Last time, we looked at how entrepreneurs & investors tell each other stories through the use of tropes during their initial meetings. Business tropes prompt mutual understanding and approval between business partners and can determine whether investors choose to finance your business and begin working with you.
Tropes provide investors with a theme or pattern, allowing them to quickly understand your business now and what future potential you could have. Knowing what trope your firm fits into and how to communicate it to investors is extremely important when considering the next steps for your company.
Being realistic about, and understanding your potential is very important. The ability to clearly communicate your equity story and make your trope attractive to investors and business partners could make the difference in your company being chosen over others, or not – the competition is fierce.
The classic US venture capital model
The US venture capital (VC)-backed firm is a well-known trope, with technology and internet giants Google and Facebook belonging to this tribe.
Classic US VC-backed firms address completely new and innovative market opportunities – the main characteristic of the trope. Facebook catapulted social networking across the globe, while Google took internet search to another level.
Expansive and self-confident, the management team at the US VC model is typically led by highly-charismatic and opinionated founder/s. These easily-identifiable business leaders are the main promoters of the market opportunity the firm presents, as well as key spokespeople for the company. They often present extremely loss-making business plans, but a goal of reaching a very high value exit in excess of $1 billion.
Market opportunity
This trope has a substantial but speculative market opportunity. Investors only expect extremely positive returns from a small number of exceptional companies; perhaps one in ten. A high failure rate of around three in ten is also anticipated, meaning the risks involved may be unacceptable to some entrepreneurs.
Large market opportunities are often very disruptive of existing industries. Some examples from the transportation industry show the different approaches possible. Tesla Motors is betting new electric car technology can replace a substantial part of the market for vehicles powered by internal combustion engines; new technology but traditional business model. Google expects self-driving cars to enable people to pay-per-trip and avoid the need to own a second car; new business model enabled by new technology. Uber is creating a global industry out of local taxi and car hire companies; using the distribution power of the internet to create demand and replace traditional local marketing.
High stakes, high rewards – sometimes!
Normally, US VC-backed companies raise large amounts of capital in successive rounds of finance – Seed, Series A, Series B etc – with increasingly complex capital structures put in place to protect investor interests. These arrangements, as well as only raising finance to last 12 to 18 months, also help minimize dilution for the founders. If a company has great potential this can work very well, but it becomes detrimental to founders if the business cannot meet expectations.
WhatsApp – the mobile messaging app for smartphones – provides a great but rare example of how this trope can surpass founder, investor and market forecasts. After raising seed finance of £250k in October 2009, WhatsApp secured $8 million in venture capital from Sequoia Capital in April 2011, with a further $50 million in Series C funding from Sequoia in July 2013. WhatsApp subsequently announced its sale to Facebook in February 2014, for a staggering $19 billion: consisting of $4 billion in cash, around $12 billion in Facebook stock and an additional $3 billion in restricted shares.
Push hard and fast
If your company fits the profile of the US VC model, I’d strongly recommend to keep pushing the business as hard and fast as you can. My 12-plus years’ experience investing in internet and SaaS businesses and getting to know management teams indicates you must keep extremely motivated and focused. It takes tremendous effort to keep running with this trope and wavering from the path you set out initially can be disastrous. Ensuring you have the right team, the right partners and robust financing to support your business goals can go a long way in helping you stay on track and achieve your ambitions.
At Vie Carratt, we know how to make your equity story ‘hot’ and can offer insight into how to communicate with prospective investors and partners. If you’d like to find out more, please get in touch.
If you missed our first Tropes article ‘What trope do you trigger with investors?’ which focuses on Bootstrapped companies click here.
By David Carratt, Founder and Director, Vie Carratt