Venture Capital For Beginners (Complete Tutorial) Startup & VC Investing Explained 2023

Hey everyone my name is Nate and in this video I'm going to share everything that you need to know about Venture Capital Angel Investing startup investing this is a topic in which there seems to be a lot of confusion on it so I wanted to clear this up today with a full tutorial this is going to be on the longer side it might not be as entertaining as the 10 other videos you can go and watch right now but I can promise you that if You sit through this you take some notes you're going to

take some information from this you can use for the rest of your life um and you know this this is an industry that seems to not have very much information readily available to to people and I looked on YouTube the other day and I couldn't find any content on this and so I thought let's go and let's make this um and and that's the goal here today so Um this is a full tutorial I recommend taking out a pen taking out a piece of paper or writing out some notes as we go through this because

we're going to go pretty in depth here uh in in helping you understand Venture Capital what this industry does how to get involved in anything else in between and so I'll share the overview of what we're talking about in this video but first I actually want to talk about today's objectives and kind of who this video is going to Be for and there's really three people that this video is going to be useful for okay the first group of people is for those who are curious about the industry of venture capital maybe they're considering getting

into it they want to get started into it they want to start investing into startups um that's the first group of people the second group of people that this is going to be useful for is for those uh People who maybe are looking to work for a venture fund or one of your friends is working for eventually funding you're confused on what that actually entails um and the third group that this is very going to be very useful for is for anyone who's considering launching a startup creating a company and raising Venture Capital uh for

their startup um and so this is going to help you kind of understand the industry as a whole because most of the large companies that We use today like you know Facebook Instagram Google Microsoft pretty much most big companies were founded with Venture Capital money they they utilize Venture Capital at some point so it's very important to understand this okay so here's some of the the topics that we're going over in this video feel free to skip around if you would like to um but we're going to go kind of in depth talking about kind

of what is Venture Capital look at some different Startup accelerators understanding some of the terms like General partners and limited partners deal structuring liquidity events everything else there okay um so let's get into it here all right so first of all just wanted to kind of uh go over who I am and and why I'm creating this video um so I actually have a venture fund that launched last year with my Venture fund partner uh sebi and so we invest Into early stage Tech mostly like pre-season C we'll talk about all those terms later and

like what that means but we've been doing this for a while and we invest into dozens of companies in the startup space you know we have the Creator angle we have a handful of channels and then we also have the Venture fund um and so let's talk about first of all what is venture capital and help you understand this here so it can seem pretty Confusing but in the simplest of terms Venture Capital it's it's really just funding companies that would otherwise probably not be viable in their early life because they might not be profitable

okay and so this is financing if you want the true definition here it's it's a type of financing that investors provide to Startup companies and small businesses that are believed to have long-term growth potential okay that sounds pretty vague but that's what You're going to find if you go and Google the definition of Entry Capital but really it's about funding experiments where there's a high likelihood of failure but if one of those experiments experimental or businesses succeeds you have a much larger outsized return because of that high level of risk that was taken so for

example uh Peter Thiel invested into Facebook in 2004 and I think he invested about 5 500 thousand dollars at a five Million dollar valuation for Facebook he invested uh to get 10 of the company um and that 500 000 turned into billions of dollars uh that he made from that but there were also hundreds of other Investments that he made that probably went to zero because the startup world is is very very risky so Venture Capital it's actually a form of private Equity um but like I said most major companies were actually started or funded

with Some form of venture capital um and so for example if you're starting a lawn care company or you know you're starting like a soap making business in your basement um that's you probably don't need Venture Capital funding to do that because it's a pretty straightforward business right you go most of Lawns you get some cash for that um and so a lot of small businesses don't need Venture Capital funding the Ones that tend to go the Venture Capital route are the tech companies or the ones that cost a lot to get started right maybe

you need to build an app you need to create some software or you want to make like chat GPT which is what openai did you can't just make that uh from scratch with no money there's a lot of costs that go into it and so in order to get that business off the ground companies decide to raise Venture Capital they they raise money for their Startup uh going that route okay um and I think we'll clear this up even more as we go throughout this video but here's just a quick little overview some different types

of alternative Investments right so standard Investments are things like stocks and bonds and you know CDs from your bank right and then we have alternative Investments and in the alternative investment category we have things like private Equity uh we have things like Hedge funds and real estate Commodities private debt and Venture Capital so it's simply one of those many different types of alternative asset classes okay so the overall value of venture capital it has really blown up in the past decade or so and right now the overall value is looking at over 345 billion dollars

now that was actually in 2021 it has been on the downtrend since we were in a massive bubble in 2021 so I wouldn't be surprised to see uh Venture Uh total volume continue to decline through 2023 maybe bottom out in 2024 um I don't have crystal ball so I I don't know truly when it will but it really had an incredible run up over the past decade in terms of overall volume in terms of venture funds being started and in terms of startups being funded and also their valuations as well so it's a massive industry

right there are hundreds of billions of dollars flowing into Venture Capital flowing into Startups so before we get too deep into this I want to share the sponsor today's video Mercury Mercury provides banking for over a hundred thousand to venture-backed and bootstrap startups Venture Capital funds and other businesses we actually use mercury for our Venture fund so this felt like a great company to partner with in this video so they offer checking and savings accounts for your business virtual and physical credit and debit cards access To venture debt and Community programs to help Founders raise

