Venture Capital – Who’s the customer?

“We sell, for instance to a company like Microsoft, something they perceive as a Gucci handbag. Something they feel they really need and are prepared to pay a hefty premium for.” This was one out of many metaphors painted by David Sonnek, CEO SEB Venture Capital, when explaining the fundamental mechanisms of venture capital. “We look for businesses that are unique, scalable and with a global market potential.” However, neither the takers, such as Microsoft or Cisco, nor the entrepreneurs are regarded as their customers. Their investors, allocating assets to the venture capital fund, are regarded as their customers. A venture capital firm, such as SEB Venture Capital, offer the opportunity to these customers, such as pension funds, to invest in fast growing unlisted tech stratups, something they otherwise would not be able to do.

We are really happy that we had the opportunity to visit SEB Venture Capital at the SEB HQ and the privilege to listen to David Sonnek’s views on the industry and his inside stories.

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6 responses to “Venture Capital – Who’s the customer?

  1. Definition:
    ”Venture capital is money invested in early stage firms and small businesses with growth potential. Venture capital is invaluable for start-ups with limited operating history, that do not have access to capital markets.” (Investopedia). Venture capitalists can gain large returns, a portion of the equity and may also influence the direction of the company. Cons are the high risks of start-ups to go bankrupt.

    Interesting comments:
    “One myth is that venture capitalists invest in good people and good ideas. The reality is that they invest in good industries—that is, industries that are more competitively forgiving than the market as a whole.” (Zider, 1998).

    ”During this adolescent period of high and accelerating growth, it can be extremely hard to distinguish the eventual winners from the losers because their financial performance and growth rates look strikingly similar. (…)Thus the critical challenge for the venture capitalist is to identify competent management that can execute—that is, supply the growing demand.” (Zider, 1998).

    Conclusion:
    I agree with Zider that venture firms primary criteria probably is investing in good industries. Hence, having your start-up in an emerging, profitable industry increases the likelihood of attracting venture capital. However Zider later says that also the management is important for venture capital firms. I think that in order to have a really successful start-up, one has to be operating in a profitable industry and also have a skilled management.

    References
    Investopedia. (u.d.). URL: http://www.investopedia.com/terms/v/venturecapital.asp

    Zider, B. (November 1998). Harvard Bussiness Review. How Venture Capital Works URL: https://hbr.org/1998/11/how-venture-capital-works

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  2. The nature of VC is high-risk and high-reward investments. According to Peter Thiel we live in a world dominated by “The Power Law”. The Power Law refers to the fact that 0.8% of the deals within VC accounts for more than 50% of the returns. This means that 1 in 100 deals might return more than all other deals combined.

    For the entrepreneurs seeking financing from VCs the implication is that they have to convince the VCs that they will be the next big thing. Good is not good enough. You have to be the best.

    It’s important for entrepreneurs to figure out what they want to accomplish with their business. If you don’t want to go big, as in very, very big – VC is not a good option for you.

    On the other hand, if you have global ambitions and need help scaling up the business VCs might be a good option.

    References:
    https://hbr.org/1998/11/how-venture-capital-works
    http://tomtunguz.com/breaking-down-a-typical-vcstartup-diligence-process/
    http://www.investopedia.com/ask/answers/020415/what-difference-between-private-equity-and-venture-capital.asp
    http://altos.vc/2016/01/paradox-of-the-power-law-in-venture-capital/

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  3. ADDITIONAL TASK – Venture Capital

    Since Venture Capital is such a high-risk investment it is vital that your business idea is very scalable for someone to want to invest. Since the investors know that a majority of start-ups are unlikely to succeed and bring in any money to the investors, the ones that succeed has to grow a lot to cover all the losses from failed companies. Similar to this, you are unlikely to get VC if your business idea is too niche. Even if it is possible to scale, it might be impossible due to simply not enough possible customers, and therefore the VC companies will not be interested.

    To get VC the idea need to be able to grow fast, those companies want quick growth/profit so they can sell off their shares and find new interesting start-ups to fund. Therefore, it does not matter that your idea might be scalable in 5 years, it has to happen now or in the near future.

