<![CDATA[Larry Scheinfeld - Larry Scheinfeld\'s Blog]]>Tue, 16 Feb 2016 04:12:08 -0800Weebly<![CDATA[METRICS THAT MATTER: HOW TO RECOGNIZE A STARTUP WORTH INVESTING IN]]>Tue, 12 Jan 2016 17:13:11 GMThttp://larryscheinfeld.weebly.com/larry-scheinfelds-blog/metrics-that-matter-how-to-recognize-a-startup-worth-investing-in

When it comes to evaluating a pre-revenue startup, it’s not an easy task and there are a handful of key components to the valuation process.

Still, aside from the science involved in predicting a company’s worth, there’s still a feeling that needs to be associated. How do you feel about the potential of the industry they’re in? Do you offer a network that could accelerate their growth?

Determining a startup’s worth is more so an educated guess. But you won’t get the answer to that guess until you’ve already made the investment. A risk all of us are probably aware of but that reward could also be an a big payout as the startup grows into later stages. Here are a few thoughts to consider when determining a prospective startup and their potential value:

#1: Founding Team

It’s not uncommon for an angel investor to believe in a team more than the actual product, hence why it’s one of the more important factors.

Just as much as the idea, you’re investing in the team that plans to carry out the idea. You have to depend on them to execute the startup’s plan of action. But startup personnel can be even more valuable when including experts in the field.

It’s also best to determine where the entrepreneurs true passions are and what they can offer. An already established team could decide many factors, such as future hires, burn rate, or even how the seed funding will be used. Take into account the vision the founders have for their entity and how detailed their plan of action is 3-5 years down the road. Their expectations for their company is usually a good indicator of their expertise and ability to carry the idea out.

#2: Traction and Expected Near-Term Revenues

Traction! We hear it everyday when it comes to startups because it’s so integral in the fundraising process, especially in the seed round. Traction is a startup’s claim to value and it’s usually the measuring stick VCs use to evaluate a business’s potential or already proven growth.

Traction varies depending on the business model and the product/service, but nonetheless it shows that a startup provides value and ideally – it’ll also show the demand.

As I stated earlier, traction depends on the particular industry and business model. Although there are universal metrics that tend to hold more value above others in early stage companies:

Active users
Partnerships and/or Clients

There is no one rule of thumb across the board that equates your traction to a particular value. Traction varies by the model. For e-commerce companies, what’s your revenue growth so far? How many paying customers do you have and how steadily are they acquired? Those inquiries vary much differently when looking into a consumer focused tech company. With consumer focused brands, traction is more tailored towards active users, engagement, and partnerships.

Determining which traction metrics are most valuable to you depends on the business but regardless of the industry you’re involved in, investors will always back momentum.

#3: Market Size

Evaluating a startup also means that you’re evaluating the market because an opportunity is comprised of the business and it’s landscape. Analyzing market size is usually identified by the startup founders because it’s an important factor in identifying your target customer and methods of acquisition.

As you probably know, there can be a vast difference between the available market and the addressable market. The available market is the total potential revenue for the industry you’re in. The addressable market is the population you can realistically reach. Your addressable market can vary, depending on employee bandwidth, resources, funds, just to name a few factors. Obviously venture capital backing can help increase the addressable market but at what cost and how much expansion will the market allow?

How big is your market size domestically? Internationally? How fast is it growing? These are all questions you should consider when looking at this key component because they directly equate to your equity’s value.

#4: Competition

Often, market size and competition go hand and hand. Competition can prove that a market is profitable but it can also show that a startup may or may not have a competitive advantage.

Direct competition comes from businesses with comparable products or services. Indirect competition on the other hand, happens when businesses compete for the same audience or profit opportunities but they may be in a different space in the market.

Sidecar, a competitor of Uber and Lyft, recently bowed out of the private ride race. Sidecar recently ended their ridesharing and delivery services because they didn’t have the capital to keep up with competition. Uber and Lyft may have not necessarily been technologically innovative but they surely had the financial advantage that allowed them to scale and profit quickly. Now they continue to grow their loyal customer base across the world.

As a VC, it’s imperative that you get familiar with a company’s competitors and where their advantages are. Competition can show a viable route for your product or service or their dominance could deter new competitors from entering a market.

Ultimately, competition is what makes products and services appealing for a consumer. By driving performance and innovation, while offering a wider variety of options, the consumer is at the forefront of all decisions.

Valuations are an assimilation of a variety of different factors though they tend to fall under these four areas. In most cases, it has to be a good marriage between your interests/network and the brand you’re investing in.

Good ideas can come from anywhere in the world, use these four tactics to determine if a startup will sustain and if your participation could help it grow towards that desirable exit.

<![CDATA[Robots Courting Venture Investments in Japan]]>Mon, 15 Jun 2015 19:28:32 GMThttp://larryscheinfeld.weebly.com/larry-scheinfelds-blog/robots-courting-venture-investments-in-japanPicture

The final frontier isn’t space. For venture capitalist investors, it may be Japan. Because Japan’s financial tech ecosystem is still in its infancy compared to the United States’, some VCs consider investments risky. However, with Japan’s advancements of AI (artificial intelligence) technology, the robot may be courting venture investors.

Koichi Hori, head of Boston Consulting Group Inc. thinks that Japan’s strength in engineering is changing its chances of getting investments.