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I'm going to be honest it is a bit gate kept so if you are not an accredited investor then it's going to be very difficult to actually invest into this category of venture capital or Startups or do Angel Investing and so in order to be an accredited investor there's there's three different uh you have to meet basically one of three different criteria you either have to have a net worth of over a million dollars excluding your home uh or you have to have an income of 200 000 per year for the past two years or

if you don't uh reach any of those then your other option is to have certain Financial licenses like a series 7 Series 65 or I believe a series 63 I'll just throw that text up on screen here so that you can see um and so basically if you do not meet any of these three any one of these three criteria then it's going to be very difficult actually you're not allowed to invest into startups if you are not what's deemed as an accredited investor so it's kind of weird it's gatekept the reason for that you

know if you ask like this you see and like you Ask the government they're going to say it's because startups are very risky venture capital is very risky and so they want to protect people from losing money in that space um so some of that does make sense but also it's kind of weird because then rich people can invest into it and make money so it's it's a strange setup but that's just what the government has okay um and so outside of high net worth individuals like you know millionaires Who are investing into venture capital

or are investing into startups uh the other types of organizations that invest into it are things like family offices so family offices are basically just when you have rich people uh like a rich family say like The Waltons right Walmart they started Walmart they have a family office so most billionaires have a family office basically it's like a company I mean they have investors in that family office who then invest into Things like Venture Capital alongside many other assets in most cases but other things that invest into Venture Capital things like Pension funds uh University

endowments right so like Harvard and Yale and Princeton they have billions of dollars under management and they invest a lot of that into Venture Capital um things like Banks corporations insurance companies actually a lot of Corporations have some type a venture Fund um so if you're like you know Microsoft you have a venture capital fund underneath Microsoft that they own that they go and invest into startups because they want to kind of like incubate some of these startups in fact even Chipotle I remember last year launched a venture capital fund as part of the company

right and I forget how big it was it's like 25 or 50 million dollar Venture Capital fund uh that chipotle launched Um so there's a really wide variety of uh people and organizations who invest into Venture Capital here's just the top 10 overall VC funds I I actually don't even know where I got this chart from but these are the ones that you're going to see most often people talking about in recent Horowitz sometimes people use an acronym for this a16z Sequoia Capital right we have things like Benchmark um General Catalyst right these are ones

That you'll see very often on cap tables uh investing into some of these startups so we've invested alongside a number of these um and they they deploy a lot of money they put in billions of dollars through their funds um but there are thousands of venture funds and there's really no um limit to being able to start one so like for example our Venture fund is is not a Multi-billion dollar fund I mean we're investing Millions but we're not you know investing billions of dollars uh through our fund because it's it's our first fund where

we're just kind of uh in the early phases of it all right um now there are some startup accelerators these are two ones that you're going to want to be aware of there's a number of them but the most popular is without a doubt going to be y combinator so y Combinator has incubated uh so many uh unicorn companies companies like Airbnb and coinbase and open c um and you know I think doordash and you know the list goes on and on and I can just throw up some of the companies that uh have been

incubated in Y combinator which is also there's an acronym for it YC so y combinator has two batches per year where they incubate usually over 100 companies I think this past match was over 200 companies uh that they Basically will invest a small amount of money uh into that company and then they will it's called a startup accelerator where they will uh connect those startup founders with investors we've invested into a number of companies that have gone through y combinator um Tech Stars as well is another one that is very very reputable um as an

incubator so if you are a Founder you're thinking about starting a company then I personally would Recommend either of these as great startup accelerators they do take a percentage of your business um uh but they give you you know a certain amount of money for that and it also helps you to connect with um investors and it kind of just kind of gives you a great boost uh in my opinion uh there are some mixed views on this some people don't like why combinator um but I think overall uh it is a really Great one

and if you get into y combinator if you're a founder and you get the Y combinator stamp of approval um it really can do wonders for you it can get you into meetings that maybe would otherwise be very difficult to get into if you weren't able to get into y combinator so be aware of these and you can actually invest into uh companies that went through YC there's hundreds of companies per year and you can even just go on to their site you go into one Combinator site and see all of the companies in the

most recent batch and then just reach out to them like if you are a high net worth individual or you're thinking about doing some Angel Investing I've done this so many times I'll just go on to the Y combinator site I'll look through the companies I'll browse through them and I'll just email or DM or slide into some LinkedIn messages for some of the founders and connect with them and potentially invest Into them of course you know this is not Financial advice you could lose all your money so you know if you go reach out

to a company and it goes bankrupt because you invested that's that's on you okay um let's talk about historic returns in Venture Capital funds uh so so the thing with venture capital is that it's very much it's it's not standardized where like if you look at a lot of funds even like hedge funds they're going to be Much more standardized where you're going to see a smaller um it's kind of standard deviation of of of of returns uh for funds and like you know different types of hedge funds um but with Venture funds there really

is a big spread so as we can see here for historic returns Adventure funds the majority of funds return uh one time or less than the money that was invested so if a fund raises 10 million dollars uh There's about a 50 chance that that fund over its 10-year lifespan uh just barely Returns the money that was invested into it and so this is where there is a lot of risk involved okay but we can see that as we go up through here a one to three x return is about a 30 chance of that

