Nic Lucas: I would like to introduce you to Sid Mofya. He has become a great friend of mine, and I really admire him. We have a fantastic rapport and enjoy engaging conversations. Sid's background is in fundraising, and currently, he works as an investor, bringing with him a wealth of knowledge. Previously, he served as the executive director of the Draper Venture Network. This network comprises over 20 venture capital funds collaborating together.
As far as I understand, the Draper Venture Network aims to facilitate numerous deals by connecting founders in need of funding with interested investors. This is particularly relevant to people like me who have bootstrapped their businesses and have limited knowledge about funding. I readily admit that I am a complete novice in this area, and that's why Sid is here to shed light on the topic.
The purpose of this call is to explore some fundamental concepts and provide a solid foundation for those seeking funding. Sid, thank you for joining us. I'll hand it over to you now and pose the first question: Can you share your insights and wisdom about the current state of the VC industry, especially for individuals who are unfamiliar with it? How can they navigate this field? Where should they begin? What should they be looking for? Let's also discuss any prevalent myths and misconceptions we've touched upon earlier.\
Sid Mofya: Thank you for having me, Nic. It's great to be here and see you again, Chris.
I have been working in the venture capital industry for the past decade, during which we experienced a 10-year bull run. It was a favorable period for venture investing; however, things have significantly shifted in the past year and a half. Companies are now raising money at much lower valuations compared to a decade ago, indicating a correction in the market.
Before diving deeper, let me briefly explain how venture capital works at a high level, as some may not be familiar with the intricacies of the business. Venture capitalists raise funds from various investors like university endowments, family offices, or even banks with an interest in investing in early-stage technology companies. Their expertise lies in identifying founders and companies with the potential for tremendous success.
The entire business model revolves around taking many swings, ensuring at least one significant win. VC firms are not as concerned about every investment being successful; they focus on finding that one game-changer. Typically, this occurs every five to ten years, where one company emerges as the standout success story. For instance, 15 years ago, people were searching for the next Facebook, and some fortunate founders and investors found it, reaping immense rewards. Then the focus shifted to finding the next Uber, which turned out to be another lucrative investment.
Consequently, in this game, there is a long tail of investors who enter, hoping to discover the next big thing, perhaps like OpenAI. However, OpenAI presents some challenges since it encompasses both the for-profit company and the non-profit organization, making it a bit more difficult to access.
Basically, that's the game. Venture capitalists typically invest in around 20 companies. If they invest at an earlier stage, the recommendation is to invest in as many companies as possible, even up to a hundred. This strategy improves the chances of achieving a good return and satisfying their investors. However, it's not always feasible to invest in such a large number of companies. Consequently, many investors adopt a more targeted approach, focusing on a specific industry or space they understand well. In this case, they may invest in around 20 companies, expecting some to fail completely, some to recoup the initial investment, and a few to deliver exceptional returns.
Venture capitalists operate on a fund-based model. They raise funds for a specific time period, usually 10 years, during which they make their investments. By the fifth year of a fund cycle, they typically start raising the next fund, ensuring a continuous flow of capital for future investments. For example, a company may raise a C round from the first fund and then a Series A round from the next fund. The venture capitalists must ensure that the financial calculations are favorable to their investment in a company.
When considering potential investments, venture capitalists seek founders who are passionate about solving real-world problems. They also look for a strong team supporting the founder. In order to identify companies with significant potential, they pay attention to technological or customer breakthroughs. For instance, in the case of Facebook, the technology was not groundbreaking, but their innovative approach in serving customers and driving engagement set them apart.
Additionally, venture capitalists evaluate market dynamics and timing. Some companies may have a great product, but if the timing is off, it becomes challenging for them to succeed. The venture capitalists also consider their own fund's economics and the commitments made to their investors. This may lead to situations where investors express interest but are unable to invest due to conflicts with existing portfolio companies or deviations from their investment mandates.
Therefore, I recommend that founders thoroughly understand the motivations and economic considerations of potential investors before engaging in conversations with them. This knowledge will enable founders to approach investors more effectively and align their expectations accordingly.
For entrepreneurs who don't need large amounts of funding, there are several options to consider. One approach is to seek investment from angel investors and angel networks. Angel investors typically invest at an early stage and are often individuals who have developed an interest in investing. They may invest smaller amounts, such as $2k, $10k, or $50k, based on their belief in the founder or their understanding of a specific industry. Angel investors typically exit their investments when institutional venture capitalists (VCs) come into play, providing them with opportunities to realize returns before the final outcome.
Another avenue to explore is crowdfunding. Crowdfunding platforms work by providing incentives to backers. If structured appropriately, crowdfunding can be a good fit for products or services that have broad appeal and resonate with the general public. For example, if your product or service aims to solve a problem that everyone can relate to, you can offer incentives such as being among the first to receive the product or service upon its release.
