3. OpModel
Intro
Venture Capital Firms are Buy to Sell Companies
Data Source: Sugarfree Ventures Proprietary Research
VC Firms are Buy and Sell FirmsBuy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel Source Build Sell
Maximize Dealflow
▪ See Deals
Understand Supply
▪ Types of Exit Funnels
Build Competitive Dealflow
▪ Be Able to Win Bids
Know-How
▪ Understand Company
Network
▪ Staffing, Customers
Frameworks
▪ Venture Building
Deal Flow to Sales Match
▪ Find exit ops
Build Sales Flow
▪ See Follow-Ons
Build Competitive Sales Flow
▪ Be able to place companies
Map to Sell Capacity
▪ Select Bids
Map to Source Capacity
▪ Select bids that sell
Capability Model
Operational Strategy
Generic Strategies
4. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research
They also need a framework for Operationalizing how they create value
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1 Find Company
▪ <2% of VC Index performs >20 X
▪ Top performers drive 40 – 60% of fund returns
▪ Understand deal flow and build VC model to it
▪ Find the right company in the ecosystem
▪ Win the bid for the right company in the ecosystem
▪ Look in the right ecosystem
2 Fund Company (adequately)
▪ Cheap companies stay cheap (“Multiple Expansion”)
▪ Less capital deployed = Less growth realized
▪ Cadence (Initial, Extension, Follow-on) matters!!!
▪ Find the right company in the ecosystem
▪ Win the bid for the right company in the ecosystem
▪ Look in the right ecosystem
3 Staff Company (adequately)
▪ No company comes with a perfect team. Period
▪ All companies hire too slow to execute fast growth
▪ Add gaps in the exec team, add key hires early
▪ Have a superior talent network
▪ Have the brand to attract talent network
▪ Ensure credible incentives and cultures are in place
4 Venture Build
▪ Learning processes and IT systems is too slow
▪ Finding data architectures and appraising value hard
▪ Easy to congest slides and frameworks take time to make
▪ Have a modular system of processes and frameworks
▪ Have experts to tailor them to the business (model)
▪ Help company get structured and organized quickly
5 Focus Company
▪ Finding most accretive capital deploy is hard
▪ Spending too much time on bad segments is easy
▪ Improving on design, UX and speed is hard
▪ Get company to spend least on useless activities
▪ Get company to spend least capital on dead ends
▪ Focus on key processes one step at the time
▪ Be a good board member!
7 Syndicate
▪ Bring in new investors tailored to business need
▪ Add enough capital to speed up the process
▪ Consider investors with bridges to exit funnel
▪ Understand your funnel early on
▪ Build network to VCs that fit into the funnel
▪ Bring in the right VCs at the right price at the right time
8 Funnel Company
▪ Quickly classify company into exit funnel
▪ Build company and syndicate towards funnel
▪ Get all stakeholders behind the funnel
▪ 2x companies follow different paths than 100x ones
▪ Identify quickly what type of company you deal with
▪ Match company to follow-on VCs that operate in this
funnel and know how to push towards exit
6 Gear Execution + Provide customers
▪ Ensure all staff is 100% “in” and 120% utilized
▪ Eliminate even more waste activity
▪ Help company translate metrics into insights
▪ Spend money on the experiments that matter
▪ Help company read the experiments and act on it
▪ Provide insights to speed up the learning process
▪ Provide frameworks to speed up capitalization of insights
How to operationalize MOICs and IRRs?
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
5. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research
Beware the Power LawBuy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
Distribution by Exit Valuation of Global Venture Portfolio
(CB Insights 2016)
All funds equally share low performers (Ben Evans)
Tha basics of the power law:
▪ Distribution of types of companies, e.g. Exit Multiple vs Seed Valuation or Exit Valuation, in all
portfolios is quite stable. Some underperform, some overperform. (1st Graphic)
▪ Overall the consensus rejects the ideas that managers are able to select winners. (2nd graphic)
▪ GPs invest into companies that all could be potential outliers, but most of them are not.
Portfolio Composition matters:
▪ Most companies sell below 50 Million and hence only Exit into regional M&A players with
limited budgets (e.g. MidCaps)
▪ Many more (37%) exitbetween 50 Million and 400 Million to a variety of MidCaps and
Corporations
▪ Only very few reach outlier valuations and exit late via IPO, Buyout or large corporate M&A
▪ Every VC needs to able to assess how to funnel a company in the portfolio towards the Exit.
▪ The later the stage, the more likely the VC has to execute the M&A himself and needs
to build a network.
▪ The earlier stage funds have the luxury of only needing to build networks with later
stage funds that are then able to exit the low performers early.
▪ Both activities are key part to the value creation process.
The relationship to value creation?
▪ Low performing companies need to be built different and prepared for an early exit. And they
create more value if they understand this mechanic and support the process.
▪ Outliers can only become outliers if getting the right support and attention. Most value creation
for the fund itself is in this segment. And most resources go to these outliers.