“Digital media will only be in the mainstream for about three years, or five years at most,” Hori, said. “From that time on, robots and robotics will be the eye-catchy industries. Japan has a good chance, particularly in the area of hardware for robots.”

Japanese Prime Minister Shinzo Abe hopes to woo investments, creating a sort of ‘Silicon Valley annex’ in Japan. One of the defining differences Abe noticed was the reluctance of Japanese patrons to bet on up-and-coming startups, which affects the prospects of any real tech innovation.

Hori adds, “In the U.S., people who start their ventures are to a certain extent respected by society, and in contrast in Japan entrepreneurs have been considered as those who couldn’t become bureaucrats or employees of big corporations.”

Abe’s recent trip to California provided him more motivation to replicate the tech culture of Silicon Valley, with the the robotics industry to start. To do so, the prime minister will delegate plans to insert $19 million into robotics by 2020.

Things are starting to shift in Japan, though slowly. In order for the country to compete with Silicon Valley, it needs to ramp up, and quickly. With Google Inc.’s investment in Japan-based Schaft Inc. two years ago, American VCs are taking calculated risks on entrepreneurs that Japanese firms are turning down. According to data from Japan Venture Enterprise Center and the U.S. National Venture Capital Association, Japanese VCs investments into Japanese startups were overshadowed by U.S. investments into startups by a large margin.

In order for Prime Minister Abe to create a culture similar to the one he witnessed in California, the attitudes towards tech entrepreneurs will have to undergo some modifications. Japan’s robotic industry may help pave the way.

<![CDATA[Secret App: Bad for Business]]>Tue, 19 May 2015 19:16:22 GMThttp://larryscheinfeld.weebly.com/larry-scheinfelds-blog/secret-app-bad-for-business
There has long been talk and rumors that the tech bubble will burst but, so far, no bubble has burst. However, that is not to say that there haven’t been missteps in Silicon Valley leading VCs (Google Ventures being one) that no amount of investment money can fix. 

Case in point: the Secret App. The startup announced it would be closing its doors last month to some VC investors’ chagrin. The app that allowed users to post anonymous, often scathing posts about people, places or things without their identity being revealed. The app was a big hit last year but has since fallen flat. 

Founders David Byttow and Chrys Bader garnered the interest of Google Ventures and Kleiner Perkins Caulfield & Byers (two of the largest venture capital firms) early on after Secret generated a substantial following. The problem could’ve arisen when Secret attempted to raise a second round of investment of $25 million. This time, Google Ventures did not bite on the advice of Google Ventures managing partner Bill Maris:

“We told them [Secret] didn’t need the money. And raising that much money that soon, it was going to be impossible to meet the expectations in the future.”

But the startup did not heed the warning. Through Index Ventures and Redpoint Ventures, along with other angel investors, the company raised the $25 million; the two founders wanted $3 million each. 

With the announcement that the startup would be closing their doors, they are vowing to return the remainder of the investment money, though no mention of the $3 million they took for themselves. 

Mr. Maris compared them to bank robbers and should return all money, though he later retracted his harsh comments about the founders on a Medium post. Regardless of how the VCs and angel investors who invested in Secret think behind closed doors, it’s no secret that the startup was the epitome of a bad investment.
<![CDATA[The Top 7 VC-Backed "Green" Companies]]>Wed, 22 Apr 2015 21:38:10 GMThttp://larryscheinfeld.weebly.com/larry-scheinfelds-blog/the-top-10-vc-backed-green-companiesPicture

Happy Earth Day everyone! As consumers care more and more about the societal impact of the companies they engage with, it is becoming increasingly more important for Venture Capitalists to invest in companies that prioritize the environment. 

Inc.com has provided the top 10 biggest venture funding events for green companies over the last year. Here are the top 7:

  1. Boston-Power Inc. - This lithium ion battery provider topped the list with a $250M round of funding from unnamed investors. 
  2. Sunnova Energy Corp - Based in Houston, Sunnova makes it easy for homeowners to go solar and save themselves money in the process. They also earned themselves $250M, tying for #1 on this list, thanks to funding from Triangle Peak Partners and Franklin Square Capital Partners. 
  3. SunRun, Inc. - Another solar company, SunRun is based in San Francisco and has over 60,000+ customers and counting. They earned $150M from Foundation Capital, Accel Partners, Sequoia Capital, and Madrone Capital Partners. 
  4. Hampton Creek - Also based in San Fran, Hampton Creek is bringing sustainability to the food industry by utilizing plant-based proteins in their products. They've raised $120M so far, with $90M in the last round from the likes of Collaborative Fund, Founders Fund, Far East Organization, Khosla Ventures, and some others.
  5. Impossible Foods - Along the same lines, Impossible Foods creates cheeses and meats from plant-based products. They've raised $75M from Khosla Ventures and Google Ventures, among others.
  6. Sungevity Inc. - Another residential solar panel company (this one based in Oakland, California) is notable for being the first to design their solar energy systems over the Internet (back in 2007) using satellite imagery. They've pulled $72.5M from E.ON Venture Partners, Brightpath Capital Partners, and others.
  7. Solexel Inc. - Solexel, based in Milpitas, CA, develops extremely flexible and thin silicon solar cells and modules at a very low cost for a variety of industries. They pulled $65M from GAF Corp., DAG Ventures, and others.