a three of five x return about a nine percent chance of that and then there are funds that return 10 20 or 30 times the value of the fund and it has happened so many times in the past where You know they invest into Uber at a very early stage or they invest into Apple at a very early stage and end up making an incredible amount of money and a credible multiple on their Capital so as I said as you can see here there is quite a bit of risk and not everyone can win in

this space and so the whole point of venture funds is how can you differentiate how can you find those early companies that have the best chance of turning into unicorns which a Unicorn is just labeled as a company that is valued over a billion dollars all right um and so you know I have friends who have invested into companies at you know five million valuation and it balloons to a 15 20 billion dollar valuation and they end up making uh 500 or a thousand times the money that they invested into that company um and so

really is about taking as many swings as possible in Venture uh we can talk a little bit more about like Venture portfolio construction but um we'll we'll go into that later okay so historic returns overall though just to kind of leave this off on this last note here um it's it's relatively vague you know there's there's a lot of funds don't publicize their exact Returns on cash Returns on Capital that they've had over the past 10 years or 20 years but I would go to say and you know just through the research that I've done

over the years that a lot of venture capital In general has pretty decent returns uh some people would argue that it outperforms the stock market there are studies that show that Venture Capital outperforms the stock market and then there's also going to be people who say that it underperforms the stock market it might be closer to five percent returns whereas other people are going to say 15 20 returns it really does depend on what data you are pulling but nonetheless you know has been some Pretty positive returns uh historically over the past 50 60 years

since Venture Capital has really been around okay um so this is actually a chart that I want to show you of the companies that have been in the YC batches uh and what industry they've been in so uh most uh companies that are funded through Venture Capital these days at least tend to be things like B2B SAS so uh um business to business uh software as a Service solutions basically just like boring SAS right like if you're like using like Asana or something like some workflow management software uh some sales management software that tends to

be some of the most popular uh companies um in y combinator who are started and then also just in general uh for Venture Capital so a lot of venture capital is going to be Tech focused right it's it's a lot of apps it's a lot of software but then there's also going to be things Like consumer packaged Goods which the acronym for that is cpg so things like you know somebody's starting like a candy bar company and they raise Venture Capital through it that is still very possible as well there's quite a few physical products

we've actually invested through our fund into some hard tech companies as well who are trying to do last mile Solutions um you know building underground tunnels Some kind of ridiculous things uh that you know we'll see if they pan out um but this is just kind of a chart that I want to show you here right so there's quite a few ones in uh edtech in education a lot of consumer companies Healthcare uh fintech which is financial technology real estate and construction Industrials and government and you can see how this has kind of shifted over

time right there's not as many consumer uh startups uh today in 2023 or in 2022 As we see on the chart here as what there were in 2005 or 2006 2007 uh when like the social stuff was super big so it's interesting to see the trends here and kind of see like what's going forward um but you know that's just kind of an indicator of what's being built like in the 2023 recent batch most of the companies in that y combinator batch were actually AI companies right and so I'm sure that something out of that

Batch of the 200 some companies will probably turn into a multi-billion dollar company I don't know which one but there are some incredibly smart people in that batch we've talked to a lot of them and so we'll see on that okay so now let's talk about General Partners versus limited partners these are just some terms that you're going to need to really know if you get into this industry okay so General Partners the acronym for this is GP and LP so you can Hear people talking about this all the time if you're at like a

you know an event or a conference or something people are talking about their LPS they're talking about you know their GPS and so basically what this is is the general partner is the person who is running the Venture fund The Venture Capital fund it's the person who controls it it's the person who started it most likely or they are managing the Venture Capital fund they don't have to Start it there can be other Founders but the general partner is the one who is managing the fund they're the ones making the decision on what to invest

into through the fund um and the lp The Limited partner is the investor in the fund now technically actually LPS like do oh own the fund what we don't have to get to it like into detail on that so just remember that LPS are the investors into the fund and GPS are the ones who are deciding How to manage the fund what to invest into uh and kind of like you know talking to all these startups uh screening all the startups meeting with the founders and investing it okay so the LPS are like um the

the Pension funds and the banks and everyone who invests into a fund right so like with our fund with Roadrunner uh myself and sebi were both the GPS we're the general partners and the LPS are the people who invested into Our fund so people invest into our fund then we take that money and we invest that money into a variety of different startups okay so hopefully that kind of clears it up there definitely take note on GP and LP and the difference between those two all right now I don't want to scare you here with

this layout on on the the structure of a venture fund um please don't run away okay because the first time I looked at this years ago it was a little bit scary to me and I didn't understand uh the layout of this but this is how most Venture funds are structured okay so basically we have all of the investors they invest into this Venture fund which is this green one down here okay um and then from this right there's two different types of fees we'll talk about this in the next slide management fees and carry

uh carried interest um and so the management fees in this fund get paid out to this other LLC Which is the Management LLC uh and a lot of those are two percent management fee and then we have the 20 carry on the profits like I said we'll talk about this in the next slide but I just want to show you this so basically the 20 uh basically if if the fund has uh made money and it's it's profitable um and there was some type of liquidity event um then the carried interest goes over to this