▪ The Capability and Credibility of the VC – discussed later - is key to get deals in and fit into the
venture capital ecosystem, but selection has no prediction value on the success of the company.
Value creation is not in “research” or “sourcing” – although bad sourcing leads to more
underperformers in the portfolio - , but in preparing companies for the right funnels and
managing the funnel towards Exit.
6. OpModel
Intro
6
Value Creation is a Network Game. Network Management is a Sales Game
Multi-Stake Holder Sales Problem : GPs must excel in sales a varied set of stakeholders . Foremost it is a sales and marketing job .
Sourcing
& Dealflow
Venture Support
Syndication & Follow-On
Exits
LPs
Talent
Key Partners
▪ Partners Some emerging managers raise large funds and hire top partners. It can make a difference
▪ Investment Teams Banker, Consultant, Entrepreneur and Quant/Tech Talent DNA requires skill to attract
▪ Venture Support: Hiring to cover all basic areas of venture support also isn’t easy, given other needs
▪ Investors Entrepreneurs, Angels, High Networths, Family Offices, VCs, Governments, Institutionals
▪ Agents Working with strong agents especially in larger funds to access hedge funds and instit. Is key
▪ LP Info Some LPs also play key role in matching companies to GPs. Identifying highly networked LPs can be critical for emerging GPs to find syndication partners
and funnel dealflow to the right lead investor
▪ Venture Funnel Follow-on investors that believe in similar thesis and share view of market need to acquired and nurtured. Deciding on follow-on vs. secondary more difficult
▪ Strategic M&A Especially in earlier stage where most of the portfolio exits the funnel early, building relationships into exit market is key
▪ IPO Even early stage investors should be aware of the opportunities around listing on the stock market. Entrepreneurs won’t know.
▪ Co-Investors Lots of competitor intel and relationship needed to understand who to syndicate with. Who shares the thesis. Who leads, who follows. What value-add
▪ Follow-Ons Might be easy to funnel an outlier to US investors. Far harder to find follow-ons for a weak company without ruining trust if things go wrong
▪ Risk Sharing Special credit for funds that accept the beat to their balance sheet and enjoy sharing deal flow to syndicate over deals. Relationships and trust matter.
▪ Experts & Advisors For due diligence, ad-hoc support, consulting and other tasks, you always need an expert to bring in to assess the situation and find ways forward
▪ Venture Partners For branding or actual value add, finding top venture partners with experience and actionable knowledge is hard. Having them on payroll on harder.
▪ Network Small insights and comments and sharing research, frameworks or networks can also mean more value. Good reputation brings value in any case
▪ Hiring Pools Having the brand to attract top talent and having a talent pool to touch down with in case of need is another key source to differentiate and drive value
▪ Consulting If things need structure, deep analytical thinking about markets, processes, strategy and the likes, it never hurts to have consultants in the rolodex
▪ Banking Same applies to bankers. Complex financial engineering, gearing KPIs and driving company towards investor expectations is a bankers thing
▪ Customers The one single most important feature for early stage and late stage is access to customers. Trust and relationship can open doors and boost valuations
▪ Fund Admin On basic level, good fund admin and reporting keeps LPs happy. Harder in multi-GAAP
▪ LP Panels LPs are not only about funds. Thought leaders on the asset class have better relations
▪ Lawyers Top law firms and engagements have several layers of value-add. Comes at a price
▪ Due Diligence Experts and specialist firms for proper due diligence can matter in some cases
▪ Sell Side Process For funneling and strategic M&A, having sellside know-how and network is key
▪ Transaction Experts Structuring and executing transactions in due time can help building reputation
▪ Tax Experts Venture support changing tax shields? Complex transactions? Taxes matter
▪ Financing From raising debt to financial engineering to other aspects of finance, bankers matter
▪ Network The larger the network and the stronger the brand of the VC, the more likely the company gets deal flow from VCs, lawyers, entrepreneurs and others
▪ Ecosytsem Know all universities, all accelerators and incubators, all start-up pitches, all local ecosystem angels that see the full picture, build relationship and get deals
▪ Data Data services exist in abundance. Most are quite expensive. Some can be hacked. Using market landscapes, providers like pitchbook to screen deals is key
▪ Other xxx
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
7. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research
All strategies really depend on the stage and position of the GP and its funds
Start-Up
Ecosystems
Angel
Investors
Seed
Investors
Series A
Investors
Series B
Investors
Exit Channels
Regional companies
in regional clusters
Regional angels tracking
local ecosystem in all sectors
Regional and cross-
regional VCs
National and
cross-national
International
and Global
International and global on top performers,
more regional and small in low performers
1 Bn+ Exit Channel: IPO, Mega-Exit
300 Mn – 900 Mn Exit Channel: Small IPO / Exit
100 Mn – 200 Mn Exit Channel: Cross-National M&A
40 Mn – 100 Mn Exit Channel: National M&A
< 40 Mn : National M&A and Liquidation
Tier 1
Tier 2
Tier 2
Tier 3
Tier 1
Tier 1
Tier
2
Tier 4
Tier
3
Tier
4
Where to sit in the ecosystem?
