Notes from live meeting between VC and Entrepreneur

In this blog post, I will write about the investment analysis procedure by the venture capitalist (VC). We had a tremendous opportunity to observe a meeting between an experienced VC, Rodolfo Carpintier from DaD and promising young entrepreneur Parisa Louie pitching the WatchFit project. I won’t give out much specifics of the WatchFit not to breach confidentiality, but will walk readers through the VC questioning process. Hopefully, this information will help entrepreneurs to prepare better for meetings with the VCs.

Investment analysis

1. Project Sales for next 5 years
2. How many employees you need?
• How many now and in 5 years
• What is the shareholding among current employees / founders

3. How many countries you need to be?

4. Describe the business model in shortest possible way

• (Do not use the word platform or technological terms when pitching to investors)

5. How long will it take to bring the product to customers?

6. How much money you need to start?

7. What are the customer acquisition costs?

• Consequently, how much will you be spending in marketing?

8. How many customers will you have in the first year?

• Who are the customers? Are they the same profile (advisable to be)?
• What is the conversion rate from registered user to frequent user and paying customer?

9. When do you start billing? What will you bill?

• (It is very difficult to get money from advertising unless you have 800k or more users. Do not assume more than 15% revenues from advertising)

10. What profit will you make and when will you breakeven?

Evaluation criteria

1. Entrepreneur’s knowledge of the market
2. Entrepreneur’s knowledge of her business
3. Numbers are reasonable (VC will run her own calculations and challenge you with them)
• Visualize the business plan in a simple single spread sheet
• Test the assumption about the market at the social network or perform a pilot

In general, VC see dozens if not hundreds of project per year. Most of the projects are viable, it means that business model makes sense, there is a market and good entrepreneurial team. Being viable is necessary, but not sufficient condition to receive an investment. Actually, most of the viable projects are not interesting to investors either due to lack of scalability and / or lack of real need of investor’s money to set up the business. What the VCs are looking for are investable projects, which have interesting growth potential and good future valuation in order for investor to get her required multiples on the money invested.

Interestingly enough, valuation of the company will vary based on the country, where the business carried out or starts. The reason behind is that VCs want first to try the product in their country. The market potential of countries differs greatly. For instance, valuations in the UK are approx. 2x higher than in Spain, France is in the middle, Germany 80% of UK, and USA 3x of Spain. Concluding from that when you are in a small country, the valuation will be also smaller.

Additionally, VCs like entrepreneurs to be focused on their product and market. Diverse product portfolio creates suspicion especially if the product targets both enterprises and consumers. For conducting B2B business, the team’s skill set is rather different than being in B2C.

We shortly discussed if there is a bubble growing around the recent valuation of internet businesses. Rodolfo suggested that despite being in the 21st century, 95% of the companies behave as if we still were in 19th or 20th century. In particular, today’s E-commerce is just copying the old business models at the internet (except Amazon, E-Bay, …). Hence, e-commerce has to be completely re-done and there are more examples like that. Consequently, internet business is to be taken seriously among other also in financial valuations.