Joy Guo, CFA

Balderton's €1.3bn raise for European startups sparks debate: Does a bigger VC fund lead to better outcomes? First, consider: 💲 Larger rounds demand bigger funds, but returns get harder at scale 💲 $100M fund needs $1bn exit at 10% ownership for a single 1x return 💲 Most early-stage VCs target 3x returns, investing in 30+ companies 💲Management fees (typically 2%) grow with fund size Plus, the current landscape: Giants like Balderton, Index, and Accel are raising massive funds, while smaller firms stick to sub-$200M and focus on early-stage startups. Many VCs have maintained their previous fund sizes, while others are downsizing or struggling to raise new funds (or even returning un-invested capital to investors, as CRV recently announced they will do). Thus, weigh up the trade-offs: Larger funds (≥$500M): 📈 More firepower, full-cycle support 📉 Risk: Pressure to deploy capital, potentially lower returns Smaller funds (≤$200M): 🔍Agility, focused support, higher potential multiples ❌ Limited late-stage participation The future of European VC may not be one-size-fits-all. As the ecosystem matures, perhaps there's room for both Davids and Goliaths. What's your take? Would you bet on a nimble $150M fund or the muscle of a €1B+ vehicle? Source: Sifted #EuropeanVC #FundStrategy #StartupInvesting PS 🔔 Follow me for strategies and resources for startups and VCs! There's a better, streamlined way to raise capital: 💸https://foundersuite.com/ for startups 💸https://fundingstack.com/ for VCs and investors

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TLDR: EIS should be scrapped as a fund structure but retained for Angel investments by individuals. Alex Chalmers has done all the work which in 10 years I've never got around to doing: why 95% of EIS/VCT funds are bad for our tech ecosystem, rip #startups off, and why as a Founder you should push back against their stupid fees or not take their money. https://lnkd.in/dnq9ZScS

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public SaaS multiples, measured by market valuation against annualized current run-rate ARR, have now reverted to levels seen around 2016. for me, this suggests that the market may have hit rock bottom, opening up opportunities for growth (link to the report is in the comments). the elevated multiples observed during COVID, driven by the expectation of a permanently virtual and remote work setting, are gone for good, though.

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Taavet Hinrikus and I made the Financial Times Due Diligence email. https://lnkd.in/ez2AuGQx One 'unintended consequence' is that if there is a 45% tax on carry and CGT (raising £40m per year, remember) it for all intents and purposes closes the door on new VCs in the UK. Especially started by teams from non-traditional backgrounds. To meet the GP commit, you need to be already part of the 'wealthy' as you cannot rely on the value you create - nearly half of it will disappear - to fund it. We have both had extremely successful startups which are few and far between. The smaller number of new VCs will therefore more likely increasingly be for people who have inherited the capital or can draw it from their already rich family. Probably not want they have in mind with this policy.

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Great question by Jason Long on a previous thread ( link in comments below): """ I'd be curious to understand the SECs rationale for making sub-$1B valuation IPOs so difficult. The US public market might be losing its agility by effectively barring small-caps from having a fighting chance. As you mentioned, plenty of great companies IPO'd below the $1B range. """ Here's the 3 U.S. Securities and Exchange Commission mandates with roughly # of employees devoted to each. 1. Investor protection -- Think securities police -- 2,500 2. Maintaining efficient markets -- think regulators -- 2,500 3. Capital formation -- think helping businesses raise capital -- 2 Why? The SEC has an impossible task of policing a $100 Trillion stock and bond market with 2,500 cops. So, they focus on the big banner cases that are most likely to get the rest of the market to pay attention and change behavior. Congress isn't going to ask the SEC commissioners to testify as to why small businesses struggle to IPO. But they do ask them to testify when stock markets collapse or we have derivatives crisis like 2008-09. And, so they work very hard to make sure investors don't get screwed, and that we have efficient public markets. But as a result, compliance to be a public company costs between $2-5 million a year. This is why there's half as many public companies as there were 20 years ago. Crowd-funding is a thing, but only a couple hundred companies take advantage of that every year, because if a crowd-funding investor buys stock in a small business, where can they resell the stock and take a profit? There's no stock exchange available to do that. So, small business capital formation is left to the venture capital community. VC's funds are structured so they and their investors can only make money on their fund when they invest in future unicorns.