?
?
?
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
8. OpModel
Intro
8
Position in Funnel depends on capabilities. No Capability -> No Credibility -> No Network -> No Value
Deal Flow
Research
Brand, Reputation
and Performance
Go-To-Market
VC Relationships
Credibility = Capability Problem: VC funds need to find a way to position themselves in their competitive landscape in the funnel
▪ Starting point First time managers don’t start multi-stage funds. Everyone starts somewhere and background dictates credibility, This is not Hedge Funds were some
kids can run a 5-6 year 50% IRR using a quant model and raise a million dollar and then billion dollar fund. It is a network industry with gate keepers. The
starting point provides credibility and from there the fund expands into earlier or later stage, based on credibility, performance and growth appetite.
E.g. a Early stage fund might expand into late stage by increasing commitments. Or by raising follow-on funds for its top investments.
▪ Maturity Asset managers start in an entry point, then compete for metrics and finally turn into process driven funds that can replace managers easily. The latter is
more true for very large funds that can essentially live from the management fee. If they choose to do so, they will turn more quant and risk-driven and
focus on diversification and allocation, having enough power in the market to be competitive on bids. Very rare in the VC industry, though.
▪ Network Drives position in the funnel and core competences of the GP team and defines levers for adding tangible value
▪ Capability Providers entry point into sales and networking activity. Why is this fund there? What is the USP to companies, VCs, LPs?
▪ Credibility Execution on Capability and Network model together with deal sourcing and winning bids and marketing creates the portfolio
▪ Performance Value Add during Management Phase and ultimate ability to funnel investments (network and credibility based) generates returns to raise more funds
Building Expertise
▪ Macro/Quant Funds extremely heavy on quant data (benchmarks, system dealflow, valuations) and macro more likely to be in later early stage or early late stage
▪ Vertical Skills More common is building very deep sector expertise in particular verticals covering tech, customers, experts, buyers, investors and the likes
▪ Deep-Tech Some funds focus on being extremely competitive on bids for deep-tech and being extremely good at assessing merit in deep-tech.
▪ Frameworks From generic venture building frameworks to org design and hiring portfolio frameworks. Knowing what drives returns and alpha is key part of research
▪ Market Appetite A key risk to VCs is finding no co-investor, no follow-on and no exit. All market participants follow the herd and knowing market demand is critical.
Caveat: Our studies showed that asset selection is not working in VC. For now it remains a network industry heavy on sales. Know-how does not always pay off
well in such industries. Expertise is all about adaption to the funnel ecosystem and positioning/differentiation. Specialists can be a viable asset for co-invests
and thereby build a position in the market. This leads to capability => credibility effect and expands deal-flow via co-invests.
▪ Market Insight Sharing dealflow, doing deals together, doing marketing. VC relationships are vital to create additional sources on insights about what is going on
▪ Market Thesis A critical part from all the interaction is reverse engineering the true thesis of other investors and to understand how this fits into the general thesis of GP
▪ Intelligence Every investor has weak spots and strengths. Who to call to get value-add? Who to call to push a bad deal? How to engineer a deal for an investor? Intel.
▪ Credibility All interactions also build or destroy trust. And trust builds credibility if the positioning is sound. A deep-tech VC wants to be a partner on deep-tech issues
▪ Market Insights Deal flow tells an investor if the quality of incoming deals or actively sourced deals looks competitive. Otherwise a VC needs to iterate just like a start-up
▪ Deal Screens In any case, having founder calls and going deep on any potentially interesting “type” of deal allows free access to market insights and investors take it
▪ Founder Pipeline Apart from getting free research, the # of viable entrepreneurs is limited. Deal flow is good to assess what entrepreneurs are out there and build a pool
▪ Venture Relations Being a good VC always helps. Entrepreneurs without the right background still have a network and might open referrals to viable organic leads
▪ Network Insight In the very worst case, unviable business cases cast light on entrepreneurial ecosystems and provide insights on hunting grounds, eh, sourcing ecosystems
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
9. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research
Network + Funnel Position + Positioning => Core Activities
1 Find Company (Sourcing Funnel)
▪ <2% of VC Index performs >20 X
▪ Top performers drive 40 – 60% of fund returns
▪ Understand deal flow and build VC model to it
2 Fund Company (adequately)
▪ Cheap companies stay cheap (“Multiple Expansion”)
▪ Less capital deployed = Less growth realized
▪ Cadence (Initial, Extension, Follow-on) matters!!!
