In recent years, national and global startups have been attracting record numbers of investments. In the first half of 2021 alone, Crunchbase estimates that around 288 billion dollars were invested in startups around the world - which represents an increase of 61% over the last record invested in the second half of 2020.
With this investment boom, it has become increasingly common to hear from investors about their disappointment with themselves for not having made the decision to invest in highly valued companies. Over the last few years, I have had several conversations with investors of all types, angels, early stage, growth capital, private equity and strategic, and it seems that the acceleration in the number of companies demonstrating exponential growth has been accompanied by a growing frustration for missed opportunities.
One of the best examples of the hangover of passing up good deals I heard on a podcast, Invest Like the Best by Patrick O’Shaughnessy. In episode 230, John Harris, from Sequoia Fund, said that these cases are worse than those in which there are losses, as these are generally assimilable. The investor lives with and follows the sins of omission (aka the good deals missed) for a long time.
The are several reasons
The reasons why some investors are left out of transformative deals vary greatly, but are generally associated with divergences in valuation and contractual conditions, when the company is not already discarded in one of the first filters.
The post-mortem analysis of these decisions seems to yield little fruit, as the evaluation tools are not that different between investors, even considering very different mandates.
Is the remedy to move on to the next one and hope to have a little more luck next time? When looking at the main evaluation dimensions, can we find factors that should be studied more carefully?
Prioritizing companies that occupy positions of advantage in relation to transformative trends is a well-known and effective strategy. But beneath the surface, the differences and nuances vary so much that it is very difficult to assess which company is actually in a position to take advantage of tailwinds. On the other hand, investor playbooks generally favor those characteristics that, found in successful Silicon Valley companies, are good markers of the potential for success.
However, there are many case examples that defy the typical playbook
What to say about ATTA, TradersClub (TC) and Mercado Bitcoin?
ATTA was a spin-off of an existing company that, with the founders, smart money investors and Fisher Venture Building, had a fast trajectory and was recently sold to the unicorn QuintoAndar.
TC had a bootstrap trajectory and its first relevant capital market operation was the IPO.
Mercado Bitcoin, also a bootstrap, held its Series A and Series B four months apart and jumped straight to unicorn status with a valuation of U$2.1 billion, preferring not to go public on B3.
Bootstrap companies, with no history in the capital market, with “non-ideal” captables, with business models without direct comparables abroad or that have not yet got the revenue growth model right, have a high chance of being discarded. Every now and then, however, we see these “jabuticabas” moving away from ideal archetypes and succeeding, showing that extrapolating success cases is far from being a sufficient criterion.
If we ask entrepreneurs and investors who have had successful trajectories, we will hear that luck counts, but that this is only part of the story. What seems to be a common element is the value attributed to the much-discussed dimension of people and how they behave when approaching one of the most challenging items of any transaction: valuation.
Entrepreneurs x Investors
In the clash between the conviction of entrepreneurs and the necessarily more defensive stance of investors, much value is lost. Generally, entrepreneurs have difficulty recognizing the limitations of investors' mandate and point of view, and these in turn place a lot of emphasis on capital protection and “fundamentalist” analysis and forget that nothing truly transformative happens through processes of certainty.
In this space, it would be difficult to address all the details that make up the main factors at play in negotiations, but communication and building relationships between entrepreneurs and investors is perhaps the single most important element: a large part of successful operations result from an investment great at relationships and it is not uncommon for friendships to emerge or consolidate in this process.
In this sense, valuation becomes a tool for building the company's equity story and the investor's thesis, and not just a quantitative measure that expresses a negotiation with zero-sum logic. In other words, the objective and value of joint achievement must outweigh the initial negotiation.
How entrepreneurs can maneuver in this market, taking advantage of FOMO in a non-opportunistic way will be left for a second article.