demystifying venture capital business
TRANSCRIPT
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Demystifying VC Business
Joshua Agusta - Head of Indigo Accelerator
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ABOUT MDI
• Established in 2015, as a corporate venture initiative of Telkom Indonesia, with mandate to invest in growth stage companies globally.
• MDI combines a VC model with services in providing companies with access to operational and go-to-market assistance after making a financial investment.
• Focus investment: high growth verticals to enhance the digital experience and provide excellent services that ultimately lead to the more demanding customer expectation.
• Co-manage and oversee the Indigo Incubator Program since 2015 and had incubated more than 20+ startups with Indigo Incubator.
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MDI IS FORGING STRATEGIC ALLIANCES WITH MAJOR CORPORATES
InvestmentManagement
Incubation & Acceleration
Objectives Initiatives Partners
StrategicAdvisory
Key Activities
Build startup ecosystem by supporting early stage companies
Indigo Incubator
Mandiri Inkubator Bisnis
- Corporate venturing- Corporate innovation
seminars/workshops- Ad-hoc advisory
Venture capital fund
Collaborative investment activities
• Perform strategic investments in line with corporate innovation agenda
• Maximize financial returns for corporate principal
Leverage MDI’s unique resources to create value in areas uncovered by investment and incubation activities
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SILICON VALLEY - SOUTHEAST ASIA
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60+ INCUBATED IN 3 INDONESIA CITIES• Started in 2013, operating in 3
cities in Indonesia.
• Maintains at least 40% Follow on Funding in every batch of graduates since 2015.
• Assist launched 20+ startups go to market.
• Dual track immersion program to Silicon Valley in partnership with Plug & Play.
• Formed the largest angel network in Indonesia (150+ angel investors attending Indigo Demo Day in the past 2 years).
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COMPANIES
Singapore & IndonesiaSeries A
Indonesia & PhilippinesSeries A
Indonesia & IndiaSeries B
Thailand, Malaysia, Philippines, IndonesiaSeries B
Singapore & IndonesiaSeries B
JapanPre IPO
Singapore & IndonesiaSeries B
Philippines & IndonesiaSeries B
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BATCH 2015 & 2016
45%FOLLOW ON FUNDING
MM 4.5X
WEIGHTED AVERAGE
Total of 35 startups incubated, chosen from
2,000+ entries
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Now New NextRevenue Enhancement &
Cost SavingsNew Growth and Revenue
OpportunityNew Technologies beyond
Telco sector
Investment Thesis
- Future-shaping technologies relevant to Telkom ecosystem (A.I., robotics, space technology, 3D printing, Internet of Things)
- Technologies ready for early adoption in the Indonesian market (Blockchain, big data, cyber security, healthcare)
- Technologies ready for use to solve current problems (Logistics, e-commerce enablers, advertising, cloud computing, payment solution, SaaS, education)
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• Access to large established customer base • Network of partner companies and advisors • Access to later round financing/exit opportunity • Access to ICT infrastructure
• Insights into new markets and technology • Next gen products and services • Domain expertise • New business models for the future • Cost savings
Access to Telkom’s Infrastructure
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VC: 2-Sided Business
DemandSupply
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VC: 2-Sided Business
Demand
1. Things you need to know
before VC pitch
2. How VC Valuations Work
3. Some Investment Trends
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VC: 2-Sided Business
Demand
1. Things you need to know
before VC pitch
2. How VC Valuations Work
3. Some Investment Trends
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3 Things to Find Out Before VC Pitch
1. VC’s Investment Thesis
2. Preferred Ticket Size
3. Preferred Investment Stage
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Different VCs Have Different Investment Thesis
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Now New NextRevenue Enhancement &
Cost SavingsNew Growth and Revenue
OpportunityNew Technologies beyond
Telco sector
Investment Thesis
- Future-shaping technologies relevant to Telkom ecosystem (A.I., robotics, space technology, 3D printing, Internet of Things)
- Technologies ready for early adoption in the Indonesian market (Blockchain, big data, cyber security, healthcare)
