startup, venture capitalists, coming later, might try to Rob you of your share. Now the angel can make something like a Demo Day or AngelList and get access to the same transactions, and venture capitalists. The days when venture capitalists could oust the angels from the table of capitalization are long gone.
I think one of the biggest untapped opportunities in investing in startups today – this is a fast investment of the angelic dimensions. Few investors understand the costs that are start-UPS in connection with investments. If the company consists only of founders, at the time of attraction of means all work stops that can easily take 6 weeks. The current high cost of fundraising means a place for low-cost investors who can bypass the rest. In this context, low-cost means of quickly making the decision. If there were a reputable investor who invested $100,000 on good terms and promising to decide "Yes" or "no" within 24 hours, he would get access to almost all the best deals, because every good start first would go to him. Such investor would be able to choose, because every bad startup would also first addressed him, but at least he would have seen the full picture. If the investor is known that it requires much time for decision-making or negotiation about valuation, founders will leave it for later. In the case of the most promising start-UPS that are easy to raise funds, to left on then the investor may not be reached.
Will there be a number of extremely successful start-UPS to grow in direct proportion to the number of new startups? Probably not, for two reasons. The first is that fear establish a startup in the old days was a pretty effective filter. Now, when the price of failure is reduced, it is expected that they will launch more startups. It's not bad. In the field of technology it is common practice when innovation, lowering the cost of failure, increases the number of failures and thus leaves you ahead.
Conflict of ideas
Another reason why many extremely successful startups will not grow in proportion to the number of new startups, this is an expected increase in the number of conflicts of ideas. Despite the fact that the limited amount of good ideas is not the reason that we only have 15 extremely successful startups in a year, the number of good ideas is still limited, and the more startups, the more we will see a situation where several companies are doing the same thing at the same time. It will be interesting, in a bad sense, if the conflict of ideas becomes commonplace. [7]
Pyramid startups
Mainly due to the increase in the number of early failures, and business startups of the future will change shape, it will increase its scale. What was the obelisk will become a pyramid. It will be a little wider at the top, but much wider at the bottom.
What does this mean for investors? First, investors will have more opportunities at a very early stage because it is here that the volume of our imaginary array grows the fastest. Imagine the obelisk of investors that corresponds to the obelisk of startups. As its expansion in a pyramid matching the pyramid startups all content will aim upwards, leaving a vacuum at the bottom.
That opportunity for investors mostly means an increase in the number of opportunities investors as the risk that an existing investor or the company is comfortable taking is one of the most difficult to change things. Different types of investors adapted to the different degrees of risk, with each of them accepts specific well-established the degree of risk, and this applies not only to procedures that they follow, but also people who work in such company.
Investing series
I think the biggest danger for VCS, and also the biggest opportunity, lies in the stage of investment series A. Or rather that was the stage of investment series And while the series And actually turned in rounds of the series.
Currently, VCS often knowingly invest too much money on the stage of Serie A. they Do this because they feel that need to grab a big slice of each company in the series And to offset the cost of lost opportunity associated with obtaining seats on the Board. This means that where there is a lot of competition for the transaction, the changing number is the assessed value (and therefore invested amount), and not equity of the company. This means, especially in the case of promising startups that investors of the series And often force companies to take more money than they want to.
Some venture capitalists will cheat and claim that the company really need so much. Others are more sincere and recognize that their financial models require the ownership of a particular percentage of each company. But we all know that the amounts that are involved in rounds of Serie A, are determined, without asking what will be better for companies. They are determined by venture capitalists based on the share of the company that they want to own and market, which determines the estimated value, and therefore the invested amount.
How many poor, this situation unintentionally. Business venture capitalists ran into her after the gradual obsolescence of their original assumptions. Traditions and financial models of the business venture capitalists started when founders needed investors more. In those days it was natural for the founders to sell most of his company in a round of Serie A. Now the founders prefer to sell a smaller share, and venture capitalists Balk because they are not confident that you can make by buying less than 20% of each company in the Serie A.
I describe it as a risk, because investors series And more in conflict with start-UPS, which they seem to serve, a trend that eventually will turn against them. I describe it as an opportunity, because now accumulates a lot of potential energy, as the market went from the traditional business model of venture capitalists. This means that the first venture capitalist, who "breaks ranks" and start to make investments series A for the share that the founders want to sell (and without the "pool options" only to founder stock) will break a huge profit.
What will happen to the business venture capitalists, when will this happen? I do not know. But I bet that any particular firm will come. If one of the leading venture capital firms will begin to invest in the series And is based on the amount which the company wants to attract, and leave the acquired share at the discretion of the market, and not Vice versa, it would instantly get almost all the best startups. This is where the money is.
It is impossible always to resist the forces of the market. The last ten years, we observe that the share of companies sold in series A rounds uncontrollably reduced. Earlier was 40%. Now venture capitalists are struggling to keep the bar at 20%. But every day I expect this strap will collapse. It will happen. You can safely expect that.
Who knows, maybe the venture capitalists will earn more doing the right thing. It was not the first such case. Venture capital is a business where casual big success gives a hundredfold profit. How confident can you be in such a financial model? Great strides have to be just a little less random in order to compensate for the halving in the share sold in rounds of Serie A.
Summary
notes
[1] I understand that the true measure of startup success is profit, not borrowed funds. We have presented statistics on funds raised, because these are the figures that we have. We could not meaningful to talk about profits, not including the figures for the most successful start-UPS, and we don't. We frequently discuss earnings growth with startups at an earlier stage, because that's how we measure their progress, but when companies reach a certain size, such action on the part of the seed investor becomes arrogance.
In any case, the market capitalization of the companies eventually begins functionally depend on profits, and post-investment evaluation constitute at least guesses of professionals as to the consequences of such capitalization.
The reason why the rating were only 287 startups, is that the rest primarily raised funds on the terms of the convertible loans and convertible loans although often a limit to assessment, it represents only the upper limit of the appraised value. Back
[2] We tried to take a certain amount. We would not be able to do it, even if I wanted to. We just tried to be more selective. Back
[3] bottlenecks never clear, I think the next will be the coordination of efforts between the partners. Back
[4] I understand that to start a company does not necessarily mean to establish a startup. Many people base a typical company. But this is not true for the audience of investors.
Geoff Ralston says that in Silicon valley it seemed possible to establish a startup in the mid-1980s. It would have started there. But I know that the students of the East coast didn't think so. Back
[5] This trend is one of the main reasons for increasing economic inequality in the United States since the mid-twentieth century. The man who in 1950 would have been the General Manager of division x and the Mega, is now the founder of company x and owns substantial shares. Back
[6] If Congress passes the startup visa in unchanged form, only that in principle can give us an increase up to 20 times, because 95% of the world population lives outside the United States. Back
[7] If the conflict of ideas will go far enough, it could change the very concept of a startup. At the moment we usually advise startups to ignore competitors. We compare start-UPS with race, not football: to take the ball from the other team is not required. But if the conflict of ideas becomes sufficiently commonplace, you may have to start doing it. It would be a shame. Back
Thank you to Sam Altman, Semi Buchheit, Dalton Caldwell, Patrick Collison, Jessica Livingston, Andrew Manson, Geoff the Ralston, Garry Tan for reading drafts of this article. (approx. author)
the Translation is done in the framework of the summer school startups Tolstoy Summer Camp.
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