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There are several reasons why startups lose a lot of investor money and some even turn out to be fraudulent: **High Risk, High Reward:** * Startups are inherently risky ventures. They often operate in unproven markets with untested business models. This means a high chance of failure, leading to lost investment capital. * Investors are aware of the risk but are drawn to the potential for high returns. However, many startups fail to deliver on their initial promise. **Challenges Startups Face:** * **Lack of experience:** Startup founders may lack the experience and resources needed to navigate the complexities of running a business. This can lead to poor decision-making and financial mismanagement. * **Market competition:** Startups often enter crowded markets with established competitors. Standing out and capturing market share can be difficult. * **Rapid scaling challenges:** Scaling a business too quickly can lead to operational difficulties, cash flow problems, and a strain on resources. * **Unrealistic valuations:** Some startups may be overvalued during funding rounds, leading to investor disappointment if the company doesn't meet inflated expectations. **Fraudulent Activity:** * **Intentional deception:** In some cases, startups may be outright frauds with founders who have no intention of building a successful business. They may use investor money for personal gain or mislead investors about the company's prospects. * **Fake it till you make it:** Some founders may overhype their business model or capabilities to secure funding. They may not have a viable long-term plan and eventually run out of money. **Here are some additional points to consider:** * **Due diligence:** Investors can mitigate risk by conducting thorough due diligence on startups before investing. This involves evaluating the business model, the team's experience, and the market opportunity. * **Regulation:** Regulatory bodies are working to improve oversight of the startup ecosystem and prevent fraudulent activity. * **Alternative funding models:** Alternative funding models are emerging, such as crowdfunding and revenue-based financing, which can offer investors different risk-reward profiles. **Overall,** the startup world is a dynamic and exciting space, but it's also fraught with risk. Investors need to be aware of the challenges and conduct proper due diligence before investing in any startup.

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Valuation multiples step down at each new round …and that’s completely normal 👀 These drops are not a sign of weird times or a broken system ARR multiples are supposed to go down over time Because eventually they have to trend to the public multiples ✅ Now… As long as your revenue stays on the venture scale path → your revenue multiples will keep dropping → but your overall valuation will go up So if you’re going to raise capital… I think it’s important to understand that the multiple you raise at isn’t what you’re actually worth TODAY ❌ It’s the multiple you’re worth assuming you hit those FUTURE venture scale expectations (once you hit $1M ARR, can you get to $100M ARR in 7 to 10 years?) Which basically means that once you hit $1M ARR... You’re growing at 10% month over month for the next 24 months straight before starting to slow down to 2x year over year growth So even though Seed to Series A sees the biggest drop in multiples, that 10% mom growth will still drive up your valuation ----------------- But here’s the thing… If you’re growth slows to less than 2-3x between Seed and Series B → or sub $10M in ARR Your multiple doesn’t just drop to the Public Index (currently at 6.4x) It’ll actually fall below that index (closer to a 1-3x multiple) Because the acquirer is now arbitraging between they pay for you (1-3x multiple) and what they’re worth (6.4x multiple) ----------------- So what can you do? Focus on the milestones that’ll fuel your growth → instead of fundraising rounds or paper valuations And keep your cap table as light as possible until you’re ready for step 3️⃣ 1️⃣ Problem Solution Fit 2️⃣ Go to Market Fit - unlocks Series A 3️⃣ Scale PMF #1 - Series A use of funds 4️⃣ Scale PMF #2 -- ♻️ Repost to help a founder in your network Click 'visit my website' at the top of this post to register for my free Unlock your Series A session on how to navigate VC expectations in this market

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Great presentation of the laws of gravity in Venture Capital and startups