Entrepreneurs can also consider joining accelerators and incubators. These programs typically run for around 12 weeks and focus on helping startups achieve their growth goals and reach product-market fit. Some accelerators offer investment at the beginning or end of the program or facilitate connections with investors during a demo day. However, it's crucial to research and carefully select the right accelerator, as it requires a significant investment of time and involvement.
Overall, entrepreneurs who require smaller amounts of funding can leverage angel investors, crowdfunding, and accelerators/incubators to kickstart their businesses. It's essential to explore these options based on your specific circumstances and find the right fit for your venture.
When it comes to finding funders, there are a few common mistakes that entrepreneurs make. One of the biggest mistakes is being hesitant to give up control or equity in their company. Many founders are reluctant to dilute their ownership and fear losing decision-making power. However, it's important to remember that investors are not just providing money but also expertise, networks, and guidance. It's a trade-off, and finding the right balance is crucial.
Another common mistake is not building relationships early enough. Networking and building connections within the industry is essential. Entrepreneurs should start networking well in advance of needing funding, as relationships take time to develop. Relying solely on cold emails or approaches may not yield the desired results. Warm introductions from trusted contacts can significantly increase the chances of making a meaningful connection with potential investors.
Furthermore, being unprepared and not understanding the investor's perspective can be detrimental. Entrepreneurs need to thoroughly research and understand the expectations, motivations, and investment preferences of the potential funder. Each investor has their own investment thesis and criteria, so tailoring your pitch and understanding how your venture aligns with their focus is crucial for success.
Lastly, entrepreneurs often overlook the importance of having a clear and compelling pitch. Presenting a well-thought-out business plan, showcasing traction and potential for growth, and demonstrating a strong understanding of the market and competitors are essential. Failing to effectively articulate the value proposition of the company may result in missed opportunities.
Overall, avoiding these common mistakes involves being open to collaboration, building relationships, doing thorough research on potential investors, and honing your pitch to effectively convey the potential of your venture.
Once a founder has secured an investor or a group of investors, the nature of the relationship can vary. The best investors go beyond providing capital and offer additional value. They leverage their networks and industry expertise to open doors to potential customers, strategic partners, and other investors. These investors can be instrumental in helping founders navigate challenges and make strategic decisions.
Investors who bring more than just money are highly valuable. They may actively participate on the company's board of directors, providing guidance and insights to support the founder's strategic vision. Having an invested board member who is genuinely interested in the company's success can be a valuable resource for founders.
Moreover, the investor-founder relationship should be built on trust and open communication. Founders should feel comfortable reaching out to their investors when facing challenges or seeking advice. Experienced investors have broad exposure to various companies and can provide unique perspectives and insights based on their past experiences.
It's important for founders to recognize that investors have a wealth of knowledge and connections that can benefit their venture. However, not all investors will offer the same level of involvement and value-add. Therefore, founders should carefully consider the investor's track record, reputation, and their ability to contribute beyond just financial support when selecting investment partners.
Nic Lucas: What's a couple of examples? I'm throwing this one at you out of the blue, but just a couple of examples that you've seen through your role at Venture Network, right?
Because listening to you, it seems like VCs are hedging their bets, playing the numbers, investing a lot, hoping for a unicorn to cover their costs. From someone on my side, it doesn't seem like they care about me too much. I'm just part of the mix. On the other hand, I have a great idea that might not become a billion-dollar company, but it means a lot to me and my customers.
I want the investor to follow my mission. So, can you share some feel-good stories of big businesses that have done well through your network, not necessarily unicorns?
Sid Mofya: Yeah, there are some companies that we invest in knowing they won't become huge outliers. This often happens in nascent ecosystems. For instance, when venture capital started in Greece, it was about proving the case for venture capital and investing in solid companies. We've seen this happen many times. Australia is an up-and-coming ecosystem where venture capitalists and angels make such investments. However, as the ecosystem matures, it becomes more competitive for investors.
The hardest part of an investor's job is raising capital for their fund. They need to compete with others raising money to show their limited partners that they find the best companies. After the ecosystem develops, it becomes harder to justify such investments. Early on, and for angel investors and angel syndicates, this happens too.
For example, angel syndicates gather around a cause or sector they believe in, like manufacturing or supporting women founders. They invest because they want these products to exist. If you have a specialized business that aligns with their interests, they could be a good fit.
Nic Lucas: Just as we wrap this up, given the economy, what's going on, and the resurgence of Bitcoin, what's the current state of blockchain and crypto entrepreneurship? The news reflects doom and gloom, but what are you observing on the ground?
Sid Mofya: I believe it's an exciting time to be an entrepreneur. It feels similar to when the internet first emerged. The economics of starting a company have changed rapidly with AI. The ability to reach and serve people has improved significantly. It's becoming cheaper to start a company, and now is the time to figure things out. This coincides with the economic correction, creating a self-reinforcing cycle. We'll have a period of reckoning, but once we find cheaper ways of doing things, we will do more than ever before. We are at the ground floor of a new wave, making it a great time to build.
Nic Lucas: That's a nice and optimistic note to finish off.