    Since VC is such high risk, and there are many start-ups looking for capital they can afford to be very picky. As such, they can demand proof of potential and not just invest because you have a nice business plan. They often want the start-up to have succeeded to some degree.

    Sources:
    https://www.forbes.com/sites/dileeprao/2013/07/22/why-99-95-of-entrepreneurs-should-stop-wasting-time-seeking-venture-capital/#151717b346eb
    https://www.forbes.com/sites/dorieclark/2012/11/24/want-venture-capital-funding-heres-how/#2b46b6261197
    https://www.techinasia.com/how-to-get-venture-capital-funding-10-questions-for-startups
    https://www.techinasia.com/how-to-get-venture-capital-funding-beginners-guide-startups

    Liked by 1 person

  4. Venture capitalist tends to specialize and invest within a certain area. In general venture capitalists expect to get a return on their investment 5 to 10 years after the initial investment. Since many start-ups fail they need to get a high return on investment on those who succeed. The start-up team is also important when they invest in a company. A good idea could fail due to bad leadership.

    From this we can draw the conclusion that start-ups with a fast growth potential and scalability are more likely to receive investment from venture capital. The industry is also important, fast growing often tech intense industries are interesting. Additionally, start-ups with a trustworthy team are also more likely to receive capital from VC, e.g. if the team members have previous experience of successful start-ups. Since venture capitalists are looking for relatively fast return on investment they are less interested in firms that are aiming for slow and sustainable growth.

    Sources:

    http://www.investopedia.com/terms/v/venturecapital.asp

    http://www.techworld.com/startups/venture-capital-explained-what-is-venture-capital-company-3642646/

    https://startupxplore.com/en/blog/how-does-a-venture-capital-firm-work/

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  5. The US venture-capital industry is viewed as the engine of economic growth globally. Contrary to many beliefs, venture capital only plays a minor role in funding basic innovation. However, when innovators seeks to commercialize its innovation, that where venture capitalists comes in. In other words to grow the business by providing knowledge and guidance as well as capital. The goal is often to expand the business to a sufficient size to be sold to a corporation with the help of investment bankers. The likelihood of a company to be funded by venture capitalists depends on the innovators and their vision for their product/service. If commercial goals exist, there is a high probability of the company being funded by venture capitalists whereas other more idealistic innovators wants to keep control of their ”baby” regardless of lost opportunities of commericialization. Usually I would think the innovators are prone to see the real potential of their innovation and in most cases I would think that they would prefer to utilize venture capital and consequently see their innovation providing some degree of utlity and satisfaction in the society. As venture capitalists focus on the middle part of the S-curve, which also can be interpreted as one of the toughest parts of creating a successful startup, might also increase the likelihood of innovators seeking venture capital for their business.

    (https://hbr.org/1998/11/how-venture-capital-works)

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  6. In previous courses regarding entrepreneurship I was under the impression that many lecturers had the perspective that VC’s are the last resort of funding of many start-ups since there are tons of other better possibilities. This of course if the idea was good enough… However one must conclude that business creation processes more often end up as failures due to various reasons, for example lack of expertise, not enough connections or to little funding. Accidentally these reasons are some of the concepts that a VC actually could help a start up with, to benefit both parts and pave the way for a succesfull business venture which as explained in this video https://www.youtube.com/watch?v=a4aUX5u90oA. There are though a down side, which I pressume is the one that previous lecturers have had in mind; VC’s have their own agenda which can conflict with your own plan as an entrepreneur. Since they have invested a lot of money in various project, they have huge demands on ROI and overall economic performance since they often claim equity when engaging in a business venture. The other options such as bank loans or funding from private investors could therefore be healthier for your corporation in terms of your ownership, but a VC firm will most likely push you in the right direction if you look to expand and grow your seed as high as possible. Although the influences might not always be in line with your thoughts since the VC and the entrepreneur might have different agendas which is stated in this brief explanation of VC funding: https://www.youtube.com/watch?v=4UostF_73po. With this being said I would not hesitate to engage with a VC I was in need of money and good advice, wherefore I lastly would like to stress that VC’s not should be the last resort of funding, at least if they can provide you with a beneficial network and helpful strategies…

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