Investing in Startups without the hype

Bits & Pretzels, Web Summit and other event formats are hyped like crazy (2019)

But why? Startups are great, necessary and vital for every economy. An economy without a startup culture is dead - or won't survive - pick one. 

Hyped events that are only making the organisation rich that are organizing them are worthless for the crowd. Who says a startup will find an investor at such an event? Thousands of visitors are flying to events, paying for overpriced tickets and hotel rooms, destroy the nature by flying in with hundreds of airplanes and pay 5 digit ticket prices to be a table captain or host a dinner. Isn't this counter productive?

Why isn't there a real web (online) summit? A big zoom call or something like that? Different twitch channels with pitches of startups and investors explaining what they care about or what investment targets they have?

Of course - meeting someone in person is the only way to build real trustworthy relationships. But not with one touch point in real life or at an event. It takes statistically 10 and more meetings to build real(life) trust between two humans. 

So what is the point? Why is everyone so keen to spent 1000 Euro and more to travel to an event to meet (say) 20 people for a couple of minutes and listen to some people on stage he could also watch at a live stream?

It is the same hype as the valuation hype called "unicorn"

There is nothing more unattractive than trying to achieve a billion Euro or USD valuation. Inevitably the founders are getting squeezed out or diluted to a minimum equity stake (if they are not really clever).

Market participants who set up funds with EU participation or other grants/subsidies are fueling the system but with a broken risk/reward ratio. 

Where is the real risk of you get your funding doubled by the EIF (European Investment Funds) and others PLUS you get the full upside but only 50% of the risk? Full upside means you can leverage your negotiations with a "shadow" pari passu partner with no operational impact on your decisions.

Isn't this a real disadvantage for other investors or business angels that don't have access to those co-invests?

Buying into a startup company at 10 million pre money valuation is easier if I have to pay only 500k for it (so the valuation is effectively 5 million). If the next round is at 3 Mio pre money for 10% (30 million valuation) and I want to keep my 10 %, I have to pay 300k (150k if EIF follows on). So my invest would be 650k for a 10% stake in a 30 million startup. That is a whopping 4.6x multiple with 50% less risk. 

The other part of the story might be even more interesting to look at. These are the governmental subsidized startup initiatives. Hundreds of initiatives that are partly not even visible online. Countless Pitch events and thousands of advisors and other "servicers" are living good off of these initiatives but what is the outcome? No one knows...

Yes there are hundreds of good news out of several thousands of those initiatives. But is this really efficient? No one knows...

All those events are offline and analoge without a sufficient digital outreach or professional tracking for successful fundings. No follow ups after the event - event Apps and matchmaking areas all over the place but then? What happens afterwards? No one knows...

We all want the startups to succeed and grow but - with more efficient structures. Why is the European Union not helping more online platforms to grow and fuel them with all the contacts gathered by their own initiatives (and with taxpayers money). One can only guess that all the above mentioned advisors and stakeholders are not interested to report what can be done better outside of subsidized companies to not loose their benefits. 

This will leave the startups with an ever so big selection bias and even higher concentration towards bigger and bigger funds. This will hurt the pre-seed and seed phase since it is impossible to dump more than 5 million Euro into a seed company without conducting fraud.

After reviewing more than 8.500 startup applications, I can definitely state that roughly 10 percent have the chance to succeed. But here is the difference - usually the success rate is around 1%. Every venture capital fund is reporting the same numbers and success rate of 0,5% - 1%. Business Angels who invest their own money are reporting up 2%-2%-5% success rate (startups not loosing money and/or a successful exit). 

Still - why not 10%+ across all verticals and startups? -> The reason is selection bias. 

Efficient matchmaking and anonymous profiles help making sure to not decide biased. Anonymous pitch decks help to find the real good deals and match the right parties efficiently. Anonymized company names, gender and company names prepare decision makers to decide unbiased. Digital introduction management is efficient and helps to actively bring together what matches. Fast, reliable, cheap and objective. 

Early stage startups suffer high disadvantages in finding investors compared to Series B-C-D startups or other mature companies with a professional management. Naturally the early startups need to address that they are in need of money but they doesn’t know how to do it or where to look for an investor. 

Startups and professional investors don’t speak the same language due to their different setup. Investors with highly trained teams professionally scan for the “best” projects and have sophisticated methods and lawyers to value equity and success rates. 

Startups/entrepreneurs neither know which information is important like KPIs to provide nor do they have the funds to hire professional teams to do it.

An extremely crucial part is educating startups and entrepreneurs about what is really important and what is not. Thousands of advisors are scamming entrepreneurs by selling best practices or management know-how or offering ?advice for equity“ or ?finding investors with 10% commission“ - No tracking or reviews of all those advisors is available. A playground for scam. 

Investors naturally have a differing incentive than the startup. They want more equity for less money. What they don’t want is a (funding-wise) sophisticated and well informed startup, they want to buy in cheap at first. 

The more the startups tries to find investor and tries to spread the word that he needs money (sends out it’s pitch deck to hundreds of potential investors), the lower the valuation will be, because the startup appears desperate and investors will see it negatively - who wants to invest in a startup that is desperately in need of capital?

Another important factor in today's colorful but meaningless pitch decks is intellectual property rights protection. Or better NO protection. 

We at capmatcher have seen this a thousand times. Pitch decks containing and explaining all the "secret sauce" of a startup. We have seen other startups copying that secret sauce. We have seen investors forwarding those decks to their actual investments to implement all or parts of that secret sauce into their portfolio companies. And so on and so forth. 

Startup investments and venture capital are extremely crucial to the success of any economy. Everyone should be interested in supporting his countries very own ecosystems. It will, going forward, decide which country or continent will survive. 

FANG is a good example - where would the USA be today without Facebook, Amazon, Netflix and Google? Google and Amazon alone rule the whole world, not just economically. 

Let's build the foundation to help the next FANGs to be built and help young entrepreneurs (or old entrepreneurs) with an healthy environment containing and educating thousands of business angels and venture capital funds on how to identify and invest into pre-seed, seed and series A stage startups. 

Yours,

Boris Hardi 

So how about an intro service right in between the startup and the investor? Someone who scans both sides digitally with an outstanding outreach attracting 10.000 startups each year to help them succeed and to help them professionally prepare for investor meetings. Something like a digital accelerator that is for free? - This is www.capmatcher.com - 1 Mio. impressions monthly within high quality scalable startups and investors. 950.000.000 EUR in pre-seed, seed and series A in 1.200 startups on offer. Register today and request your intro!