Later-stage capital is the venture capital provided after the business generates revenues but before an initial public offering (IPO). Finally, many corporations have started investment arms over the past decade to try to harness the potential of entrepreneurial activity, and they can learn from the practices of the VC industry. Im Daniel Eisenberg. Every pitch to a venture capital firm starts with an introduction to someone at the firm. At YouTube, they moved onto open source, and they were using MySQL, also a relational database. This list of startups in the venture capital space provides data on their funding history, investment activities, and acquisition trends. The very first money that many enterprises raise whether they go on to raise a Series A or not is seed funding. So if its an enterprise technology company, for instance, you have a network of CIOs to call to understand what they think about this companys value proposition. It would be difficult for anyone to make a multi-million dollar decision on a restaurant if all they have ever known were microchips. (Some startups may raise pre-seed funding in order to get them to the point where they can raise a traditional seed round, but not every company does that.). But I think there are some signs that the entire market is sort of on zero interest rate steroids. Investors may also ask for an executive summary but over the past decade, this has become less and less common, with most preferring a pitch deck. How much aggregate funding have these organizations raised over time? We have team members on the ground in more than 20 countries who bring experience as entrepreneurs, investors, and operators from some of the worlds leading technology companies. THESE VALUATIONS ARE ESTIMATED IN ACCORDANCE WITH 500 GLOBALS VALUATION POLICY. Twenty-eight of those opportunities will lead to a meeting with management; 10 will be reviewed at a partner meeting; 4.8 will proceed to due diligence; 1.7 will move on to the negotiation of a term sheet with the start-up; and only one will actually be funded. It doesnt mean its in a public setting. Is that something that you also see in Europe, start-ups faring well not just against industry incumbents but also tech incumbents? Are there things start-ups should be doing to win you over as an investor that are any different in the past, or is it still all about the fundamentals? Sutter Rock Capital ( SSSS )technically not an ETF, but a publicly traded investment fundseeks to invest in high-growth, venture capital-backed private companies. The boom that tech start-ups have been experiencing has continued through the pandemic. The first task a VC faces is connecting with start-ups that are looking for fundinga process known in the industry as generating deal flow. Jim Breyer, the founder of Breyer Capital and the first VC investor in Facebook, believes high-quality deal flow is essential to strong returns. But I think this time its like a change of scenery for the digitally-powered, innovation-powered economy. He has spent over 20 years building companies in Silicon Valley, including YouTube and Instagram. So we do look for these pockets of innovation. One framework suggests that VCs favor either the jockey or the horse. (The entrepreneurial team is the jockey, and the start-ups strategy and business model are the horse.) Over the past year, practically all the start-ups we look at that address one of the legacy markets that is typically dominated by the financial industry, or retail, for instance, are outperforming the legacy incumbents on pretty much all parts of the business. It's a short, well-crafted explanation of the problem a startup solves, how they solve it, and how big of a market there is for that solution. Crypto services. So when I get the question, What do you need to hear in a pitch, well, I want to see what can you achieve in a reasonable timeframe. Founded in 2018, the firm looks to build positions in startups by buying out other VC firmseither a portfolio of their equity holdings, or taking some or all of an investment la carte. Tourists who drive along Sand Hill Road in Palo Altothe street where many of the leading multibillion-dollar venture capital funds are locatedare often shocked to find only small, conventionally designed offices set discreetly behind leafy trees. Its a short, well-crafted explanation of the problem a startup solves, how they solve it, and how big of a market there is for that solution. Now, theres a whole branch of economic theory around clustering, and how industries tend to cluster, because theres a very rapid exchange of ideas. Because big companies have so many advantages. PJ Parson: Yeah. I think in the last six months, weve made five investments in companies that are not based in Silicon Valley, or not headquartered in Silicon Valley. Theyll want to know what youre intend to use their money for. However, the survey was not anonymous, and we matched the respondents with VentureSource and other data sources. And the productivity of the engineering team is fabulous. And they become these unicorns or decacorns, or even more. Soaring IPOs, strong funding rounds, unprecedented demand for digital products and services around the worldin recent years, start-ups and venture capital have experienced a boom many say can only be matched by the original dotcom boom of the late 90s. Rockstart invests in early-stage startups and provides access to capital, market, and expertise by connecting founders with co-investors, mentors . The challenge that we have is, do we close the doors for business in an environment like this? We did this by developing two dozen landscapes last year. I think its also a generational thing that you can build trust in that different way. Investments in venture capital are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not . A typical deal takes 83 days to close, and firms reported spending an average of 118 hours on due diligence during