This article is from WeChat public account:People God Fen (ID: tongyipaocha), title map from: American drama “Silicon Valley”

1. Why is the valuation too high but it hurts you?

There is a plot in the American TV series “Silicon Valley”. Richard, the CEO of the entrepreneurial team “Magic Flute”, invented one of the most powerful compression algorithms, and became the “darling” of venture capital chasing.

But his venture capital friend gave him a suggestion: someone gave you a high estimate(runaway valuation)< /span>In fact, you are ruining your company, don’t accept it.

It’s like someone wants to invest in you, and you counted 10 million, but you shook your head and said, no, I only value 5 million.

Don’t think that this is just the plot in the TV series. Although “Silicon Valley” is just a US drama, the plot of entrepreneurship seems to be open, but one thing is worthy of recognition: the venture capital shown in the drama is at different stages of the company. The role is still very realistic.

This article, I will use “Silicon Valley” to talk about how a startup should do it, and then use the venture capital to grow up from the “incubator” to the C wheel step by step. What are the common pits, including the beginning? The question of “why can’t be overvalued.”

2. From “incubator” to “angel wheel”

“Silicon Valley” was started from the “incubator”. The “business incubator” is actually providing rent-free office (and dormitory) for several years, as well as entrepreneurial consulting services for seniors.

When you first entered the “incubator”, these people often only have a big direction of entrepreneurship, and even the direction is constantly changing. Today, we must do a sharing economy, and we will do blockchain tomorrow, and all kinds of big and unreasonable concepts are flying all over the sky. Most of these projects are unreliable. For example, there is a startup team to use microwave technology to heat the skin, and someone to do a parking parking location software to prevent themselves from finding a car.

Of course, the real project of the Niubi is very unreliable at first, so the “incubator” owner Ehrlich is usually the one who refuses to come, and then slowly observe and slowly eliminate it. High failure rates naturally require high returns on a single project. Ehrlich can make up for the “company” (in fact, there is no company at this time) with the “free office” offer10% of the shares.

In addition to the government or private “incubators”, China’s current role is similar to the “seed round” and “wind investment intermediary” – as long as you give 10% to 20% of the equity to him (or investment rebates), he will help you package projects, establish business models, and contact investors.

The “incubator” is good, but the time given to you is very short. The boss can sweep you out at any time, so Richard, the protagonist of “Silicon Valley”, keeps on optimizing ideas and ideas from the first day. Looking for investors, accept the severe test of the first level, that is – “angel wheel.”

3. From “Angel Wheel” to Round A

With a technology, or a prototype of a product, but you don’t have the money to make the product, what should I do? This is the problem solved by the angel wheel.

The protagonist Richard in “Silicon Valley” is a standard technology house. Without a business mind, he invented a new compression algorithm, but made this promising technology into “only facing the search rights of musicians.” The small and beautiful product, so repeatedly ridiculed by the incubator owner Ehrlich.

But this does not prevent people who are truly knowledgeable from discovering the value of this technology and knowing its true use: search, storage, etc. in the high-frequency public business.

So in the “Angel Wheel”, you don’t need to make the product complete, as long as your idea is worthwhile, you can go to the “angel wheel” investment – the role of the angel wheel is to pay Help you to make the product.

(Note: The financing environment shown in “Silicon Valley” is under a light bubble economy. If it is a “freezing period”, the product is made. It is not necessarily possible to get the angel wheel. The same as below)

Richard has developed a music copyright search software, but angel investment is only his compression algorithm, and the purpose of the investment is to help him make a really commercial compression product.

In addition to technology and ideas, angel investment is more about the background of the founder. Richard has a working background for big companies, no points, but no points. However, this background may not be sufficient in China. For domestic VCs, the industry background is far more important than the entrepreneurial direction.

An angel wheel is very different from an “incubator”. The “incubator” invests in people, and the “angel wheel” has begun to transition from people to the team – “Silicon Valley” has a detail, VC The cheque was opened to the company, and the “Magician” company did not exist at the time.

An angel investigator Gregory told the CEO Richard that if you want to get an investment, you must do the following:

  • Defining Board of Directors and members;

  • Clear the team everyResponsibilities and options of a member;

  • Find people who are proficient in business operations;

  • More importantly, as a founder, you have to be able to articulate your business model – which is too difficult for a technical home like Richard.

It all forces the inexperienced founder to change his role, from an expert in a certain field to a true team leader to ensure that the product can be made.

It can be said that the sole purpose of “Angel Wheel” is to turn the “founder’s idea” into a real “company’s product”, so the investor will only give enough money to make the product. Usually only enough for a few months, also is to add a few equipment, recruit a few people, small-scale market test water.

As soon as the product came out and reached the functions envisaged at the time, the game of “start-up financing and customs clearance” officially entered the next round – A round of financing.

4. A troublesome round A financing

In “Silicon Valley”, the “Magician” team invented an algorithm that was more bullish than the “Angel Wheel” stage, coupled with the accidental death of Angel Wheel investors, so the next “A round of financing” caused a lot of The pursuit of venture capital.