3 Staff Company (adequately)
▪ No company comes with a perfect team. Period
▪ All companies hire too slow to execute fast growth
▪ Add gaps in the exec team, add key hires early
4 Venture Build
▪ Learning processes and IT systems is too slow
▪ Finding data architectures and appraising value hard
▪ Easy to congest slides and frameworks take time to make
5 Focus Company
▪ Finding most accretive capital deploy is hard
▪ Spending too much time on bad segments is easy
▪ Improving on design, UX and speed is hard
7 Syndicate
▪ Bring in new investors tailored to business need
▪ Add enough capital to speed up the process
▪ Consider investors with bridges to exit funnel
8 Funnel Company (Sales Funnel)
▪ Quickly classify company into exit funnel
▪ Build company and syndicate towards funnel
▪ Get all stakeholders behind the funnel
6 Gear Execution
▪ Ensure all staff is 100% “in” and 120% utilized
▪ Eliminate even more waste activity
▪ Help company translate metrics into insights
Understand your Ecosystem Invest with Thesis you can execute Carefully manage Economics
for you and your syndicate
From before you raise your fund and choose the stage
you invest in, identify the sourcing channels you can
access. From the sourcing, you can derive what type of
companies are coming out of your sourcing funnel.
Understanding if you are sourcing 100x, 10x, 5x or 2x
companies is important for the entire execution model
of the fund. It defines which types of exits are possible,
and the follow-on investors you can ask to help you
build the companies for that exit. They, too, will have a
understanding of their supply chain and some fit letter
and some fit worse.
With funnels and multiple expectations of your companies
defined, build all your venture building frameworks around
this particular funnel.
Companies exiting at 50 Million with slow complex sales
processes and slower learning founder teams need different
support than companies existing at 500 Million, with
incredible founding teams.
Hires look different, processes look different, focus exercises
look different. And the speed of gearing execution and KPIs
looks different.
With a clear view on the type of companies, their
trajectories, their risks and your ability to work with them
and gear value, You can also think about capital allocation
cadence. When to bring in how much capital, what
extension investors to consider when and why and how to
time and value the extension rounds so everyone can go
home with a decent risk to the portfolio and
MOIC and IRR potential.
Think teamwork and always think funnel and expectations.
Adapt Operational Model to Venture Financing Funnel Ecosystem
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
10. Venture
Funnels
10
Operational Model Summary by Stage
Angel Pre-Seed Seed Early Late Growth
Who ▪ Individual
▪ Group / Syndicate
▪ Club (like Pre-Seed)
▪ Incubators
▪ Nano VCs (< 25m)
▪ Micro VCs (< 100m)
▪ Super Angels
▪ Angel Clubs (<100m)
▪ Micro VCs (<100m)
▪ Seed (<300M)
▪ Multi-Stage (< 10 Bn)
▪ Early VCs (< 500m)
▪ Multi Stage (< 10 Bn)
▪ Late Stage VCs (< 5 B)
▪ Multi-Stage (< 10 Bn)
▪ Multi-Stage (< 10 B)
▪ Growth VC (< 10 B)
▪ Buyout (< 20 B)
▪ Banks (< 100 B)
▪ Hedge Funds (< 5 B)
▪ Corporates (< 100 B)
Stage ▪ Founding
▪ Angel
▪ Pre-Seed
▪ Angel
▪ Pre-Seed
▪ Seed
▪ Pre-Seed
▪ Seed + Series A
▪ Later Series if distressed
▪ (Seed)
▪ Series A – C
▪ Later Series if distressed
▪ (Seed)
▪ Series B – IPO
▪ Typically no distressed
▪ Series D – IPO
▪ No distressed
Investment Volume ▪ $ 50 k - $ 2 M ▪ $ 50k – 1 M ▪ $ 500k – 5 M ▪ 5 M – 100 M ▪ 20 M – 600 M ▪ 140 M – 900 M
# of Invest per Fund ▪ No fund, 3-5 invest p.p. ▪ 10 – 100 (12-15 usually) ▪ 15 – 100 (30-45) ▪ 12 -30 (15-20) ▪ 8 – 25 (12 - 18) ▪ 5 – 12
Valuations ▪ 2M – 7 M ▪ 2 M – 5 M ▪ 4 M – 16 M ▪ 14 M – 300 M ▪ 500 M – 5 B ▪ 500 M – 20 B
People / DNA ▪ High Networth
▪ Entrepreneurs
▪ Specialized ANgels
▪ “Business” people
▪ Networkers, Sales DNA
▪ Emerging VCs (Entrepreneurs)
▪ Bankers
▪ Consultants
▪ Entrepreneurs
▪ Entrepreneurs
▪ Bankers
▪ Bankers
▪ Top-Executives
▪ Entrepreneurs
▪ Bankers
▪ Hedge Funds
Sourcing ▪ Local/City
▪ Personal Network
▪ Vertical
▪ Regional/National
▪ Ecosystem Watch
▪ Screening
▪ Tap into Incubators
▪ Regional/National
▪ Verticals
▪ Ecosystem Watch
▪ Screening / Deal flow
▪ Tap into incubators,
network, Seed VCs
▪ Co-Invests/Syndication
▪ Cross-National / Global
▪ Also Vertical Focus
▪ Global Activity Watch
▪ Disciplined Screening
▪ Deal flow / Reviews
▪ Co-Invests/Syndication
▪ Global, no vertical focus
▪ Selecting from global funnel
▪ Sourcing Agents
▪ Very heavy due diligence
▪ Clear thesis on building value
▪ Only investing with thesis
▪ Global, Financial Driven
▪ Selecting from global funnel
▪ Sourcing Agents
▪ Competitive deals
▪ Clear thesis driven (financial)
Value Add ▪ Money
▪ Advice
▪ Introductions
▪ Coaching
▪ Judgement