other Um entity here that then gets distributed to the fund managers over here okay so um it can be a little bit confusing but once you like kind of do this for a little while this is going to make a lot of sense to you um so don't don't don't don't be scared by seeing this um and actually in fact a lot of venture funds don't even have to like think about a lot of this because we have a company that manages our back end of our Fund and so we just focus on investing we

don't have to worry about all these different entities and moving money around and everything it's it's a lot more simplified uh than it than it actually looks okay so and here's just a much simpler layout here right so limited partners they invest in the Venture Capital fund then there's the general partner who can also invest into it but ends up just managing the Venture fund and then that fund invests into a Number of companies okay much simpler uh process here of what it looks like right all right so let's talk about fees on Venture Capital

funds what are the standard fees and what are the differences between between them okay so fee structure is determined by General Partners so when someone creates a fund they are the ones who say what the terms are for the fees right so for our fund with Roadrunner our fees are the standard two plus twenty that's what People call it two plus twenty so it's two percent management fee annually over uh the fund's lifespan oh and most funds tend to be 10 years in lifespan and then 20 carried interest so basically uh the two percent management

fee gets taken out every year and that's that's really to pay for uh the uh running the fund uh doing due diligence for companies right it's it's meant for those purposes um and this is what most funds do actually just most money management in General like most hedge funds do two percent management plus 20 carry uh most uh real estate funds uh actually do even weirder terms they do like 35 or 40 carry uh on some of those deals so you can see them deviate there are also some funds where you won't see any management

fees or you won't see any carry but in my opinion those are kind of a red flag because it means that they're kind of desperate for money um that's just my personal opinion there Okay so management fees I think are pretty straightforward right it gets taken out every year uh to to pay for uh the due diligence and to pay for running the fund operating the fund um and also if you're a fund manager only doing that management then also to kind of help you uh survive as well and make sure that the fund runs

smoothly okay uh the carried interest or carry uh is basically just a percent of the proceeds if the fund is profitable so Most funds are going to have it set up where like if there's a 10 million dollar fund right if you launch a 10 million dollar fund um and you have a 20 carry on that and the fund uh doubles right and and uh there's a big liquidity event some company uh um IPOs or something right and the 10 million dollar fund ends up turning into 20 million dollars um through some type of liquidity

event so basically the fund doubled and now You as a fund manager would get a 20 cut of that total okay so of that total gain so the funds started at 10 million it doubled it went to 20 million dollars so there's a 10 million dollar gain of that the fund managers get 20 so the fund managers get two million dollars and the investors get that eight million dollar profit plus the original money that they invested okay so that's how Kerry works on that um it typically only kicks in once a fund has reached Um

over what the initial amount invested was so if a venture fund um you know raises 10 million dollars and then uh the fund returns 10 million dollars people just get their money back basically um then there really shouldn't be any carried interest on that uh because it's not profits it's actually just getting their initial Capital back um but then really kind of what this Gets interesting is like people who are running I have some friends who are running like 400 or 500 million dollar funds and if you have a 500 million dollar Venture Capital fund

and it turns into a billion dollars it's a 500 million dollar profit for the investors of that you might get 20 carry on that 20 of 500 million dollars is a hundred million dollar profit for the general partners for the GPS in that fund so you can see how this is pretty lucrative for Venture fund managers and then also for LPS if if it turns out to be profitable in a lot of cases they don't mind that the general partner takes a 20 percent uh carried interest on that if they're making good money so it's

kind of an everyone wins situation if the fund does well um and I think the carried interest is good because uh what it does is it really incentivizes the GPS to make sure that they're investing into companies That really have great potential and it kind of aligns the incentives there to make sure that the GPS are aligned with the LPS uh with the carried interest okay um so yeah like I said these can vary uh the GP sets the terms on this and can even kind of like change them based on you know which investor

is coming into their fund they can you know slash them they can say zero percent they can say you know three percent I've seen some do Higher um but that is the standard fee structure for Venture Capital funds okay so let's talk about the startup financing cycle and kind of like where Venture funds come in okay so this is a a basic chart of showing you uh revenue and time that a startup is alive okay so in the first initial phase of a startup this is what we call the Valley of Death it's where someone

might have an idea they might be Building something but they can't raise money for it they're not profitable they have to build some type of software it's going to cost hundreds of thousands of dollars and so the value of death is where most people kind of end up because they can't get past that initial raise and they can't raise some seed capital from Angels or Venture funds and they end up the company ends up dying okay but then as we go through here right you have your early stage uh rounds so we Have uh so

how it works is there's there's pre-seed there's seed there's series a series B series C and I can go onwards down to like series d e f g and then at some point hopefully there is an an exit right maybe there's an IPO or someone acquires the company but that tends to be the big goal is to enter the public markets uh later on and you know if you are ipoing as a startup uh you're likely in the billions of dollars evaluation Um so it's it's it's very difficult to get to this point but this

tends to be the end goal for most startup Founders is to have a big IPO for that company um so let's just show you the different stages of venture capital here like I said precede this is when a company is there's there's really no product it might just be an idea um it might just be a small team of people uh you can have no money in the Bank right but you have an idea you want to work on it and you want to prove that this potential concept or idea could work and that's when