- Technologies ready for use to solve current problems (Logistics, e-commerce enablers, advertising, cloud computing, payment solution, SaaS, education)
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Telkom Synergy Value
Business Process Outsourcing
IT Managed Service
E-Payment
Third Party Administrator Digital Entertainment Mobile Subscription
User Base Support (Corporate & Consumer)
Media Services
We Need Our “Users” to Justify Our Investments
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Reve
nue
TimeValley Of The Death
Break Even
Seed Capital
A
B
C & above
Venture Capitals, Strategic Alliances,Mergers & Acquisitions
Early Stage Later Stage
Angel Investors, Seed VCs
IPO
As Well As Investment Stages Preference
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Reve
nue
TimeValley Of The Death
Seed Capital
Venture Capitals, Strategic Alliances,Mergers & Acquisitions
Early Stage Later Stage
Angel Investors, Seed VCs
IPO
As Well As Investment Stages Preference
A
B
C & above
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VC: 2-Sided Business
Demand
1. Things you need to know
before VC pitch
2. How VC Valuations Work
3. Some Investment Trends
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Startup Financing Stage
Pre-Seed / Bootstrap Seed Series A, B, Etc.STAGES
PURPOSE
AMOUNT*
Hypothesis Validation
$10-50K
INVESTORS FFF, Angel Investors
Figuring out the product and Getting to user/Product Fit
$100-500K
Angel Investors, Micro VC, Seed VC
Scaling the product and getting to a true product market fit. The rest of the funding series is about scaling
VC, Institutions, PE
$1-5 Mio
These are the 3 common rounds of financing. Sometimes it requires a bridge round between these stages (Pre-Series A, or a Bridge Loan)
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Basic Truth for Early Stage Fund Raising
In short, startup investors would see these 3 Ps before investing :
PEOPLE (50%)
track record and sectoral experience is important, if the team is weak, idea is
irrelevant
POTENTIAL MARKET (25%)
funding for a $10 million market and $100 million market will be different. (for VCs, if
it’s not at least a $100 million market, why bother starting?)
PRODUCT (25%)
pivoting in early stage is common, but a sound product and solid business model
should be designed.
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– Aswath Damodaran
“VCs Price Businesses, Not Value Them”
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HOW DO WE WORK - STARTUP VALUATION
Star
tup
inve
stm
ent
oppo
rtun
itie
s
Angel
investors/VCs(Deals) experience and points of reference for
valuation
Industry knowledge
Angel network
Supply Demand
Startup Valuation, especially for early stage companies, is more like an art. Supply and Demand drives the valuation (willingness of each parties determines).
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BASELINE STANDARD - PUBLIC REVENUE MULTIPLES
Formula:Price = Forward Multiple x ARR - Private Discount Rate
E.g:SaaS Company A is growing at 80% YoY rate Current ARR = $2 Mio Implied EV = 7.6 x $2 Mio = $15.2 Mio Price = $15.2 Mio - 20% = ~$12 Mio
Source: https://goo.gl/XE5e6T
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– Reid Hoffman
“VCs are ‘Creatures of Herd’”
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INVESTOR HERD IN RIDE-SHARING STARTUPS
Source: theinformation.com
Tips: Find multiple investors to invest in 1 investment round
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VC: 2-Sided Business
Demand
1. Things you need to know
before VC pitch
2. How VC Valuations Work
3. Some Investment Trends
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Conglomerate Family Backed VC Foreign VC
Local & JV VC Corporate Backed VC(Foreign & Local )
VCs OPERATING IN SEA (ACTIVE)+/- US$ 4.5 Bn of capital is ready to be deployed
Source: mapofthemoney.com
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Source: CB Insights & KPMG 2015 Report - Global Analysis of Venture Funding
Center of Gravity is Shifting Towards Asia
0
35
70
105
140
2011 2012 2013 2014 2015
North AmericaEuropeAsia
Asia % of Total
Investments in VC-backed Companies
13% 11% 13% 24% 31%
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Asian Deals are Getting Bigger
2011 2012 2013 2014 2015
# of deals Investments ($B)
$39.70$20.60$6.40$4.70$6.20
445566
826
1,143
1,446
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Quarterly Tech Exit Volume: Asia
0
40
80
120
160
Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
4346
11
908383101
135M&A IPO
ASIAN EXITS IN H1 2016
Asian exits increased slightly in Q2’16 with 90 acquisitions and 4 IPOs. Activity is still down from Q2’15 highs, but is on an upward trend over the last two quarters.
