Establishing a mutual understanding between investors and entrepreneurs as to what each expects from the other is essential to a harmonious beginning for a new venture.
The future is likely to be challenging; if entrepreneurs expect to be able to count on additional support from their friends, family, and Angel investors, several key risks that must be addressed in advance. This video focuses on four of those fundamental risks:
(1) A startup’s high probability of failure;
(2) The mathematics of dilution;
(3) The tendency to misunderstand a company’s stage of development and, therefore, its capital needs;
(4) Understanding the risks associated with investing good money after bad and knowing when to call it quits.
Some important statistics:
In 2012, the average amount of seed or angel capital raised per company was $880,000 (Source: Pitchbook)
61% of seed-funded companies will not be able to obtain follow-on funding (Source: CB Insights)
Those seedlings that won’t find capital will be the victims of the so-called Series A Crunch
While seed investments increased by 64% in 2012, Series A investments declined by 2%. This defines a supply/demand imbalance exists between institutional VC capital and the ‘Seed Crowd’ .
It is a tribute to America’s innovation culture that, while most startups fail, we are currently experiencing such a boom in seed financing in the United States. Institutional venture capital is not increasing; on the contrary, the industry continues to consolidate by firm and is declining in total.
Being aware of the risks inherent to startup investing and having a clear understanding of the basic parameters of dilution mathematics should be helpful to investors and entrepreneurs alike. If you are an entrepreneur, this video may be very helpful to you so that you can explain these risks to your investors. If you are an investor in very early stage companies, this video provides useful perspective on risk and portfolio management.
This video is Chapter 2 of the Entrepreneur Essentials Video Series.