you raise a pre-sea precede round and these pre-seed rounds are totally dependent on the industry that you're in right if you're doing like Tech um consumer attack or you know B2B SAS a lot of pre-seed rounds these days are somewhere between like five and ten million dollar valuations sometimes Lower sometimes higher it really does depend on who the startup founder is but that tends to be the range for pre-seed tech companies in the United States if you are in Europe it's going to be totally different you probably more like a million Euros or something or

two million euros um if if you're in you know a different country if you're in Japan somewhere it's probably gonna be a totally different setup as well okay but pretty is really just proving out this Concept um there's a lot of things that determine the value that you're able to raise at for a pre-seed round like if you have a previous company you know we've invested into a couple of companies through Roadrunner um where the pre-seed round was like 10 million to 15 million dollars for a pre-seed round but the founder had previously sold their

last company for you know 500 million dollars and so uh They have quite a great track record and so we understood look this PC rounds can be a little bit higher but that's okay because we have a lot of faith in the founder so we're willing to pay a little bit more to get into the company okay seed round is when you typically have some type of almost some type of product Market fit uh the seed rounds today for tech companies tend to be in like that 10 to 20 million dollar range give or take

for uh Tech and then we have series A series B series C and onwards um and with every round there tends to be a lot more financial data and a match tricks as we go throughout like later on in the routes right so like with the pre-seed investment or with the seed investment as a venture capitalist you really like you you you have to uh do things Beyond just looking at the numbers because if you go to someone who's who's raising money on a PC round and it's just an idea well how do you you

know uh like You can't look at their balance sheet you can't look at their bank account and make judgments off of that because it's really just an idea when Mark Zuckerberg started Facebook and he got that uh initial investment from Peter Thiel they weren't making money right they were losing money um but they were still able to get a five million dollar valuation from it because Peter teal understood the importance of overlooking the basic Financials and instead focusing on the team focusing on the idea on the strategy to build this into a multi-billion dollar company

okay but as we go through like as we get to series B series C Series d That's when you can start really looking at financials of a company and say okay well you know how much company like how much money is this company burning um what's the runway how long can they last are they profitable and through Every round you hopefully want to get closer towards profitability as you go throughout and you get down to like series D or Series E and hopefully at some point there is an IPO or a spec or you know

a sale of some sort um so those are the stages of venture capital um sometimes you'll see people like skip some of these like they'll go straight to a seed round or they'll like Skip One or they'll do a bridge round in between Them but not like a formal round um so yeah so now let's talk about dilution this is a really important thing to understand here most people don't kind of think about this which is absurd but you you absolutely need to okay so with every new uh round that is raised for a startup

you end up getting diluted because you're bringing on new investors and you're giving away some of your shares to those new investors in most cases okay so let's say that Um you own 10 of a company at the pre-seed level as a venture capitalist right you own 10 of the company you invest five hundred thousand dollars at a five million valuation right um now if that company goes and raises a new round uh with every new round it tends to be somewhere between like a fifteen and twenty percent dilution um because that's typically how much

is going to be given up to new investors on every new round right so Um if you owned 10 of the company but now we're bringing in new investors on the next round you might only own eight percent of the company unless you continuously follow up and every round continuously invest money into it which is not something that we tend to really do with our fund um and so you do get watered down you do get diluted over time where if you invest pre-seed and you own 10 percent And you never follow up on any

of those other rounds by the time you get to like a series C or series D or E and you know you're like having an IPO you might only own uh you know three or four percent of that company instead of ten percent of the company because you get watered down every single time um you don't have to you can try to fight and keep your Equity but that means you're going to have to continue to put money in every round and keep Upping the ante basically uh to retain the equity that you had uh

from the first round that you got into okay and that also goes for for Founders as well this this happens all the time you know like Founders they start off owning 100 of the company by the time they get to a late round you know series D or later they might have uh you know only a 30 stake in that company um but the goal here is that with every New round you're raising a much higher valuation that it doesn't really matter like you're still gaining anyway so if you own 10 and then next round

you only own eight percent but the value of that company 10x well you still have a much higher gain right so that's why a lot of people don't complain about it but you do want to be aware of it um and there are even cases where like Founders will get kicked out of companies Um because they don't own enough like they start off owning all of it and then you know like Steve Jobs has happened to them in the 90s I think or sometime maybe it's the 80s he got kicked out of apple right they

they fired him um and it was his company like he started the company but it's because he owned less than half of it and he didn't have all the Voting Rights um and people teamed up against himself just something to be aware of in in the World of of venture capital and startup investing that there is something called dilution okay so now we're talking about post money and pre-money valuations these are two uh terms that you're going to hear being thrown around quite a bit and you don't want to look like a fool and not

understand them if you're talking to a startup or you're talking to a VC and they ask is it post money is it pre-money what are the terms um and so here's just a basic Understanding of the difference between these two basically pre-money valuation is um you are adding money on top the investors adding money on top of what the current valuation is so like if someone says the valuation is a million dollars pre-money then if someone invests 250 000 uh it ends up being the total valuation of 1.25 million dollars and then post money valuation

is much more common in the space at least today Most people go off of Post money valuation which as you can see here is slightly different right so if it's a million dollars most money and someone invest 250 000 they now own 25 of that business because the total valuation is a million dollars and they invested 250 000 right so um most people do use post money evaluation some people do talk about pre-money but um at least from what I've seen over the years it tends to be post Money right um so let's talk about

deal structuring uh there's there's really three kind of like big things that people do for deal structuring so we have convertible notes convertible promissory notes um this is definitely one of the most common that we see um and this is basically a note that is converted into Company stock in the next financing round so going back to like The Peter Thiel Mark Zuckerberg Facebook deal uh this I believe was on a convertible note where Peter Thiel invested 500 000 it was that five million valuation but he doesn't get that Equity until the next round that