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Valuation multiples step down at each new round …and that’s completely normal 👀 These drops are not a sign of weird times or a broken system ARR multiples are supposed to go down over time Because eventually they have to trend to the public multiples ✅ Now… As long as your revenue stays on the venture scale path → your revenue multiples will keep dropping → but your overall valuation will go up So if you’re going to raise capital… I think it’s important to understand that the multiple you raise at isn’t what you’re actually worth TODAY ❌ It’s the multiple you’re worth assuming you hit those FUTURE venture scale expectations (once you hit $1M ARR, can you get to $100M ARR in 7 to 10 years?) Which basically means that once you hit $1M ARR... You’re growing at 10% month over month for the next 24 months straight before starting to slow down to 2x year over year growth So even though Seed to Series A sees the biggest drop in multiples, that 10% mom growth will still drive up your valuation ----------------- But here’s the thing… If you’re growth slows dramatically between Seed and Series B → or sub $10M in ARR Your multiple doesn’t just drop to the Public Index (currently at 5.7x) It’ll often fall below that, often closer to a 1-3x multiple (or more likely a 4-6x EBITDA multiple) ----------------- So what can you do? Focus on the milestones that’ll fuel your growth → instead of fundraising rounds or paper valuations And keep your cap table as light as possible until you’re ready for step 3️⃣ 1️⃣ Problem Solution Fit 2️⃣ Go to Market Fit - unlocks Series A 3️⃣ Scale PMF #1 - Series A use of funds 4️⃣ Scale PMF #2 -- ♻️ Repost to help a founder in your network Click 'visit my website' at the top of this post to register for my Seed to Series A session -- *Note that a huge jump in Series D & E+ valuations in Q2 2024 are based on a low number of deals (35 and 19) compared to Seed (492), Series A (415) and Series B (185) skew the multiples for those rounds much higher this quarter

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Thank you Funds Europe for including my voice in the new UK Budget coverage. VC industry was expecting the tax on carried interest - private equity managers’ share of profits on successful deals - to increase. However many of my fellow Venture Capitalists raised a concern about removing the right incentives for taking risks. These incentives are even more important for the founders creating strategic technology assets in the UK than for their investors. "Carried interest rewards fund managers who take long-term risks, which frees the capital needed to support early-stage innovation, particularly in R&D-intensive fields like quantum computing and AI. These sectors require sustained, high-stakes investment, where tremendous strategic asset value can be created, but the journey involves a great deal of risk-taking and patience." Thank you to everyone who led a dialog on this topic in the past few months and made sure that incentives are largely not removed for the founders and capital to stay in the UK. OpenOcean, British Private Equity & Venture Capital Association (BVCA), Michael Moore, Daniel Harrington

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VC fund GP: Interested in our fund? Me: How does the fund make money? VC: Exits and liquidity events. Me: I know how, I meant how are you literally going to facilitate those events happening in a timely manner and still getting above market returns within a 10 year fund cycle? VC: Crickets... Raise, allocate and wait is not a VC strategy. Getting money in is easy but to get your money out, there has to be opportunities to do so because you'll have little to no say or control after you allocate.

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What should investors expect from the VC industry over the next 3-5 years when it comes to exits and performance? Rick Zullo, on X, has argued that there will be a greater divergence between VC funds, with the most successful ones producing even stronger performance, while the median fund return will reduce. I would agree with this as we are likely to see fewer, but typically larger, exits. It will become more important than ever to have meaningful exposure to the small number of winners that drive VC performance. We saw this divergence in VC fund performance very clearly after the 2008/09 financial crisis. As you can see from the chart below, it was the top-tier, established managers who make up our Core Manager cohort that massively outperformed as the market recovered. We have identified three key factors that we believe materially contributed to this outperformance: 1. Quality of portfolio companies. We know that VC is a power law asset class, but the distribution of returns is even more concentrated after a correction. The number of successful exits falls significantly and the small number of VCs able to back these companies will materially outperform. We usually see the best companies actually improve their competitive positioning during a correction. They become more capital efficient, increase market share and benefit from many of their competitors being unable to survive. 2. Availability of capital. In a downturn, even the very best companies will usually need to raise additional capital. As a VC, if you don't have the capital to support these companies and protect your ownership, then you are in trouble. The best VCs can still raise new funds even in the worst of markets and will have the capital to ensure their best companies survive. 3. Willingness to continue to invest during the most challenging periods. The best managers have the experience of managing through prior downturns as well as the confidence (and the capital) to take advantage of the opportunities that a correction creates. This means that they can double down on their best companies, often at attractive valuations, and also access market leaders they may have missed in prior rounds. We have seen a major flight to quality from LPs to date in 2024, with a small number of VCs responsible for the vast majority of capital raised. Unfortunately, this is shutting the stable door after the horse has bolted. Venture capital is a cyclical asset class - corrections are a feature, not a bug. This means that LPs need to construct a portfolio that not only captures the upside as the market rises, but is also resilient during a downturn.