▪ Customer intros
▪ Money
▪ Frameworks
▪ Cohort / Team
▪ Advise
▪ Hands-on support
▪ Customer intros
▪ Money
▪ Hands-on support
▪ Frameworks
▪ Board Guidance
▪ Customer Intros
▪ Hiring Support
▪ Money
▪ Network and Strat. Support
▪ Stronger Board Guidance
▪ Customers and Executives
▪ Partnerships
▪ Money
▪ M&A opportunities
▪ Strategic Partnerships
▪ Financial Engineering
▪ Top Executives
▪ Operational Restructuring
▪ Money
▪ M&A opportunities
▪ Financial Engineering
▪ Top Executives
▪ Operational Restructuring
▪ Built-up for IPO
Funnelling ▪ Pre-Seed / Seed
▪ Other Angels
▪ Seed VC network ▪ Seed Co-Invest
▪ Series A network
▪ Strategic M&A / Exits
▪ Late stage network, banks
▪ Strategic M&A
▪ IPO (rarely)
▪ Growth investors
▪ Strategic M&A
▪ IPO (rarely)
▪ Buyouts / Hedge Funds
▪ Buyout
▪ IPO
▪ Strategic M&A
Exit Capability ▪ Low ▪ None ▪ Regional MidCaps
▪ Reg. Corporates
▪ Active sourcing
▪ Cross-national M&A
▪ Tech sector M&A
▪ Buyout, basic IPO
▪ Global M&A
▪ IPO, Direct Listing, SPACs
▪ Buyouts
▪ Same as Late
▪ Purely exit focused
▪ Value Engineering
% Exit in Portfolio (estimates) ▪ < 5% ▪ 0% ▪ < 10% ▪ Up to 80% ▪ 100% ▪ 100%
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
11. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research 11
Strategies can vary independent of Funnel Position (1/3)
Conviction Financial Return : 1000x Investors (Multi-Stage Funds)
Stand Alone Growth (Seed to Late Stage Tier 1 – Tier 4)
Investors expect the company to grow without external help and see a strong
overall company on the path to success. It is very likely that the profitability
and market position is attractive for IPO or a strategic investor.
Value Add Model will increase growth (Entrepreneur VCs, Rocket, Tier 1 US Seed)
Customer and hiring network fits the company very well and can be used to
drive the revenue building and operational improvement after the investment.
Investor can invest pre-improvement and gets a bargain. Investor is sure there
will be follow-on financing and the same logic as the stand-alone model gives.
Capital Intense Business with Attractive Defensible Market Position
This is the old-school venture capital case. The initial investment to build a
defensible market position requires substantial upfront investment into R&D
(e.g. Google Search Index) or into the asset base of the business (e.g. eScooter).
Only limited amount of investors are willing to provide the capital and the
potential for profitability and cash flow is substantial. The market position will
be major, the market is huge, the position can be defended from new entrants
and old
Hyper-Speed Winner Takes All Market Grab (Accelerators, Seed VCs, Multi-Stage)
The actual technology or product might not be capital intense, but the market
requires substantial marketing and sales activity to build a strong position in
the market very quickly. Network effects provide a winner takes all market and
the position is highly defensible. Examples include Facebook, Twitter, TikTok,
Instagram, LinkedIn
Conviction Financial Return: 100x Investors
Opportunity Funds : High Conviction
Early Stage Investment in potential Mega Investment (Most Seed/Early)
Small Seed or early stage investor invests into a company that might not
reach its milestones with the investment, but might catch interest of very
large investors that will then lift the valuation and return the money. Ideally
the larger investors will buy the existing shares early on via a secondary
sale.
Quick Flip Opportunity (Early Stage / Late Stage Funds, Corporates, PE, Banks)
Company is already grown substantially and could attract M&A investors.
The founders might be willing to sell but want to maximize the exit
valuation of the company by bringing in new investors. New investors
might open new strategic accounts, provide a stronger brand value. If the
current valuation of the financing is still far below the potential purchase
value of the strategic investor, the investor can capture a decent money
multiple in a very short time frame which will boost the investors IRR.
Sector-Thesis Investment.(Quant Seed VCs, Multi-Stage Funds, Late / Growth)
Some companies build their cases by promising their investors to offer an
exposure to a particular sector and to invest into the top performing
companies within the current generation of companies in the target stage.
Let’s say there is a new development in Internet of Things technology. The
majority of new companies bringing in new technology into the market is
expected to launch in 2020. So in 3 -5 years time, the most promising ones
will emerge to raise Series A funding. The investor raises a fund with the
goal of investing at least 20% of this fund into the top performing
companies in this segment. Giving access to its investor to the new
technology segment and maybe being a bridge building for future M&A
activity.