that period, making calls to an average of 10 references. Youre recruiting an investor whos going to be with you on a journey. There are so many companies that have had to embrace inside sales instead of direct sales. Our findings are useful not just for entrepreneurs hoping to raise money. Roelof Botha: Sure. The business model was cited as an important factor by 74% of firms, the market by 68%, and the industry by 31%. Venture capital is a type of financial investment that helps businesses to grow and expand. And when it comes to private valuations, one person is placing a value on the company. And I think the answer to that is a resounding, No. If you had closed your doors for business in 1999, you wouldve missed both Google and PayPal. We went public, and then sold to eBay for $1.5 billion at the end of 2002. PORTFOLIO COMPANIES DISPLAYED ON THIS PAGE ARE NOT NECESSARILY REPRESENTATIVE OF ALL INVESTMENTS IN VEHICLES MANAGED BY 500 STARTUPS MANAGEMENT COMPANY, L.L.C. And now they understand the benefits. What do you see as some of the more surprising or less discussed effects of this remote shift, on start-ups specifically? PJ Parson: I think there has been this very popular concept of blitz scaling, the idea of extremely fast decision making and building capabilities. Because the investments are fairly large, your startup has to be prepared to take that money and grow. Roelof Botha: Go for it. And then COVID itself has led to a whole raft of opportunities for companies to deliver services to consumers in a very differentiated way. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. Who are you going to turn to for advice to help you navigate those moments? Daniel Eisenberg: Roelof, how do you view the pace of innovation globally right now? It only takes a little while and is an easier way to provide a reference back to a company profile than messing with attachments. Roelof Botha: That last questions a dangerous one. Its woven into the fabric of everything we do as a society today. Unlike a bank that takes all interested customers, VCs tend to be far more selective in who they take pitches from. Although most investments yield very little, a successful exit can generate a 100-fold return. ANY INCLUSION OF SUCH TRADEMARKS OR LOGOS DOES NOT IMPLY OR CONSTITUTE ANY APPROVAL, ENDORSEMENT OR SPONSORSHIP OF 500 GLOBAL BY SUCH OWNERS. Its no longer acceptable to have a great idea the founder has to be able to prove that the great idea will make a great company. 500 Global is a venture capital firm with more than $2.7 billion in assets under management that invests in founders building fast-growing technology companies. To pull back the curtain, we recently surveyed the vast majority of leading VC firms. But then you need to catch up with other parts of your business, your go to market capability, your sales function, marketing, product marketing, human resources, talent management, all these other business issues also need to catch up with the companys growth. PJ Parson: I think the most important thing is that over the past ten years Europe has gone to a completely different place in terms of innovation, access to capital, and access to talent. 3. No longer do you need to database it in Australia, because you can get a database as a service on one of the cloud vendors. There are no easy answers, and research has pointed to a variety of frictions that exist in the entrepreneurial ecosystem. PJ Parson: I think its pretty much the same. I think it has had a tremendous impact on the VC community insofar as that pretty much all the companies that have an international mandate to invest have gone super international because they, or we, have all decided that we can make a substantial investment without meeting in person. But it too was a bottleneck that caused the site to struggle with scalability. And so that was a bottleneck. When I was at PayPal, there were about 200 million people on the internet 20 years ago, on dial up by and large. And you know, for most of the start-ups that we have looked at over the past 25 years, very few of them actually get even close to their plans. To pull the curtain back, Paul Gompers of Harvard Business School, Will Gornall of the Sauder School of Business, Steven N. Kaplan of the Chicago Booth School of Business, and Ilya A. Strebulaev of Stanford Business School conducted what is perhaps the most comprehensive survey of VC firms to date. Big tech obviously has a tremendous impact on, for instance, cost of customer acquisition if youre a consumer company. The event is a collaboration with the MSU Research Foundation and its venture arm, Red Cedar Ventures, along with Broad's Department of Finance and its Center for Venture Capital, Private Equity and Entrepreneurial Finance. If that happens, you essentially lose management control of your company. You want to give somebody a little bit of feedback, and now suddenly it becomes a big deal instead of just a quick hallway conversation or a chat over coffee. . Vinod Khosla, a cofounder of Sun Microsystems and the founder of Khosla Ventures, told us that the power dynamic can quickly flip when VCs become excited about a start-up, particularly if it has offers from other firms. Find somebody whom you trust, whos going to be at your side, somebody who you can call on a Sunday night when something blows up at the company, when you have a squabble with your cofounder, when your biggest business partner goes sour on you. Theyve been gaming together. The reason for this is that once each investment is made, the partners must personally manage that investment for up to 10 years. In this premier episode of the McKinsey on Start-ups podcast, Daniel Eisenberg speaks with two experienced venture capitalists, Roelof Botha of Sequoia Capital and Pr-Jrgen (PJ) Parson of Northzone, about the overall start-up investing landscape and the challenges and changes their industry is experiencing in the wake of the global pandemic.