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Talk the talk: a giant 𝗹𝗶𝘀𝘁 𝗼𝗳 𝗙𝗣&𝗔 𝗮𝗯𝗯𝗿𝗲𝘃𝗶𝗮𝘁𝗶𝗼𝗻𝘀 (🔖save this post) 👇 ~~~ 📌𝗧𝗼𝗱𝗮𝘆'𝘀 𝗔𝗻𝗻𝗼𝘂𝗻𝗰𝗲𝗺𝗲𝗻𝘁: Modeling guide 👉 https://lnkd.in/eUN-E-Qc ~~~ ✓ FINANCIAL PERFORMANCE METRICS: • ARPU: Average Revenue Per User • CAGR: Compound Annual Growth Rate • Cash EBITDA: Earnings Before Interest, Taxes, Depreciation, Amortization, and Change in Deferred Revenue • EBIT: Earnings Before Interest & Taxes • EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization • EBITDAR: Earnings Before Interest, Taxes, Depreciation, Amortization & Restructuring or Rent Costs • EBITDAX: Earnings Before Interest, Taxes, Depreciation, Amortization & Exploration Expenses • EPS: Earnings per Share • FCF: Free Cash Flow • GP: Gross Profit • GM: Gross Margin • NOI: Net Operating Income • NOPAT: Net Operating Profit After Tax • NPV: Net Present Value • ROCE: Return On Capital Employed ✓ FINANCIAL STATEMENTS & COMPONENTS: • BS: Balance Sheet • COGS: Cost Of Goods Sold • COR: Cost Of Revenue • D&A: Depreciation & Amortization • IS: Income Statement • P&L: Profit & Loss • SCF: Statement of Cash Flows ✓ FINANCIAL RATIOS & ANALYSIS: • ABC: Activity-Based Costing • bps: Basis Points • DCF: Discounted Cash Flow • FR: Financial Ratios • IRR: Internal Rate of Return • QoE: Quality of Earnings • WACC: Weighted-average Cost of Capital ✓ FORECASTING & PLANNING: • BVA: Budget vs. Actuals • Budget: Estimated future income & expenses • FCST: Forecast • Forecast: Updated estimate of future financial results • FP&A: Financial Planning & Analysis • LE: Latest Estimate • MYR: Mid Year Review • Rolling Forecast: Continual update of future performance projection • S&OP: Sales & Operations Planning • xP&A: Extended Planning & Analysis ✓ TIME PERIODS: • 6+6, 3+9, etc.: Actuals (6 or 3 months) + Forecast (6 or 9 months) • BOY: Balance of Year • EOD: End of Day • FY: Fiscal Year or Full Year • MTD: Month To Date • MoM: Month Over Month • PTD: Period To Date • QoQ: Quarter Over Quarter • TTM/LTM: Trailing Twelve Months / Last Twelve Months • YTD: Year To Date • YoY: Year Over Year • YTG: Year To Go ✓ OPERATIONAL METRICS: • Actuals: Actual financial results • CapEx: Capital Expenditures • FTE: Full Time Equivalent • G&A: General & Administrative Expenses • KPI: Key Performance Indicator • OpEx: Operating Expenses • R&D: Research & Development • S&M: Sales & Marketing • WCR: Working Capital Requirement ✓ RISK & OPPORTUNITY: • DD: Due Diligence • R&O: Risks & Opportunities ✓ VALUATION & CAPITAL STRUCTURE: • EqV: Equity Value • EV: Enterprise Value • ND: Net Debt • NWC: Net Working Capital ✓ REPORTING & TOOLS: • Dashboard: Visual display of key metrics • Flash Report: Quick financial overview • IRL: Investor Request List • VDR: Virtual Data Room ~~~ 👋 Hey, I'm Chris Reilly, and I teach Financial Modeling based on real Private Equity and FP&A experience. 📌 Learn more here 👉 https://lnkd.in/eG_uVhsE

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FIXED - Valuation multiples changing over time → from 2020 to 2024 This week I fixed a modelling error when looking at the timing of each round relative to the $1M to $100M in 10 years venture scale curve Instead of using the time between rounds for that specific Quarter for every round, I'm now working backwards (link to deep dive in the comments): → So if a Series B was raised in Q1 2024 → Based on Q1'24 data, that took 27 months → So their Series A was raised in Q4 2021 → Based on Q4'21 data, that took 19 months → Meaning their Seed was raised in Q2 2020 Re-running the data we can look at the trends for Q1 from 2020 to 2024 → Seed stage still remains high → Series A is back around 2020 levels → Series B/C look to be floating back up I'd say take Series D (just 23 deals in Q1 2024) and Series E (only 16 deals in Q1 2024) with a grain of salt (link Carta's state of Private Markets in comments) And for each time period, I’ve also included the SaaS Capital Index for public SaaS companies (the dotted line) for context 👍 -- ♻️ Repost to help a founder in your network Click 'visit my website' at the top of this post to register for my free Unlock your Series A session on how to navigate VC expectations in this market