Most Common in Seed / Early Common in Early-To-Late Stage
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
12. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research 12
Diversified Investment Strategy / “Outlier Strategies”
Holistic Venture Asset Class Investors (Late, Growth, Buyout)
Goal is to offer a diversified exposure to top companies in to growing
verticals and sectors. A 1 billion dollar fund might aim at investing in Series B
stage into the 5 most promising verticals ranging from pharma to software.
Investing into the strongest companies in the sector and thereby locking in a
unique return profile that suits the allocation of their institutional investors.
Return expected independently from exit strategy. Both IPOs and strategic
M&A is an option. This strategy increasingly also fits the style of private
equity funds who buy companies to generate returns from the strong cash
flow profile of the strongest high growth companies in specific verticals.
The 500 Start-Ups Early Stage funds (Pre-Seed/Seed)
Some investors are focused extremely of capitalizing on the power law of
the venture capital ecosystem. They can range from Seed Investors that
place 150k investment bets into very early stage companies – like Y
Combinator – to investors capturing 50 – 100 investments investing up to 2
– 5 million. An example would be the German High Tech Founders Fund.
Also, there is an increasing number of fund of funds players that invest into a
series of early stage funds to get a larger diversified exposure to the early
stage market.
The goal is to invest into enough potentially failing start-ups to get an early
access to a potential outlier. A small set of outliers is then returning the
fund. This strategy is highly different from the high conviction portfolio
models of regular VC funds who invest in mere 25 companies.
The special case of e.g. Y Combinator types is their proximity to the 1000x
investors and their ability to attract a high number of potentially outlying
companies.
Strategies can vary independent of Funnel Position (2/3)
Strategic and Buyout Funds in Venture Capital
Dealflow Funds (Regional Seed / Early Stage, Corporate VCs)
Some funds promise their investors an early access to young companies to
scout and probe the market for upcoming new ventures. The goal is usually
not return driven. Rather companies shall be guided through the early phase
of market discovery and product validation. After this stage, the companies
are being prepared for a strategic exit at comparatively low exit multiples.
Strategic Investors (Regional Seed / Early Stage, Corporate VCs)
An even more aggressive strategic approach is to identify companies in the
early stage to directly connect them – as suppliers – to strategic bidders. The
companies then are guided – via board activity and investors – to develop
specifically for a strategic buyer. These type of investors may take in co-
investors to bring outside management and operational know-how into the
board and support staffing for particular operations engineering purposes.
But at some point the companies are approached for a strategic buyout. The
valuations of the buyout can be even lower and the buyouts may happen
earlier. The investors typically build a lot of pressure on the company to
accept the terms and might even be mislead in the growth path to achieve a
particularly low valuation.
Capture and Kill Investors (Strategic, Single LP Seed/Early Funds)
The worst of these types of strategic investors are of such kind that they use
their fund vehicles to gain control of the company and aim at liquidating the
company. This can happen if the strategic limited partner is in direct
competition or invested in a competitor. From destroying bidder competition
and reducing valuations and cash-intake to installing executives that work
against the company from structuring unproductive boards, the repertoire
can be big. But such funds are rather rare.
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
13. OpModel
Intro
Data Source: Sugarfree Ventures Proprietary Research 13
Strategies can vary independent of Funnel Position (3/3)
Distressed and Special Situations
Distressed Investors (PE investors and Multi-Stage Funds)
If a company just did not perform well or did not raise enough cash to validate
the market, but there is still financial value to be captured down the line, a
distressed investor typically becomes interested. Strategies can be varied. Most
of the time they support buying out existing shareholders and perform a
recapitalization (“re-cap”), provide sufficient liquidity for the company to reach
the next milestones. They typically also come with operational support and might
add executives or even restructure the management layer completely.
Special Opportunity (Regional / Vertical Specialists, Early/Late Stage)
A special form of distressed investor looks at distressed investments from a
strategic M&A perspective. A company might be under control of a strategic
investor or capture and kill investor and be set-up for doom. Or it might simply
be distressed by having underperformed on its milestones.
A special opportunity investor might identify the company as a potential M&A
candidate for a rivalling strategic buyer or as a portfolio company for a vertical
specialized private equity investor. The goal is again to structure an investment
the restructures the cap table, management and sets a defined agenda in
restructuring the business to dress it up for a buyout.
There are also specialized funds that support current executives in buying out the
company from existing investors and the original founders to turn the company
around under the leadership of the existing insiders and their thesis. The exit
from such a strategy could also be the return to the classical venture capital
funnel or growing the business towards cash flow and allowing a full
management buyout of the company.
Empire Builders
Building Portfolios to build the next unicorn (Late/Growth/Buyout)
Especially larger funds who have experience in understanding industry
dynamics and market positions sometimes work towards building very large
companies with diversified business segments by strategically investing into a
set of related companies. The company with the strongest growth rate, solid
and experience management and good cash flow profile is used as the
frontrunner of the empire building process. If the company grows fast
enough to have an attractive valuation, it can use its valuation and cash flow
to buy out the other companies in the investor portfolio.