Although this episode is too exaggerated, the TV series did not make mistakes in the focus of “A round of financing”. No matter how many technical products you have, the purpose of A round of financing is only one – help your product. Establish a “revenue model”.

What is the “income model”? Including: Who is providing the service? Who is charged? What is the core charging function? How to collect? How much can I collect? This stage does not have to fully realize the income, but the possibility of showing the income to the investor – if you are ToB, you have to see the customer orderWillingness to continue working together; if it is ToC, be sure to find “seed users”, or the rapid growth in the number of users and the proportion of payments.

“The Magic Flute” had a problem in this round, because with the intellectual property lawsuits of big companies, they did not find a professional venture in the A round and were forced to find an inappropriate investor – Billionaire Hannamon.

Why isn’t he a qualified VC? Because you want to run the revenue model, you must first polish the product through a mature R&D team, and then find the right customer (ToB) and The user (ToC) also tests the potential market to demonstrate the validity of the “revenue model.”

To achieve these tasks, the team members must be increased, the organizational structure should be sound, and the external relations should be straightened out. Therefore, the A-round venture should not only invest money, but also help the startup team to complete these. They have never done it before. Things.

Hannamon not only did not have the money in place, but also often interfered with the normal operation of the team. What’s worse, he decisively betrayed the company’s interests when he encountered a financial crisis and asked them to make a profit immediately.

As a result, the “Magic Flute” can only be commercialized when the product is not mature. Fortunately, there is a “protagonist halo” possessed. If it is not in the drama, it has already died eight times.

So, the real A round of “Magic Flute” is Hannamon’s sale of the equity to the real venture capital, and finally get the “Magic Flute” of the A round to rush to the next target “B round” Go, to recapture the lost time.

Professional venture capitalist Laurie also made a mistake that should not be made by a ” venture capitalist”. She rushed to the founder Richard Della and got a professional manager to come over, which made “B WheelRoad” cross section.

5. Failure from round A to round B

Before said, the financing goal of Round A is to help enterprises run through the “revenue model”, mainly referring to the size of users and the willingness to pay, and did not consider the issue of profitability. Therefore, at the beginning, the round-A venture capitalized billionaire Han Namon also asked the company not to make a profit, as long as the number of users.

But sometimes, the “revenue model” reasonable business model may not be profitable, or the day when the profit is not profitable, the goal of the A round of financing will jump directly to the “profit model.”

The “Celebrity” alien CEO Barker believes that now is the “bubble period”, which may be punctured at any time. Now it is racing against time. His business goal is to find products that can be quickly commercialized and sold to large companies. Immediately profitable cash flow income, then quickly B round, C round financing, and then listed,

In fact, if the market size of a product is limited and the barriers to competition are not high, it is better to run the “profit model” directly. The most typical one is the business that relies on large customer orders.

As a foreign CEO, Buck thinks so. He doesn’t understand the value of this compression algorithm. He sees the “Magicial” as an ordinary technology company. The end point is listing or high price. Sold to big companies.

And Richard knows the importance of his algorithm, he wants the former model, big platform, amazing products, massive users, changing the world…

It is obvious that the “Apis” A-round venture capitalist Laurie did not think about this problem, which led to the founder and the CEO having a control battle because of the business direction, wasting the entrepreneurial The most precious time and resources.

Although in the end, Laurie realized this error (thanks to the bubble economy, making the platform higher than the hardware valuation), “Magic Flute The hand “returned to the original position, but tossed a circle, the money is gone.

The money didn’t support the next round of financing, and most startups are so dead. Although it is a pity, it is completely in line with the business rules. The money that the investor gives you has a set purpose. Can’t you really have the next round?

Fortunately, Richard used it again.”The protagonist aura”, miraculously made the platform out without money. But at this time good luck has been exhausted.

If you are doing a toC platform, then the number of users is the pass for you to get the B round. This is the most fancy thing for the B round. The new platform for “The Magic Flute” is because the technology is difficult for ordinary people to understand, the number of users is growing slowly, and Richard has no time and money to improve his products.

In the end, Richard took the risk and bought fake users. The matter was revealed and the B round failed completely.

6. Change the day to complete the B round

Speaking of this, we can imagine that if Richard didn’t waste time, the user slowly grew in the initial stage and eventually reached a certain scale. He finally got the B round. After that, how can he continue to reach the C round?

In fact, if set according to the plot, the “Magic Flute” before the transition will never reach the C round, because the user can not understand his product, he will never solve the problem of profit model.

The goal of A round of financing is to get the “revenue model”, and the goal of the B round is to establish a “profit model.” Most companies are unable to enter the C round because of the inherent flaws in the business model, which leads to an insurmountable barrier between income and profit that cannot be changed through the efforts of the day after tomorrow.

The most common situation is that as your income grows, so does the cost, and even faster. The reason may be:

  • The asset is too heavy and needs to be kept