Denis Dovgopoliy on what investors are ready to pay for, and what they are not ready to pay for

Denis Dovgopolyi, head of GrowthUP, shared his opinion about what investors are ready to pay for or, in other words, what kind of information they are ready to buy. AIN.UA published the article with the author’s consent.

Little introduction

• In 1996 according to estimates of Shai Goldman, who also suffers from this topic, there were only 74 venture capital funds.
• In 2005 the total number of venture capital funds in the world was equal to a few hundred: the feeling is that their number ranged between 300 and 700.
• In 2007 the most complete database of funds was collected by TheFunded and there were 700 funds there. I am sure that at that moment there were no more than 1000 venture funds.
• In 2008-2009 the number of funds decreased significantly: almost a third (and by some estimates a half) of funds collapsed. This is especially true for new markets: Asia, Middle East, Eastern Europe and even Western Europe.
• Until 2010 the Valley dominated both in the number of funds and in the amount of capital under management. And still, its share is significant.

Several studies at the same time give the same numbers of new startups founded per year. In 2007 this amount was ranged from:

• 10,000 to 20,000 new startups per year in the United States (90% of which in California and 80% in Silicon Valley);
• outside the US the number of new startups was estimated from 2,000 to 5,000.

These numbers considered startups which have launched a product or prototype. If you use the definition of Steve Blank, “a startup is an organization created to find a repeatable and scalable business model,” then the numbers can be easily doubled.

After the crisis of 2008-2009, the term “unicorn” became widely used (before we simply said “billion-dollar company”) and hysteria began to grow. The number of startups and funds began to grow like an avalanche. The growth was uneven, so assessing annual growth is not a fair method, so let’s better look at the 2018 estimates.

About the startups

Crunchbase believes that in 2018 there were 34,000 transactions worth $350 billion. 31.5 thousands of them were in the early stages: Seed, A, B.

We are very active in scrutinizing this market (at the focus of transactions, investors, and startups) and now we can say that Crunchbase sees:

• no more than 90% of all major transactions (including Unicorns);
• no more than 50% of transactions in companies with a valuation from $500M to $1B;
• no more than 30% of transactions in companies with a valuation up to $500M;
• less in transactions for companies which are valuated under $100M.

Moreover, the further the transaction from the USA (even from the Valley, because the transaction in the conditional Colorado is as inconspicuous as the transaction in the conditional Ukraine), the more poorly the information about it is presented at CrunchBase. Since this is a pyramid, we can safely assume that 31.5k deals are about only 30% of the total market of startups that raised at least one round.

So it is possible to suggest with a high degree of accuracy that the number of startups in the world which in 2018 closed any transaction ranged from tens of thousands of dollars to billions of dollars is about 100k (+-10%).

In the definition of Blank the number of startups that were created in 2018 can be assumed at 200-300k. This is a monstrous figure and no one in the world counted or identified them. If we extrapolate the figures in the parameters of the raised money, then they can be valuated at half of a trillion dollars.

Anyway, CrunchBase, CBInsight, Dealroom, Mattermark, and others can’t see the whole market. Especially in the early stage.

So in the 10 years-period the number of new startups founded per year has grown 10-15 times. Wow!

About the funds

Now we are digging the database of funds. We have made the most complete database of Unicorns and their investors in the world. After we researched all the companies that received a valuation of $1+ billions since 2000, threw out the spinoffs of public companies and all non-core companies like oil and gas ones, we saw 700 unicorns. A total number of investors who have participated in their funding is more than 3000 funds. There are more than 1000 funds in the world that have 2 or more Unicorns.

When we crawled down the pyramid we estimated the number of funds in the world, along with corporate venture funds and individuals who can invest from 1 million and more, ranged from 20k to 25k. We estimated the number of managing partners in them at the level of 100k. And we estimated the number of employees in them at 200k. Total 300k.

For any entrepreneur, this is a huge target audience and the bunch of services appears. All of them are trying to bite off their 0.5% slice from the half-billion pie. From 10 to 30 such startups appear every year, equal to the amount of such startups which die every year.

Everyone has the same problem – a misunderstanding of market problems.

90% of companies in this market are trying to sell investors the Deal flow. They do not understand that the number of applications that receive funds is no longer measured by hundreds, but by thousands and sometimes tens of thousands a year; top-end funds receive up to 70k applications per year. This is a monstrous figure, primarily due to the fact that the funds have to disassemble this deal flow. Any startup that offers the fund a deal flow increases this figure in any case, and it is guaranteed.

Let’s look at the two main parameters for the fund: false negative and false positive. Fear of missing an interesting startup does not allow the fund to ignore any lead that falls within its field of vision. Fear of investing in trash startup forces the fund to spend huge resources on analyzing each of them. If you offer the investor access to the startup database, you cannot force him to abandon the existing flow, but add another stream to this flow.

An investor always runs away from such opportunity and especially not ready to pay for it.

His work with deal flow consists of two things:

• focusing marketing efforts within the target audience with their investment focus;
• developing a network that takes over the function of preselection, voting for its bet in dollars (yes, syndicates).

The second thing that an investor does not like is competition, he wants to see gold startups that are not in the sight of other investors because competition for a deal can inflate its value to the skies. That is why cool investors do not go on accelerators demo days, and if they do, then with a bet already made. They do not want a sample of the remaining 100k investors to fight for such a startup. That is why the accelerator managers show the most interesting to cool funds long before such demo days. For the same reason pitching startups from the conference scene is a futile thing if it is not TCDSF or DEMO.

So, I don`t know how to make the investor to pay for the access to startups.

There is a hypothesis that novice trash funds are willing to pay for deal flow, since they do not have any bids at all, but the experience of trying to sell them something has brought negative results. Moreover, they “do you a favor” by looking at your startups.

Despite the fact that the industry is huge in the number of startups, the number of investors and the money, I have hypotheses about problems for which startups are willing to pay and who else can buy the access to startups and investors. But I don’t know for which you can take money from investors without competing with CBI, CB, Dealroom, Mattermark, and others. I am sure that I will find it, but not in the first and not in the second year.

Author: Denis Dovgopoliy, GrowthUP.