How startups can grow with Venture Capital funds.
All of us, professionals, entrepreneurs and other participants in the innovation ecosystem are bombarded with news of negotiations carried out by excellent advisors, billionaire exits, and other exits that are not billionaire, with an unlikely profitability for traditional markets.
In 2020, several movements of this type were mentioned, such as CS Bank, raising BRL 1.3 billion with the assistance of Credit Suisse (EXAME, 2020); Nu Bank, receiving an investment of USD 400 million and preparing for an IPO (A GAZETA, 2021); VTEX, raising BRL 1.3 billion and joining the select group of Brazilian unicorns — startups with a market value of over BRL 1 billion (GAZETA DO POVO, 2020); Neon Payments, receiving an investment of USD 300 million (FORBES, 2020), among other movements.
In conversations with market participants, or even laypeople, we commonly support our expectations in these movements and visualize the ideal exit in each disruptive solution we find in a process of prospecting and analysis, in each substantial disclosure in the most diverse media vehicles, and in each investment round carried out, for example.
However, the dream of reaching the long-awaited finish line distracts attention from the importance of the start.
This is not a criticism of the news and the incorporation of high expectations into the process, after all, the dream is an important source of energy to walk this journey. In the meantime, let’s do an exercise in thinking about the real “big news”.
Perhaps the big news should not be the success of company “X” in its exit or the advisors who participated in the fundraising, but the success of company “X” in building a good start, so that business could grow consistently until the exit performed.
It is known that in this process, may startups die along the road, due to many reasons. According to a study by CB Insights (2019), there are twenty main causes for startups to fail: Unnecessary for the market (42%), lack of cash (29%), inadequate team (23%), being beaten (ignoring competitors) (19%), pricing (18%), unfriendly product (17%), product without business model (17%), inefficient marketing (14%), ignoring consumers (14%), poorly programmed product (13%), loss of focus (13%), disharmony of the team and investors (13%), wrong pivot (10%), loss of passion (9%), failed geographic expansion (9%), lack of funding (8%), legal challenges (8%), not using the network (8%), exhaustion (8 %) and pivoting failure (7%). Among these points, we emphasize the need for cash inherent in startups and how fundraising can contribute to solving this bottleneck — even through the very performance of our fund.
In general, there are several players that can contribute so that entrepreneurs are able to deal with the problems arising from the structuring and operation of their startups, so that they can follow smoother paths to success. Among the main ones, we can mention the Incubators, Angel Investors, Accelerators and Venture Capital Funds.
Incubators can contribute with managerial and technical support (rooms, internet network) that involve the necessary structure for the operation of a company, as well as management, accounting, legal advice, and networking for companies and entrepreneurs for the development of disruptive technologies (ABSTARTUPS, 2017). Angel Investors can add resources — at a time when startups find a funding vacuum (small to attract Venture Capital Funds) — and with the expansion of strategic networking, professional experience, strategic vision of the market and business, as well as management of the company’s daily life (LOSADA, 2020). Accelerators can help with business scalability, without much focus on product technology, management, opening investment rounds for funds, solving institutional problems, among others, through the contribution of resources, mentoring, networking with entrepreneurs and connections with hubs of innovation (DISTRITO, 2020). Furthermore, among these, other players, we: Venture Capital Funds.
Venture Capital Funds, such as Invisto, generally show interest in the participation of startups’ lives in a seed-round (a stage in which startups begin to structure themselves as a business) and in fact participate in later rounds: series A, B, C, onwards — phases in which there is proof of concept and measures of results obtained (Series A), targeting regional expansion, scale and distribution (Series B) and validations in the success model, as well as output (Series C and on) (LOSADA, 2020).
Notoriously, each fund has its investment thesis based on knowledge acquired by partners and investors, and which can be quite divergent, even if it is built by funds inserted in the same markets as other investment vehicles.
Despite the differences in thesis and methods linked to them all, Venture Capital funds (VCs), in the limit, have the important role in the ecosystem of financially supplying the startups’ operations so that there is an acceleration in the development process.
In addition to the financial incentive, to a greater or lesser degree, the VCs also contribute to the startup journey by formulating strategies, knowledge, networking, in addition to other activities, the so-called: smart money.
In this quick reflection, the complexity of running a successful business in an ecosystem of startups is noticeable, in all stages of construction of this company or this type of business, with all players participating in the process, and in all activities of the day-to-day — as an entrepreneur or as an investor — it is clear that the operationalization of all these variables, over time, for the long-awaited dream, is the big news.
We at Invisto are honored to contribute to the construction of a good start; in working with entrepreneurs to enrich the innovation ecosystem. From this perspective, we are evaluating startups linked to our investment thesis, for the composition of our new Fund.
Companies with a B2B business model, SaaS technology, with two or more entrepreneurs, in the traction phase, located in the South and Southeast regions, open to diversity and with some participation at the ESG moment will have priority in our investment evaluation.
