We were going Revizor: how do venture capital funds carry out analysis of companies

Venture capital investments (from the English. venture, risky undertaking) high — risk investments in early-stage company with the goal of getting high earnings.

Venture capital funds and private investors for their funding share of the company. The most popular method of exit from investment — sale to a strategic buyer or an IPO of the company.

Distinguish the different stages of venture investment. In the early (pre-seed, seed) risks are highest. At later stages (e.g., series A — series C) risks below. The higher the stage, the harder it is to go to the project: competition stronger amount more.

Infographics Crunchbase demonstrates that at earlier stages is more deals, but the amount of funds distribution is quite different: the later the stage of “win.”


Source: Crunchbase

The return on investment can be huge, so venture capital investments are attractive for private investors and partners of venture capital funds. Thanks to venture capital is becoming possible to develop innovative high-tech start-UPS, later changing entire industries and ways of doing business that could not change for decades.

Investment strategy

Each successful venture capital Fund has developed its investment strategy to maximize the number of successful transactions. Some funds focus on seed investments with small cheques into a large number of novice start-UPS, others prefer to invest large sums in projects that have already proven themselves in the market.

We at GR Capital typically invest $1-5 million in startups in the series stages A–C. the Ratio of risk to return at this stage much more attractive. For example, in the diagram CB Insights shows what percentage of startups invested in Seed-stage, raise the next rounds of investment.


Source: CB Insights

To estimate the approximate size of the round (depending on the stage of the market), you can focus on infographics PwC.

Source: PwC MoneyTree Report Q3 2018

The Fund follows a tactical approach growth investments, with minimal risk to investment to maintain a high yield. The approach is based on three principles: We invest in technology companies because they create new markets or significantly improve existing ones. Finance projects that are already successfully validated the business model in major markets and require investment to scale. Look to sell the business or IPO in 3-5 years.

Another secret of success is to co-invest with leading funds from USA and Europe. To see the most promising startups, you need to look in the same direction as world leaders. Together we are investing in breakthrough technology projects in Europe and the USA, which has already proved the success of the business model.

As funds are looking for startups to invest

Venture money is much more than truly promising startups. In the United States and Western Europe investment funds competing to invest in promising project.

Venture business is a business of relationships and expertise. The proof of this is the experimentconducted at MIT. In 2015, the researchers tested the connection between 1 271 Twitter users from a pre-harvested “venture” list, analyzing 45 521 tweet. The authors of the experiment tested how often venture capitalists communicate with each other, and retweeted each other. And that’s how located tweets on a chart.

Source: Analyzing VC Influence on Startup Success. A people-centric network theory approach, Beth M. Hadley, Massachusetts Institute of Technology, 2017.

Venture club consists of three groups: investors, strategists and innovative companies. Being in it, you know the key companies in each sector, their potential buyers and investors who are the best experts in this field.

For example, there is now a rising interest of venture investors in foodtech start-UPS, including the food delivery market. Pitchbook has devoted a separate material. But start-UPS in this promising market a lot, so it is important to choose in whom to invest. We along with the world’s top funds have funded two companies this industry Deliveroo and Glovo. They work in different segments, so each other do not compete directly, which allows us to enter this market from two sides.

Joint investment is possible thanks to a network of contacts, the reputation and expertise of the Fund not less important than the reputation of the startup. For example, GR Capital on the world market know how a Fund that can help with the market entry in Eastern Europe. We know how strong analysts and financiers: the Fund’s team are former bankers and consultants, each of the partners created more than 50 projects in all developed industries.

We actively help companies in the transformation and expansion of business and also to strengthen R&D directions. Thanks to this expertise we are the only team in Ukraine who invest at later stages in leading technology companies in Europe and the United States.

Evaluation criteria projects

Universal scheme for the analysis of a startup not — the criteria vary depending on product, industry, stage of development, the strategy of entering the market. However, the main factors to which the Fund drew attention in the initial evaluation of the project are: The robustness and scalability of the business model Target market size Competitive field now and in the future Team.

These key blocks as the Express test, which we use for 15 minutes of conversation can determine your interest.

The team plays a decisive role in the project, because these are the people who lead the company during a change of strategy, international expansion, fundraising, pivots and other key periods. But not less important criterion — the market. Sometimes investors are so addicted to the charisma of the founders and team cohesion that turn a blind eye to small size or even the complete absence of a market. The team is always possible to strengthen painless, you will not tell about the change of the underlying market.

If the first based on four criteria are positive, then 2-4 weeks is spent on a detailed analysis of the “DNA project” — a study of 30 internal and external factors.

Example of initial analysis of a startup

Here is an example of primary assessment of the project on the example of a startup Glovo of our portfolio. Glovo is a global service of the courier for anything over 60 minutes. The startup recently entered the Ukrainian market and has already started in Kiev.

Business model: the Service allows you to order a delivery not only restaurant meals, but in General any parcel weighing up to 9 lbs. This model diversifitsirovat risks and gives you the ability to scale in different regions of the (service now operates in 20 countries and 67 cities). The economy of the order has been confirmed in various cities and the ability to quickly occupy new markets.

Market: the Market is only one food delivery is about $100 billion globally and projected growth of this market by 3.7% annually.

Competitive field: the Service starts in countries and cities where there is already a sufficient market to make money and scale, but this market is not busy monopoly.

Team: Three cofounder with experience and expertise, as well as the staff of several hundred employees.

This is a very rough estimate, but it gives the opportunity to understand whether to continue to consider the project for investment. To the stage of deep analysis of the reach not all projects. For example, the Fund GREE Ventures brings their figures: considered from 475 in the quarter of analysis projects were only 12, and investments received two. And that Fund early-stage, late selection tougher.

Source: Medium

Of course, the venture is nothing you cannot predict 100% for it and venture. Each Fund has rejected the list of startups that later became very successful. But such is the price of a question: to make an optimal transaction, funds, analysts have to be careful — in the hands of their attachment partners. Concessions and exceptions to the irrational factors-for example, faith in the founder-or rumors — increase the risk of error. Importantly for the Fund in selecting projects is to keep a cool mind and work following the defined strategy.