In the end, the business can enter a public listing.
Capturing Industry Leaders with attractive Cash Flow (PE/Buyout/Hedge Funds)
Another simple strategy is to simply collect high growth companies with very
strong operating margins and promising outstanding future cash flow
profiles. Instead of listing these companies, the investors – typically late
stage private equity buyout funds – merely collect the cash flow profile and
offer it to their institutional investors. They essentially offer something like
private market IPO markets. The notable difference is the lower cost for
furnishing reports; a very good network to add new executives and improve
the operating performance; and direct control over the company which is
beneficial to carefully management the capital and debt structure of the
business. By adding debt, the funds do not only offer stronger equity returns
to their institutional investors, but also play a vital part in a private corporate
debt market and strengthen their collaboration with debt funds and brokers.
Buy and Sell
Companies
Value Creation
Model
Sales Model
Position in Funnel
Capability Model
Operational Strategy
Generic Strategies
15. Venture
Funnels
Data Source: TopTal (Link), Crunchbase data 15
Start-Up Creation World Wide
The World of Start-Ups and Investors
▪ Every year, 20.000 to 40.000 start-ups are created worldwide
(Crunchbase data)
▪ 15.000 Seed investments on average are made per year,
when including Angels into the Seed investing pool. Roughly
25%% to 65% hence never receive any funding. This requires
15.000 people or more to look at start-ups, negotiate with
start-ups and eventually deploy capital into start-ups.
▪ Annual Early stage investments (Series A + B) are around
7500 per year. This implies approx. 5000 Series A
investments. A survival rate from incubation to Series A of
25% to 12.5%. Approx. 85% of start-ups do not make it this
far. And yet, 5000 Series A stage investors need to look at
deals every year and make a judgement call on whether to
invest.
▪ The supply of start-up ideas spans a financing ecosystem
from the first Angel investment to the potential Unicorn IPO.
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Conversion
Ratios
Funnel
Visualizations
16. Venture
Funnels
Data Source: Crunchbase Global Venture Report, Global Data 16
Global Deal Capacity of the Venture Capital Ecosystem by Stage of Investment
0
2000
4000
6000
8000
10000
12000
2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2 2020 Hq
Angel / Seed Early Late Growth
# Deals
Numbers of investment in each stage reveals GP market
▪ Growth stage with $100m+ rounds fairly flat around 57 – 70
deals per quarter and divided by few later stage Venture
funds funneling companies towards final stages of growth
before preparing outsized exits into public markets, buyout
or corporate M&A. Likely maximum number of 25 - 45 active
lead taking funds globally. With <120 total co-investors.
▪ Late stage activity with approx. 500 deals per quarter and
average of $75m capital deployed indicates a wider set of
active market participants comprising of late stage funds,
investment banks and institutional direct investments. With
lead investors requiring approx. 120 – 180 funds globally to
process the stable funnel of deals. Net of Growth funds,
additional 80 – 140 funds. Regionalized activity very likely, as
well as corporate involvement. With <300 co-investors.
▪ Extreme around Seed funding with up to 5.000 deals per
quarter or 10.000 deals per year. With average 5 years
investment periods and 3.5 deals per investor per year, a
range of approximately 2900 – 3500 early stage investors
cover the early phase of the venture funnel globally
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Conversion
Ratios
Funnel
Visualizations
17. Venture
Funnels
Data Source: Guesstimates and data from Crunchbase, DealRoom 17
Estimating Deal Capacity by applying the power law to VC counts per stage
Estimated Global VC Ecosystem Funnel
▪ Summarizing previous slide, approximately 3.000 – 7.000
Seed VCs moving down to approx. 45 – 70 Growth VCs.
▪ A Growth VC would build relationships with a maximum of
the 200 Late Stage VCs to source deals and position Growth
fund for finding exit opportunity.
▪ Late Stage VCs likely not able to have relationship with 2.050
Early Stage VCs (Dunbar’s Law). Clustering of ecosystem now
starts. While top global companies will be funneled inde-
pendent from ecosystem clustering, more specialized
clusters emerge to support companies in geographically,
vertically or otherwise focused funding trajectories and Exit
strategies.
▪ The highest clustering being in the clearly locally operating
Seed VCs who will likely concentrate larger parts of their
portfolios on companies whose Exit funnel – within 3-5 years
and 2-3 follow-on rounds – they can reasonably predict and
handle.
3,900
1,500
130 25
3,500
2,000
400 110
7,400
3,500
530
135
Seed VCs Early VCs Late VCs Growth VCs
Min Variance
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Conversion
Ratios
Funnel
Visualizations
18. Venture
Funnels
Data Source: Crunchbase Global Venture Report 18
Exits from the Financing Funnel indicate local strategies exist
100%
47%
41%
11%
1%
Seed Out to Early Out to Late Out to Growth Survivors
The clustering element also is visible in the share of companies
who exit the financing funnel after a particular stage. VCs with
exposure to their unique portfolios need to identify local strate-
gies that allow them to source for a particular build and sell
model in the local market.