Source: CB Insights - Tech Exits Report H1 2016
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● SEA tech funding still growing in Q2 2016, albeit slower pace
● SEA has not seen many Series B investors to go for companies invested in the recent seed boom
● Anticipating Series B readiness, SEA startups are shifting towards business model with clear path to profitability
• B2B business models• Vertical integration trend for e-
commerce companies
● Large series B investors are gearing up to invest in the market
• Alibaba gets aggressive in SE Asia, plans to both invest and acquire, other Chinese companies follow
Source: Techinasia, e27
SEA Tech Funding Q1 2015 - Q2 2016
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0
15
30
45
60
Seed Series A & Above
43
53
3
19
2014 2015
Source: Tech in Asia (https://www.techinasia.com/breakthrough-year-indonesias-startup-landscape-2015-infographic)
VC Investments in 2015 shows a significant rate of growth compared to 2014
Indonesia Startup Funding 2014 & 2015
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“How VCs Make Money Out of Their Business?”
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VC: 2-Sided Business
Supply
1. VC’s Business Model
2. Investment Returns in VCs
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VC: 2-Sided Business
Supply
1. VC’s Business Model
2. Investment Returns in VCs
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VC Fund Structure
• Most VCs are fund managers - they’re doing their investment activities using money they raised from their LPs for a certain investment period
• LPs are usually expecting their VC funds to have 3x-5x return rate
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So Far, VCs Have Yielded Better ReturnsVCs have shown better returns to investors, particularly after 2011
Source: Cambridge Associates
12.90%
21.20%
16.20%
10.90%
4.20% 5.90%
13.30% 13.00%
11.20% 10.90%
1.40%
15.10%
12.60%
7.30%
5.00%
2015 2013-2015 2011-2015 2006-2015 2001-2015
AnnualizedReturnsonUSVC,PE,andPublicMarketInvestments
VCFunds PEFunds S&P500
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VC’s Business Model
1. Management Fee
2. Carried Interest
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Management Fee
“A fee charged by VCs to their LPs as a compensation to manage their fund - usually the fee is utilized to cover
operational expenses, taking 2%-3% out of the total fund size”
E.g:
• VC Firm A raised a $300 Mio, 5-year fund
• Management fee = 3%
• Total management fee = 3% x $300 Mio = $9 Mio
• Annual opex = $9 Mio / 5 = $1.8 Mio
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Carried Interest
“A fee charged by VCs to their LPs from the earned capital gains out of their investments - usually the fee is taking
20%-30% out of the capital gains received”
E.g:
• VC Firm A invested $10 Mio to startup X with $50 Mio
post-money valuation —> Ownership = 20%
• 5 years later, the company is acquired for $200 Mio
• Ownership value at exit = 20% x $200 Mio = $40 Mio
• Capital gain = $40 Mio - $10 Mio = $30 Mio
• Carried interest = 20% —> 20% x $30 Mio = $6 Mio
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VC: 2-Sided Business
Supply
1. VC’s Business Model
2. Investment Returns in VCs
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This is THE Real Sh*t
• VC Firm A raised $200 Mio fund - invested $1 Mio for 20% of
Startup X with $5 Mio post-money valuation
• Startup X is acquired for $1 Bn (Unicorn!!)
• Ownership at exit +/- 15% (dilution) —> $150 Mio
• LP’s return expectation of funds = 3x —> 3 x $200 Mio = $600
Mio
• $150 Mio / $600 Mio = 25%??
Conclusion: The fund needs 3 more unicorns
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It’s a Tough Market for Venture Returns
Source: Mattermark
Most startups experienced really tough time in raising their follow-on investment round
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Power Law6% of deals produce 60% of returns
Source: Horsley Bridge
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Returns are Incredibly Skewed
Source: Horsley Bridge
“Babe Ruth Effect”: Hit big or miss big
The home runs for good funds are around 20x, but the home runs for great funds are almost 70x.
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Most Investments Lose Money
Source: Horsley Bridge
Venture capital is a risky business
Surprisingly, great funds lose money more often than good funds do
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TVPI = Total Value Paid-In Ratio
VC’s Return Metric
This ratio usually reflects the minimum level of return that investors would expect from their investments in a fund.
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TVPI =
VC’s Return Metric
CFR + NAVT
CFP
CFR = Total Cash Flow received (capital gains from previous investments)
NAVT = Net Asset Value at the time of calculation
CFP = Total Cash Flow paid in to the fund (incl. management fee & carry interest)
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Conclusions
1. Find out about VC’s Investment Thesis, Preferred
Ticket Size, and Preferred Investment Stage before
meeting them.
2. VCs price businesses, not value them
3. VCs are “Creatures of Herd”
4. VC is a super competitive business - power law
distribution is imminent.
5. VC is a game of outliers - finding the “grand slam” is
the key
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Recommended Readings
Mastering the VC Game Jeffrey Bussgang (2010)
Venture Deals Feld & Mendelson (2011)
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Q&A
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Thank You