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What to Include in a Data Room for Investors? — Advice From VC Fund GP https://buff.ly/4eEUahI Investors look for comprehensive data rooms to make informed decisions. A well-organized data room should include financial statements, legal documents, market analysis, and growth projections. Providing detailed information on past performance and future strategies is crucial. Additionally, incorporating visual aids like charts and graphs can enhance understanding. According to a study by PwC, data rooms with thorough documentation increase investor confidence by 40%. Ensuring the data room is secure and easily accessible is also essential. #InvestorRelations #DueDiligence

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Shifting Fundraising Landscape: Should Founders Reassess the VC Path? For years, founders were advised to raise enough capital to last 18-24 months. But recent data from Carta suggests this is changing. Time between rounds is growing, and raising capital is becoming more difficult and costly. The VC Playbook: A One-Size-Fits-All? When capital was cheap and abundant, founders gravitated toward a model focused on rapid, top-line growth. The trade-off? (Significant) dilution in exchange for the potential of eventually owning a small slice of a large business. But as the economic landscape shifts, several critical challenges have emerged: Extended Fundraising Cycles: The growing gap between rounds means founders need to stretch capital longer, which can stall growth or lead to decisions around scaling back which in itself may impact the ability to raise again. Rising scarcity and higher Costs of Capital: Inflationary years and market corrections have made it more expensive to achieve the same milestones. The capital that seemed sufficient two years ago may now fall short. And capital is harder to access. These realities prompt an important question: have founders fully assessed the risks associated with the venture capital path? The truth is, not every business can—or should—scale at the aggressive rates that VC funding demands. Is There Another Way? A more sustainable approach is gaining traction—one that prioritises profitability earlier in the life cycle. For many founders, this could lead to a better risk-adjusted outcome. The Transition Challenge However, shifting from VC to a more private equity-style model isn’t easy. Many companies find themselves stuck—too slow for VC but not profitable enough for PE. At Resurge Growth Partners, we’ve noticed that more and more founders are asking these very questions and re-evaluating which path is best. We’re increasingly working with founders who are navigating this shift, helping them find the right balance between growth and profitability. It’s a conversation worth having. #ventureequity #privateequity #venturecapital

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Exploring how VC funding and bootstrapping affect early-stage revenue growth. One interesting finding is that top quartile bootstrapped companies reach the $1M ARR mark just 4 months after their VC backed counterparts. Although capital is important, there are other factors that boost growth at early stage companies. full report here : https://lnkd.in/eNugEDjC

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Here is why im an angel investor and not a LP investor in a venture capital fund. Explination of Committed Capital and Management Fee in a VC Fund Committed Capital: Committed capital is the total amount of money that all investors agree to contribute to a venture capital (VC) fund over the life of the fund. This amount is pledged upfront but is typically called (or drawn down) by the fund managers over several years as investment opportunities arise. Capital Calls: The capital is called in increments over the investment period, usually the first 5 years of the fund's life. For example, if an investor commits $1 million, the fund may call $200,000 each year for five years. Often capital calls are quarterly. Management Fee: A typical VC fund charges a 2% management fee on committed capital. For a 10-year fund with $100 million in committed capital, the annual fee would be $2 million. Over the fund's life, this totals $20 million. Total Fee Percentage over life of fund= 20% Very missleading to call this a 2% mangement fee. Ontop of this fee the GPs of the VC firm also generaly get a 20% cary in the investment. After managment fee and carry you only get 60% and the VC firm gets 40%. As an angel investor you get 100% and your money and can make 20% more investments in startups than a VC with a 2% managment fee. The downside is you have to take the time to find the startups yourself. To me this is also an upside, finding amazing founders and participating in startup communities is fun. In addition a VC must stick to the investment thesis (Usually find unicorns), an angel inveator can do whatever they like, its their money.

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