In March 2021, as part of an amazing team of students representing Oxford Said Business School, I competed at the VCIC competition alongside seven other fantastic student teams. It was such a great learning experience and I recommend this competition for any MBA student who is looking to understand how Venture Capital works. Shout out to Dhruv, Jas, Niharika, Nick, and Andres for being the absolute BEST team! #TeamElm
The VCIC competition is hosted by University of Cranfield and Kenan-Flagler Business School and although this year was delivered online, it was a great learning experience on the inner workings of Venture Capital. The 1-day packed event simulates the process of any investment; pitch-deck review, founding team conversations, due-diligence, valuation estimation, and drafting a term sheet. I can only wonder what the in-person event would have felt like, but I imagine the online event does a great job of simulating the rigour and pace of the in-person event.
What is so interesting about the event is that the investment lifecycle is compressed into a much shorter period. Whilst in the real world an investment might take weeks or months, here, it essentially a deal that goes through its lifecycle in hours, and you only get around a fifteen-minute interaction with the founders.
I am bound by an NDA and therefore will not be revealing any information on any of the ventures, but as I reflect on the experience, a few thoughts come to mind:
Pattern Matching Through Practice ✅: The more I evaluate pitches either during my time chatting with entrepreneurs applying to The Oxford Seed Fund, or just chatting with entrepreneurs in general, something is clear - evaluating companies as a venture capitalist over time becomes about developing intelligence through pattern recognition. There is no shortcut here, it is learned, through hearing and analysing pitches, industries over and over again.
There are limited standard VC themes; Market Size, Team, Product, Economics, Business Model, GoToMarket, Terms, etc, and there aren't any new questions being asked. However, depending on the stage and industry weightings and follow-up questions could skew in almost infinite directions.
The information you need for a Seed Stage B2C ed-tech startup is quite different from that which you'd ask a B2B SaaS Series A - AI shipping market intelligence venture. Fundamentally, the high-level questions are the same, however, your focus and depth on specific areas will differ vastly between both and a lot about being a skilled investor is knowing what questions to ask to uncover key insight that helps you inform why you will (or will not) invest. As they say, the devil is in the details.
What's Your Thesis?💡The thesis a.k.a your strong rationale for investment is only as good as its ability to stand firm even after the rigor of intelligent counter-argument. Your pitch is as good as the quality of your thesis, and a great thesis is an amazing anchor that gives clarity to the investor and is a unifying thread through the questioning process.
In my experience so far, the quality of a thesis is strongly tied to a deep understanding of a sector; which can be gained either through experience and or rigorous research coupled with intelligent insightful interpretation, strung into a data-driven cohesive argument. A strong well-reasoned thesis is a strong foundation!
Why are you asking that question?🧐With just a few minutes to spend with each entrepreneur to both build rapport and ask the critical questions, we needed to choose our questions deliberately. I found that the more specific the questions, the better. The art of asking the right questions is a science and an art, and knowing the best question to unveil relevant critical information that helps you make a rounded decision is so important.
After reading a pitch-deck, the areas that need clarification are usually super clear. Further research into the company and industry will unearth answers, and probably even more questions. However, not every question is relevant. This is even more important when you need to review a lot of companies, say - you're a seed-stage fund investing smaller ticket sizes. You want to get to the crux as quickly as possible, know if there are dealbreakers sooner rather than later. So, question your question and ask what the answer might unveil and how that is important to your eventual conclusion.
This is where it could go so many different ways, and the heuristics developed through experience and or industry knowledge will come to play here informing what questions to ask. This approach helps iterate answers with follow-up questions intelligently and iteratively and pulling a thread that unveils what you need to see leading towards a clear conclusion - whichever way. The devil, as they say, is in the details.
What is the fund thesis or philosophy?🧭Just like strategy acts as a true north to drive the execution of a company, the fund thesis is important to give context to investment at any VC. Funds are limited, and often come with a clear strategy off the bat and they can only invest in ventures that fit that strategy. It is not logical for a fund to invest in a venture without alignment to its thesis or philosophy.
What are the terms - and most importantly why?📝VC Math is made to sound more complex than it is. The golden formula is Pre-money valuation + investment = post-money valuation, and it helps to be able to do the math quickly. (essentially, fractions converted to percentages) A venture raising $1m at a $2m pre-money is looking to give out 33% of its company in the new fundraising round. (1/3). The one thing to note, pre-money valuation prices the round and % ownership is calculated based on post-money valuation.
But the key question to validate the deal would be is there a chance that the deal returns enough multiples in x years to make your portfolio numbers work? This is after taking out annual management fees. A lot of (good, even great) startups are screened out at this point.
The Deal 🤝: Investment amount + what instrument? Full equity purchase - often preferred shares, or convertible note a.k.a SAFE? The investment amount is driven by venture round size, how bullish you are on the deal, plus your fund availability including reserves for follow-on funding to maintain your position via pro-rata rights and avoid dilution between rounds.
The Valuation 💵: You cannot discuss the deal without a sense of the valuation because you need to know what % of the company you are buying - except it is a SAFE, and even then you want to know if there is a cap to protect you from dilution in the next round. Calculating valuation is a shot in the dark in earlier stages, but with some demonstrable traction and strong comparable data, DCFs, etc - one can model out a well-reasoned valuation for a growth company with some revenue figures to date.
Investor Rights💪🏾: Information rights, pro-rata rights, drag-along rights, board seats, ratchet rights, etc. Here, the capitalist in VC comes alive! Pro-tip: Get in as many rights as you can while still being founder friendly.
Diversity in VC is an actual problem🤦🏾♀️: At the event, there were no female judges, not one woman on the founding teams, two black people (that I could see), and I believe I was the only black woman at the event out of 50+ people. These numbers are appalling, and unfortunately representative of the industry as a whole.
In the UK, according to Pitchbook, two years ago just 11% of fin-tech VC funding was going to UK-based female founders. An extended ventures report shows that in the 10 years between 2009 and 2019 only 0.24% of venture capital went to teams of Black entrepreneurs in the UK with only one black female founder raising a series A funding in the 10 years. These numbers are honestly, ridiculous, unfortunate, and heartbreaking.
These have real-life implications for women and worse - the intersection of gender and race; women of color. The types of businesses that are created, implication on women leadership, and women's experience in general. There is so much work ahead of us! If you're reading this - please do whatever you can in your sphere of influence to change this. Sponsor, Mentor, Coach, and do whatever you can for the industry to be more representative!
Till next time, and happy International Women's day! 👋🏽