Behind the scenes #13 | What returns are funds after?
היHow do soccer teams become successful? All those who are familiar with the world of competitive sports will know that what fans see on the pitch is the outcome of endless training sessions, strategies designed by coaches and their assistants, support from all manner of specialists and of course sponsors who allow the players to train in the best possible conditions using the best available facilities. The lists of people responsible for a team’s success tend to be extensive, but they all have one thing in common: a shared goal in mind. And though every match the team wins brings joy, at the back of everyone’s minds is the cup final, be it national or international at last! The same is true of how well startups end up doing – our own version of the world cup is an exit on a desired scale. What scale is that? Read on!TDJ Pitango Ventures team
What returns are funds after?We have already written about the sorts of start ups who should be seeking VC funding – how best to check if a given fund is a suitable partner is something we have covered in previous editions. If you missed these, you can find them on our website. There is one more key aspect you ought to be aware of. Every VC which invests in you does so in order to reach the glorious moment we call – the exit. We are not building a life-long business together – in a relatively short time, your start up should be sold on.At times, founders and VCs may not see eye to eye when thinking about the returns a given project should be generating. Let us assume therefore that the current value of your startup is X, which in a few years’ time will rise to 3X. Is this a great result? Looking at the market, funds are usually looking for a tenfold return of 10X or even 20X. How come?Funds have their investors who, when investing in this class of assets, expect returns of a certain amount. When joining a funding round we can never be 100% sure that the business will take off, and the team behind it will not split up long before preparing for an exit. Assuming that not all portfolio startups will achieve astounding successes, we follow the rule that the return from one investment should cover the whole portfolio.This is of course only one side of the coin – at TDJ Pitango Ventures we invest in founders who are the most important part of the equation for us. We can’t imagine a situation in which we put you in front of a firing squad and block any sort of move making an exit possible. No, this is not how we work. On the one hand, before an exit at too low a level funds are covered by a “waterfall” mechanism. On the other, we always try to talk to founders in order to achieve an understanding. We’re all playing on the same team, therefore we should be striving to make the exit satisfying for both parties. All you then need do is to work out which league you want to be playing in, because this will affect the support you receive overall.
Dialog and understanding each other’s needs and aspirations can go a long way towards a shared and practical vision between the Founders and their investors of an expected size and moment for the exit. Wojciech Fedorowicz
As a founder, you need to have a crystal clear vision on what is your end goal. Is it a small scale exit, perhaps a quick acquihire, or is it a grander vision to build a category leading venture and command a larger exit price, that undoubtedly will take longer to accomplish. Each alternative derives a strategy and an adequate execution plan towards the goal.Daniel Star
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