Post-Seed Exit metrics pose unique challenge
▪ With 47% companies leaving the venture financing funnel
after their Seed stage investment, distribution of exit
scenarios drives the chase for strategies in the market:
▪ Liquidations 65%
▪ Fire Exits 20%
▪ < 1 MOIC Exits 8%
▪ Low MOCI Exits > 5%
▪ Shareholder / Management Buyout < 2%
Post Early Exit towards 0.8 – 2.2 MOICs
▪ With 44% exiting the Venture Funnel as a norm, Seed and
Early stage VCs have to funnel their investments quickly
into a more local but still acceptable Exit to Mid-Cap M&A.
Post Late Exit towards offering 2.2 – 8.0 MOIC
Companies exiting from the funnel still need care
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Conversion
Ratios
Funnel
Visualizations
19. Venture
Funnels
Data Source: Crunchbase Database 19
Visualization of Funnel
Angel Pre Seed Seed Series A Series B SeriesC Series D Series E Series F Series G Series H Series I Series J
Global 1666 1279 6900 7540 5724 3791 2322 1366 673 312 129 24 8
Europe 607 727 3175 3050 2255 1651 1082 719 399 205 82 11 5
USA 926 1001 4784 5398 4477 3209 2067 1301 653 303 124 23 7
Number of Investors on Crunchbase
Data available on Crunchbase or Dealroom show funnel
The number of investors committing capital in later Series of
funding is steadily decreasing. While numbers might be inflated by
(a) earlier stage investors remaining part of the later stage deals
without contributing capital, (b) multi-stage funds being part of
different brackets, and (c) some later stage-rounds being focused on
bridging underperformers towards Exit, the overall picture tells a
convincing story of a decreasing number of investors being part of
the funnel.
▪ Clear highest density in the early stages in Seed to Series B rounds
▪ While many companies might already exit at this stage and provide returns to their investors
for companies that do no have the capacity or skill to grow to multi-billion dollar companies,
the remainder is funneled to an continuously decreasing number of more globally operating
funds.
▪ The dynamics can also be explained by the need to set-up early stage investors in various
ecosystems around the globe to capture regional opportunities. The sourcing of very early
stage companies from a global hub would be less efficient compared to having regional
specialists living and breathing and working with the regional sourcing, venture building and
identification of early exit strategies to more regional stragic buyers.
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Conversion
Ratios
Funnel
Visualizations
20. Data Source: Crunchbase Global Venture Report 20
Visualization of Funnel
Full Funnel GPs
Several Funds
Multi-Stage GPs
with Focused Funds
Single-Stage
Single-Fund
1 invest,
1 Follow-on
Exemplary Overview of Stage-based Strategies
Different Allocation models over stages
Earlier stage funds typically focused on basic venture building and
spray and pray models aiming at building diversified port-folios of
high potentials in a particular niche. Specialized single stage funds
bring in network and operational know-how around specialized
verticals or business models. Later in the funnel, VCs become
brokers of networks and focus more on building return strategies on
more mature businesses. Some funds operate full funnel strategies
to capitalize on the entire growth of their leading portfolio
companies.
▪ Multi-stage funds typically invest diversified in the early stage and continue to move the best
performers of their portfolio through additional vehicles under management by the GP.
▪ Single-stage funds capitalize on their unique expertise, networks and access to regional
opportunities and serve as brokers of their insights to potentially larger co-investors.
▪ Companies typically try to obtain access to the best single-stage investors that bring most value
at and de-risking for the exit funnel, while also seeking multi-stage funds for additional
capabilities and increasing their chances of convincing investors that they can grow beyond
being a regional, low multiple portfolio company. Full-funnel funds might in addition come in
later on to add their more broad and generic insights into the process and bring in additional
capital and know-how and insights.
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Funnel
Development
Conversion
Ratios
Funnel
Visualizations
Venture
Funnels
21. Data Source: Sugarfree Ventures Proprietary Research
Example Schematic View of the funneling process
Start-Up
Ecosystems
Angel
Investors
Seed
Investors
Series A
Investors
Series B
Investors
Exit Channels
Regional companies
in regional clusters
Regional angels tracking
local ecosystem in all sectors
Regional and cross-
regional VCs
National and
cross-national
International
and Global
International and global on top performers,
more regional and small in low performers
1 Bn+ Exit Channel: IPO, Mega-Exit
300 Mn – 900 Mn Exit Channel: Small IPO / Exit
100 Mn – 200 Mn Exit Channel: Cross-National M&A
40 Mn – 100 Mn Exit Channel: National M&A
< 40 Mn : National M&A and Liquidation
Tier 1
Tier 2
Tier 2
Tier 3
Tier 1
Tier 1
Tier
2
Tier 4
Tier
3
Tier
4
Company moves through funnel
?
?
?
Start-Up
Volume
Investment
Volume per Stage
# of Funds
Funnel
Funnel
Development
Conversion
Ratios
Funnel
Visualizations
Venture
Funnels