Mark Zuckerberg raised and then it kicks in but he basically Peter locks himself in at a five million valuation and then the next round I don't remember what it was um but yeah that's how it works it's It's basically money that is almost like lent to uh the company that then gets converted into stock on the next round okay um a safe was super popular uh during the big bubble that we had in like 20 20 2021 every startup founder was using a safe um this is more favorable to Founders than it is to investors

and I don't see as many safe today as what there were like last year two years ago Um but basically it's it's a simple agreement for future Equity it's kind of similar to convertible notes um but it has no maternity and it doesn't bear interest on that um so it is like I said more favorable to Startup Founders if they can pull it off um but that cash investment it converts into stock in the next round of financing okay and then we all we also Have convertible preferred stock which gives investors preference over common shareholders

um which can be really great okay so those are the three most common ways that we see deals being structured there are other ones as well um but most companies that are doing Venture funding are corporations or C corporations they're not like an LLC or something if if you see a company that has an LLC and they're trying to raise Money through the Venture round uh that's kind of a red flag like it's not a good thing to do through an LLC you want to have a C corporation I'm not a lawyer of course do

your own due diligence there but that's just on a personal note what I believe okay so let's talk about liquidity events for startups what's what's the most common way that you actually get money out of this right you invest at you know pre-seed or seed or series a how do you Actually get money from this in most cases this takes a very long time and sometimes over a decade from when the first investment is made into a company until you actually receive money out of it if any later on down the road so the most

common uh liquidity events basically like events where there's cash where there's like you know some type of like big windfall of cash it tends to be through Acquisitions this is without a doubt the most common so maybe you have A startup you build it up and you know it gets to like a series a and Microsoft acquires the company right or Google acquires the company there's always Acquisitions going on it's very common Acquisitions are the most common but they are not the highest value so most Acquisitions might be you know in the tens of million

dollars maybe the hundreds of millions sometimes in the billions of dollars like Adobe just acquired figma for 20 billion dollars Which is a really high amount which is kind of crazy um but Acquisitions are definitely one of the most common then we have public listings and we have buyouts so public listings things like IPOs are really exciting I've never experienced one myself I was at the New York Stock Exchange but I was for an ETF launch um but an IPO an initial public offering is Definitely one of the big goals for startup Founders in Venture

capitalists um to to have okay okay so now let's talk about a fund thesis a venture capital fund thesis um versus not having one at all right so every Venture fund is going to be different right some funds are going to have a thesis they're going to say this is what we're investing into this is what our focus is and others are going to say we're generalists we'll invest Into anything that comes our way uh we'll take a look at anything it doesn't matter like we'll invest in the healthcare companies will invest into companies in

you know um Brazil well like do all these different things so there's generalists and there are focused Venture funds which one's better which one should you start which one should you invest into um I I don't know but here's just some examples of some different ones and why I think having some type of specialization can be beneficial as a venture fund so I guess might as much talk about ours here because it's an example right so with Roadrunner we invest into consumer technology we invest into small and medium business SAS companies and we invest into

even some creative economy companies and why do we do this because myself and sebby my partner on this we have a number of YouTube channels we have media companies And so we understand we like to think we understand the Creator economy we like to think that we understand the consumer pretty well and we also have these marketing channels these these marketing Outlets where we can reach millions of people and so we understanding this say well if we understand kind of like consumer why don't we invest into consumer tech companies and potentially help some of those

companies on their marketing help them understand like Influencer marketing uh it's also just my favorite topic and so it kind of like coincides right we have Roadrunner that coincides with our own media companies that have you know YouTube channels and and blogs and newsletters and everything else and so that is our fun thesis our fun thesis hey look let's invest in these consumer companies Let's help them out let's help them with marketing and I think that a lot of the founders that we uh invest into invest into their Companies I think a lot of them

do appreciate you know the things that we do whether it's just something simple like giving them a shout out on my Instagram saying hey go check out this uh app that I've been using that we invested into might get them a couple hundred users it it it's helpful right and so the whole goal with a venture fund is how can you be helpful to a startup founder and I just threw a couple of other like random Venture Funds as well to show you like Intel Capital right they're very specific like if you're raising money from

Intel Capital you're probably like in that space right of computers or chips or some other type of technology in that space climate capital I don't know the the general Partners there but I assume that they're investing into climate Tech or companies that are focused on uh the environment right and so it's very like it's it's Very obvious what they're investing into and this can help them get into deals and also maybe they understand that space a lot better they specialize in that space JetBlue Ventures right they're investing into like travel companies different types of travel

