RTC #24: The truth behind VC exit stories

📢 Top 7 links of the week

• Want to build a GPT app in under 4 minutes with zero coding? Just follow these steps (Link) - My favorite this week (Try it out and I will share your GPT in the next issue)

• The hard truth about Venture Capital - read this when you are raising or applying (Link)

• The Seed Round game changed completely - you can’t compare Seed company A with Seed company B likes for likes anymore. Find out why (Link)

• Sam Altman on the “bad” advice he gave founders at YC (Link)

• This is what drives VC return in AI (Link)

• How to attract Business Angels to your startup (Link)

• USD 220m - this is what I call a proper Seed round! (Link)

📖 Report of the week

Founder personality uncovered - find out what it means for your startup success.

Get the full report here 💡

🤿 Making 10x+ on your investment is more complicated than you think

Firstly, making any money with your investment at all is a good thing (this is not the majority of VC investments).

And secondly, it is also not a bad thing that the majority of venture capital investments do not return any money.

Wait! Why is that?

How can not returning any money not be a bad thing?

The reason lies in the famous “Power Law”.

Let’s say a VC invests in 20-25 companies.

As part of their investment strategy VC firms already assume that a large number of them, around 13-16, will fail. Another 7-9 might do okay, bringing back a 2x-5x return.

But this is OK as long as you have a few companies that bring around a minimum of 10x+ return but rather 50-100x (“fund returner”).

VC firms take a high risk to find these fund returners as they need to cover the losses from the failed companies and the modest returns from the rest.

Today we will look at the journey of an illustrative startup (“New Generation AI”) and its early-stage VC investor (“Capital XYZ”) to determine what factors impact your ultimate return multiple.

Here comes the math.

Let us start at the beginning of our story

• The startup is called “New Generation AI” and was founded in 2019 in Berlin

• Early-stage VC called “Capital XYZ” invested as the first investor in the Per-Seed round

• Today, Google announced the acquisition of New Generation AI for EUR 125m

1. Pre-Seed round in 2019

Capital XYZ invested EUR 1.0m at a pre-money valuation of EUR 4.0m as the first investor joining New Generation AI.

What happens to Capital XYZ’s share / return multiple?

➡️ Investment / (Pre-Money Valuation + Total Investment) = Share

➡️ EUR 1.0m/(EUR 4.0m+EUR 1.0m) = 20% / 1.0x return

2. Seed Round in 2020

In 2020, the product was validated and New Generation raised their Seed round of EUR 5.0m led by a Tier 1 European VC (“FastInvest”) and a few smaller VCs joining as Co-Lead. The round was on a EUR 20m pre-money valuation.

As part of that round, they set up an option pool for future employees for an additional 9.0%.

What happens to Capital XYZ’s share / return multiple?

➡️ EUR 20m + EUR 5m = EUR 25m (New Company Valuation)

➡️ EUR 25m / 0.91 = EUR 27.47m (New Company Valuation incl. new option pool)

➡️ (20% * EUR 20m) / EUR 27m = 14.6% / 4.0x return

3. Series A 2021

Best times to raise a Series A!

The round is led by a US VC as the US market entry is part of the GTM strategy.

2021 is a very good year for raising money: New Generation AI raises EUR 15m on an EUR 75m valuation

What happens to Capital XYZ’s share / return multiple?

➡️ EUR 75m + EUR 15m = EUR 90m (New Company Valuation)

➡️ (14.6% * EUR 75m) / EUR 90m = 12.1% / 10.9x return

YES, we crossed the 10x! 🎉

4. “Bridge” beginning of 2023

New Generation AI is running out of cash and needs a bridge round from existing investors. In addition, another US VC joins the round. In total, they invested EUR 5m. The round is executed as a SAFE at a valuation of EUR 60m (“Down-Round”).

What happens to Capital XYZ’s share / return multiple?

➡️ EUR 60m + EUR 5m = EUR 65m (New Company Valuation)

➡️ (12.1% * EUR 60m) / EUR 65m = 11.2% / 7.3x return

Back to reality - but we are still alive.

5. Series B end of 2023

AI investment momentum is picking up and New Generation AI is executing its growth strategy expanding across the US and also into the majority of European countries. They need fresh capital to finance the growth though.

Two global VC firms are joining and invest a total of EUR 15m at a valuation of EUR 80m.

What happens to Capital XYZ’s share / return multiple?

➡️ EUR 80m + EUR 15m = EUR 95m (New Company Valuation)

➡️ (11.2% * EUR 80m) / EUR 95m = 9.4% / 9x return

Almost back at 10x!

EXIT and sale to Google in May 2024

In May 2024, early-stage investors are informed about the acquisition offer by Google. They had not been involved in the previous discussions and negotiations but this comes as a nice and unexpected surprise. Google offers an acquisition price of EUR 125m for 100% of the shares.

Great to have chosen a “hot industry” a few years before most of the other investors 💸

What is the final return multiple? Is it a fund returner?

➡️ (9.4% * EUR 125m) / EUR 1.0m (initial investment) = 11.8x return

We crossed the 10x (again)!

This is a good deal - is it a fund returner? I doubt it.

💸 New VC funds investing in US & Europe

• Norrsken VC, based in Sweden, closes the oversubscribed second fund at €320m making it the largest early-stage generalist impact fund in Europe (Link)

• ETF Partners, based in UK, has raised €285m on its 4th round to support innovations addressing the global challenges presented by the climate crisis (Link)

• Armira Growth, based in Germany, launches €200m fund that supports by providing growth financing, technology and tech-enabled startups in the DACH region (Link)

• Peter Thiel-founded Valar Ventures, based in US, raised a $300m fund, half the size of its last one, to invest in fintech startups (Link)

• TrueBridge Capital Partners, based in US, raises $1.6 Billion across five venture capital vehicles focusing on venture funds and technology companies (Link)

📅 Calendar of main VC events in the upcoming weeks

“Networking is a lot like nutrition and fitness: we know what to do, the hard part is making it a top priority.”

June
• NOAH Conference | London, UK | Jun 3-4
• SaaStr Europe | London, UK | Jun 4-5
• SuperVenture | Berlin, Germany | Jun 4-6
• Money20/20 Europe | Amsterdam, The Netherlands | Jun 4-6
• SuperReturn International | Berlin, Germany | Jun 4-7
• Bits & Pretzels HealthTech | Munich, Germany | Jun 5-6
• South Summit | Madrid, Spain | Jun 5-7
• London Tech Week | London, UK | Jun 10-14
• TNW Conference | Amsterdam, The Netherlands | Jun 20-21

👉 Get the full list of events in 2024 here

This was it for today!

If you share Road-To-Capital with one person who might also enjoy it - you would make my day!

Thank you so much.

Yours,
Stephan 👋

Issue #24 | 27 May 2024