Venture Capital investment consists of taking minority stakes in innovative companies, usually technology companies, in their early stages (let's call them "Startups"), with the aim of selling these stakes at a much higher price over a horizon of 3 to 9 years.
The revaluation of stakes, which sometimes reach multiples of 50 times or more on money invested, derives from the ability of the best startups to grow rapidly thanks to their disruptive aspect (new value proposition in the market) and their scalability (usually technology-based, they are able to manage many customers without replicating structural costs).
But of course, because of their disruptive approach and entrepreneurial stage, investing in startups carries a high risk. Only a few survive and generate the expected value. For this reason, Venture Capital investors attach great importance to both diversification and capital allocation strategy. Thus, a typical portfolio of a fund seeking to maximise returns for its investors will have a minimum of 20 companies from different sectors and technologies and will have a strategy to invest a significant portion of the fund in post-entry rounds of funding in each startup, as those that show the best execution and ability to realise their potential are identified. The best Venture Capital funds aim to deliver an IRR of over 25% to their investors within 8-9 years.
But how many startups do you need to analyse in order to compose a portfolio of 20 startups? Some investors have specific mandates in terms of sector, geography, technology or stage of development, so their "selection universe" will be narrowed accordingly. Some investors base their dealflow ("flow of investment opportunities") on their personal relationships, while others take a more quantitative approach to try to increase the number of opportunities analysed. It's a balance between seeing enough opportunities to have enough to choose from and still having time to look deeper into the most promising ones. In other words, we want quality and quantity, which is not easy.
As a practical example, in our firm we usually see more than 3,000 projects a year in Spain, but, like many investors, we phase our analysis in several stages so as not to miss good opportunities and to be able to delve only into those with the greatest potential and the best fit with our investment focus. And where do we find them? On the one hand, we have been investing in Startups in Spain for 12 years, so we have generated a certain brand recognition thanks to which we receive many projects daily through the web, social media or direct email, or from the personal contacts of the founders of the companies already invested, but we have always worked 5 origination channels that can be useful for other funds or Business Angels:
- Specific programmes: "Venture Partner" programmes, which rewards any investor (many of them Business Angels) for sharing an opportunity in which we end up investing, with €1,000 to their favourite NGO or for themselves personally.
- Investment forums/networks: Academic and private institutions frequently organise "Pitches" sessions, where Startups looking for funding present their project to potential investors.
- Accelerators/incubators: These entrepreneurship support organisations usually have 3 to 9 month programmes in which they guide and promote Startups.
- Ecosystem events: With South Summit, B-Venture, Al-Andalus Innovation or Valencia Digital Summit, almost every Autonomous Community in Spain has its reference event, which brings together for 2-3 days an important selection of local, national and international Startups and organises networking activities between entrepreneurs and investors.
All these channels, worked in a structured way, together with a genuine passion and curiosity for entrepreneurship and innovation will help you to access the best investment opportunities.
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