Tech and so I do think that having some type of some type of specialization can help you to achieve Alpha and can help you to get into a company and then help grow that company as a venture investor Um but there's also data that shows a lot of generalist funds do really well okay so so um it's really up to you if you're thinking about starting a venture fund I I would just have something where if you're trying to bring on investors and they say why should I invest into your fund what do you specialize

in what do you understand better than most people uh Then it's good to have something that you can say you know and that you can actually have a proven record of like look this is what we are capable of doing this is the space that we understand best and so we might as well invest into it it makes a lot of sense right okay so let's talk about measuring the success of a venture fund um so return multiples and then uh Returns on cash or an internal rate of return that you might have okay so

Here's just some of various different things you'll see being thrown around right so we have total value to paid in capital we have distributions and then we have residual value to paid in capital uh these are all going to be pretty important things you want to be able to understand these so if an investor is asking you or you're thinking about investing into a venture fund you can ask them uh what are the markups in the companies uh how much Cash have you returned to your investors and then also what's the time span of this

and then we also have things like irr which is internal rate of return uh compound annual growth rate um right so these are other things that you want like Net Present Value uh of the fund so those are all interesting multiples things you want to understand um you can dig deeper into that if you would like to um but it's good to have like if if You're going to potentially invest into a venture fund or you're starting a venture fund to be able to talk the talk and ask you know how many markups have you

had what are the multiples of some of these different companies what's your total Equity stake in some of these companies over time so I want to quickly talk about five or six B versus 506c this is a much kind of like in the weed technicality thing here but still wanted to mention it so 506b Versus C basically the the difference is this is like most Venture Capital funds can't really talk about that they're raising a fund and they're very highly regulated uh because they're in the 506 B category so like if you're raising a venture

fund you can't just go out and tell the world hey I'm raising a venture fund uh if you are structured with a 506b if you're 506c you have a lot more leeway and you can tell people like hey I'm raising money right now like you you Can do that but uh with the 506c people have to go through a couple more Hoops they have to like you have to verify their accreditation status that they are an accredited investor um where with the 506b it's much more like self uh checking the Box um so that's the

biggest difference between those two um but generally speaking either way if you're 506b or 506c you don't really go out and tell like last out into the World that you're raising money most people do it kind of quietly amongst friends like that's what we do for our fund we raise quietly amongst our friends and people that we know even though we are a 506c so we can talk about our fund and say that we have a fund and you know say that we're still raising it now without having to kind of like worry as much

about that so that's just the difference between those two you're probably not gonna have to really Think about this too much but just good to know if you are thinking about starting a fund um so booms and busts look um The Venture industry it's very much boom embossed right uh in the 1990s people were so excited about the.com era that they were pouring in billions of dollars into Venture Capital into startups um and a lot of people lost a lot of money through that right Um and through the early 2000s you know they went from

way up high uh to to losing most things I think like Amazon stock went down 90 percent most companies went down 90 a lot of startups went to zero um and so we had this big run up recently in 2020 to 2021 where so many companies were raising money it seems like there was infinite money Jerome Powell just had the money printer going uh everyone's getting stimmy checks Every other week it felt like and it was a pretty great time for people financially um now things have changed quite a bit right Venture is on the

downturn a bit we see less Venture funding it's harder to launch a startup and raise money today uh valuations have gone down quite considerably um but this is why and this is not advice but this is why I'm excited for our fund I'm excited for the funds that Are raising and deploying money in the next couple of years because we've had this big run up recently and now we've had this decline recently and so entering into a space where uh valuations are lower could be attractive I need to make a huge disclaimer here that you

know like there's it's still there's a lot of risk okay um and and we could certainly lose money with our fund nothing is guaranteed um But I think it's an interesting time to get into Venture Capital as a whole as things have been declining um at least in terms of valuations I like to think that it's more attractive for my personal Investments okay now let's finally talk about what do Venture capitalists look for in a startup what is the most most important factors uh to look at in VC so this is obviously very much going

to be opinionated this is uh personally what I look at when I'm Thinking about investing into a company and so because the companies that we invest into through Roadrunner are very early stage like pre-seed and seed and some series a companies the most important thing to us is looking at the team looking at the founders and understanding is this the person to do this to build this or is someone else better suited for this because with every idea there's going to be a hundred potential Founders that might be Building the same product and so why

is this person the best one to do it and are they the best one to do it because in a lot of cases you know so there's an amazing idea I love the business idea I love the models I love the the market size but I can't get over the founder there's something about the founder that I feel like they're not competent and this is where it kind of is a big art form where you have to really be able to read people understand people is this What this person actually wants to do is this

a quick money grab uh where's their head at right and so the team is the most important thing for myself when we are screening companies to invest into I want to make sure someone's very competent if they're building a tech company I want them to have a tech background because you know just being honest here like if if a Founder is a business major and they've built an app like they hired someone to build an app That's something that I don't like because if the business major can't code and they don't know how to fix

a bug that might come up at 3 30 in the morning but they're they're developers on the other side of the world sleeping or something and there's a bug in the code and the app's not working and it's crashing the founder needs to be able to fix that I believe um that's just one of the like small criteria there for myself four companies that I invest into Market Size right total addressable Market um you know if if this is a small market right uh uh and for for for my screening on this it's really I

