By: Dr. Marlo Rencher
I recently completed an online certificate program for Venture Capital University, which provides an excellent foundation of knowledge for emerging investors. It’s a collaboration between the University of California’s Berkeley Center for Law and Business and the National Venture Capital Association.
The Investment Thesis
This video is the two of a three-part series of my key takeaways from taking this venture finance course. My second takeaway is about scale. When I talk about scale, I’m talking about how an entrepreneur structures their capacity for revenue and for growth. Companies that are built to be scaled globally have processes and systems to accommodate many customers, from many locations, with different currencies or languages. They can take in lots of money, seamlessly. Smaller scale companies might be more focused on creating a very personalized and specific experience that cannot be massively replicated. Venture capital is not a good fit as a funding mechanism for small scale businesses. In order for venture capitalists to make any money, they have to offset the bets they make on high-risk businesses with an investment that will pay off in a massive way. It is not enough to get two or three times your money back. They are shooting for 50, 100, 1,000, or 5,000 times their money back. So any business not built for massive scale is not going to be as attractive a bet for most venture capital firms. The implication of this dynamic is that entrepreneurs who want money from venture capitalists or even many angel investors MUST have two things in place. FIRST, they must have some sort of intellectual property that allows them to generate value independent of the value that they as a founder can personally provide. Whether it’s a patent on some innovation, or an exclusive, contracted opportunity, or some proprietary process that is significantly more cost-effective than other methods, it is essential to have a business that goes beyond you just selling your time for a fee.
SECOND, all companies need to see themselves as tech companies. For companies that are seeking venture capital investment, this is especially the case. They must use technology to help them to access the large audiences that they need to reach.
Advice for entrepreneurs
For entrepreneurs – you MUST make sure that you are thinking big enough to attract venture capital funding. Make sure that you are on the path to be the 1 or 2 company in your specific niche. And think about all the geographic markets worldwide who might have customers who
need your product. You don’t have to serve them right now, but you need to create a company that eventually will.
Advice for Investors
For investors – particularly for angels that are starting out, make sure that the founders and companies you connect with are thinking big enough to have a successful exit. When you invest in a founder with great, but unrealized, potential, you may need to stand in the gap between what they know they can do and what you believe they can achieve. You could help them by making sure they see the bigger picture, even when they are focused on putting out the fires that inevitably come with early stage startups.
This video is the second of three on my experience with VC University. In the final one, I’ll talk about dilution. See you then. Thanks for watching this video.