mean we're talking it has to be in the billions of dollars potential Market size for me to consider investing into it um if this is a market where like you're selling like like a yard game or something or you're selling like a board game uh that's very specific to like uh Indonesia right like only people in Indonesia are going to Play this board game that's such a small Market that it's not something that I would personally invest into and like I said with this slide like I'm going really just into like personal things so you

could totally disagree with this but total addressable Market uh is something that I look at I want it to be in the billions of dollars um because otherwise it might not be a venture backable company it could still be a great company you know you could Make the board games in Indonesia and you know focus on that market and make maybe millions of dollars but can you make billions right and that's really the big question with Venture um not all companies are suited for Venture Capital um and then also traction and or product Market fit

right uh have people been using this product what's their feedback and when I'm actually thinking about investing into companies I will go and talk to the customers I will go talk to The users of these companies and get their feedback get their understanding of it also you kind of do due diligence in in like looking around and sending uh you know if it's like an app or some software not only will I use it myself for a while before it does but I'll send it to half a dozen of my friends and people around me

and send it to them say hey check this out what do you think right um and see if there is some type of Product Market fit for that and then also just a detailed use of capital right like if I'm investing money uh into a startup I want to know what are they using that for do they have a plan for that million dollars that we might be giving them do they have a plan for that or are they just kind of going to throw it into something randomly throw it into their bank account and

worry about it later I want to see a plan for that and a lot of other VCS want to see That as well and then another thing that I wouldn't I wouldn't say that like matters too much but it is a factor that you want to look at you is the other co-investors on a deal right so here's why it can be important because sometimes if you're investing into a company and there can be other people on the cap table or other investors who can be super beneficial like if I'm investing into a company on

a pre-seed level and I see that one of the other Investors alongside me might be like you know Bill Gates or Jeff Bezos that could be a really interesting indicator and kind of like a show like a sign of strength for the founder either on their capability of raising money or on their connections or actually on just their overall competence because if Jeff Bezos invests into someone then that probably means that uh that founder has been somewhat screened you want to be careful with this because it can be a trap where You know there's a

lot of like really bad companies that just got money because there's too much Venture funding going around and like in recent Horowitz was just throwing money into anything that they could possibly find seem to like tiger Global um and so uh co-investors though it is something you just want to note and like who else is on the cap table who are the other investors and sometimes it can be a good sign but don't don't limit Yourself and say I'm only going to invest when other big VCS invest because this is how you can end up

missing absolute uh great opportunities where everyone overlooks it but it could end up being a really great company uh that nobody realizes okay so how do you connect with VCS uh this is a pretty interesting slide here I think Twitter is the best way to do this so if you just go onto Twitter right and you just start blasting out things about vendor Capital you're learning about it you follow you know 100 different VCS it's going to start filling up your Twitter feed with a lot of VC and startup talk I know my Twitter feed

is entirely just Venture Capital stuff from all my friends and from other people in the space and so I've connected with thousands of people who are VCS or who are startup Founders we've found a lot of companies that we've invested into through our fund on Twitter like so so It really is uh incredible to use outside of that going to local Tech events there are going to be local Tech events in pretty much any major city in the world and then also going to things like New York Tech week Miami Tech week South by Southwest

a lot of VCS a lot of startup Founders go to them and generally speaking like VCS are very friendly uh from what I have experienced over the years um and very welcoming you know it's all About Connections right and so um if you are thinking about getting into VC uh then it's actually pretty easy to reach out to VCS from what I've seen um and so uh also yeah things like spending time in the Bay Area like if you just go to San Francisco and you spend enough time there you will meet a lot of

people in the tech space who are doing some really incredible things and just overall surrounding yourself with As many smart people as you can find and the smartest people as possible um is really one of the best ways to get into this space and then also if you're in college a lot of colleges have like incubators and clubs for entrepreneurship and Venture Capital um but yeah go and get involved in Twitter really it's it's where like all the VCS live I don't know why but they do um you know go ahead follow me if you'd

Like to shoot me a DM and let me know that you watch this video to this part too I think we're almost like an hour in so that's really cool I would love to hear about that um and and hear kind of what you're working on and how you're getting started in this space so that is the basics of this video uh for Venture Capital look we could go for another five hours but I think we were almost an hour here so I I don't want to Bore you to death um the next steps on

this if you really want to learn more about Venture Capital it's going to be through reading books uh there's a couple of really great books I will link to them down below um and they can help you get started in this space whether you're a startup founder or a veteran capitalist or an aspiring you know person working at a venture fund um then these books can be pretty useful For you um so yeah feel free to just follow me on Twitter uh shoot me a message I would love to connect I you know I don't

have anything to sell you I I do think actually I'm gonna put together uh some type of like email newsletter maybe I'll send out once a week or once a month just on some general things uh in the Venture Capital world in the startup world that you might want to stay up to date with so I'll leave a link to that Down below as well um and don't forget to check out Mercury uh it's it's the um um company that we use for our banking uh for Road Runner so thanks for watching the video and

I'll see everybody sometime in the future