Demystifying Venture Capital Business

Demystifying VC Business

Joshua Agusta - Head of Indigo Accelerator

ABOUT MDI

• Established in 2015, as a corporate venture initiative of Telkom Indonesia, with mandate to invest in growth stage companies globally.

• MDI combines a VC model with services in providing companies with access to operational and go-to-market assistance after making a financial investment.

• Focus investment: high growth verticals to enhance the digital experience and provide excellent services that ultimately lead to the more demanding customer expectation.

• Co-manage and oversee the Indigo Incubator Program since 2015 and had incubated more than 20+ startups with Indigo Incubator.

MDI IS FORGING STRATEGIC ALLIANCES WITH MAJOR CORPORATES

InvestmentManagement

Incubation & Acceleration

Objectives Initiatives Partners

StrategicAdvisory

Key Activities

Build startup ecosystem by supporting early stage companies

Indigo Incubator

Mandiri Inkubator Bisnis

- Corporate venturing- Corporate innovation

seminars/workshops- Ad-hoc advisory

Venture capital fund

Collaborative investment activities

• Perform strategic investments in line with corporate innovation agenda

• Maximize financial returns for corporate principal

Leverage MDI’s unique resources to create value in areas uncovered by investment and incubation activities

SILICON VALLEY - SOUTHEAST ASIA

60+ INCUBATED IN 3 INDONESIA CITIES• Started in 2013, operating in 3

cities in Indonesia.

• Maintains at least 40% Follow on Funding in every batch of graduates since 2015.

• Assist launched 20+ startups go to market.

• Dual track immersion program to Silicon Valley in partnership with Plug & Play.

• Formed the largest angel network in Indonesia (150+ angel investors attending Indigo Demo Day in the past 2 years).

COMPANIES

Singapore & IndonesiaSeries A

Indonesia & PhilippinesSeries A

Indonesia & IndiaSeries B

Thailand, Malaysia, Philippines, IndonesiaSeries B

Singapore & IndonesiaSeries B

JapanPre IPO

Singapore & IndonesiaSeries B

Philippines & IndonesiaSeries B

BATCH 2015 & 2016

45%FOLLOW ON FUNDING

MM 4.5X

WEIGHTED AVERAGE

Total of 35 startups incubated, chosen from

2,000+ entries

Now New NextRevenue Enhancement &

Cost SavingsNew Growth and Revenue

OpportunityNew Technologies beyond

Telco sector

Investment Thesis

- Future-shaping technologies relevant to Telkom ecosystem (A.I., robotics, space technology, 3D printing, Internet of Things)

- Technologies ready for early adoption in the Indonesian market (Blockchain, big data, cyber security, healthcare)

- Technologies ready for use to solve current problems (Logistics, e-commerce enablers, advertising, cloud computing, payment solution, SaaS, education)

• Access to large established customer base • Network of partner companies and advisors • Access to later round financing/exit opportunity • Access to ICT infrastructure

• Insights into new markets and technology • Next gen products and services • Domain expertise • New business models for the future • Cost savings

Access to Telkom’s Infrastructure

VC: 2-Sided Business

DemandSupply


Demand

1. Things you need to know

before VC pitch

2. How VC Valuations Work

3. Some Investment Trends


Demand


before VC pitch



3 Things to Find Out Before VC Pitch

1. VC’s Investment Thesis

2. Preferred Ticket Size

3. Preferred Investment Stage

Different VCs Have Different Investment Thesis

Now New NextRevenue Enhancement &

Cost SavingsNew Growth and Revenue

OpportunityNew Technologies beyond

Telco sector

Investment Thesis

- Future-shaping technologies relevant to Telkom ecosystem (A.I., robotics, space technology, 3D printing, Internet of Things)

- Technologies ready for early adoption in the Indonesian market (Blockchain, big data, cyber security, healthcare)

- Technologies ready for use to solve current problems (Logistics, e-commerce enablers, advertising, cloud computing, payment solution, SaaS, education)

Telkom Synergy Value

Business Process Outsourcing

IT Managed Service

E-Payment

Third Party Administrator Digital Entertainment Mobile Subscription

User Base Support (Corporate & Consumer)

Media Services

We Need Our “Users” to Justify Our Investments

Each VC’s Ticket Size is Also Different

Source: mapofthemoney.com

http://mapofthemoney.com

Reve

nue

TimeValley Of The Death

Break Even

Seed Capital

A

B

C & above

Venture Capitals, Strategic Alliances,Mergers & Acquisitions

Early Stage Later Stage

Angel Investors, Seed VCs

IPO

As Well As Investment Stages Preference

Reve

nue

TimeValley Of The Death

Seed Capital

Venture Capitals, Strategic Alliances,Mergers & Acquisitions

Early Stage Later Stage

Angel Investors, Seed VCs

IPO

As Well As Investment Stages Preference

A

B

C & above


Demand


before VC pitch



Startup Financing Stage

Pre-Seed / Bootstrap Seed Series A, B, Etc.STAGES

PURPOSE

AMOUNT*

Hypothesis Validation

$10-50K

INVESTORS FFF, Angel Investors

Figuring out the product and Getting to user/Product Fit

$100-500K

Angel Investors, Micro VC, Seed VC

Scaling the product and getting to a true product market fit. The rest of the funding series is about scaling

VC, Institutions, PE

$1-5 Mio

These are the 3 common rounds of financing. Sometimes it requires a bridge round between these stages (Pre-Series A, or a Bridge Loan)

Basic Truth for Early Stage Fund Raising

In short, startup investors would see these 3 Ps before investing :

PEOPLE (50%)

track record and sectoral experience is important, if the team is weak, idea is

irrelevant

POTENTIAL MARKET (25%)

funding for a $10 million market and $100 million market will be different. (for VCs, if

it’s not at least a $100 million market, why bother starting?)

PRODUCT (25%)

pivoting in early stage is common, but a sound product and solid business model

should be designed.

– Aswath Damodaran

“VCs Price Businesses, Not Value Them”

HOW DO WE WORK - STARTUP VALUATION

Star

tup

inve

stm

ent

oppo

rtun

itie

s

Angel

investors/VCs(Deals) experience and points of reference for

valuation

Industry knowledge

Angel network

Supply Demand

Startup Valuation, especially for early stage companies, is more like an art. Supply and Demand drives the valuation (willingness of each parties determines).

BASELINE STANDARD - PUBLIC REVENUE MULTIPLES

Formula:Price = Forward Multiple x ARR - Private Discount Rate

E.g:SaaS Company A is growing at 80% YoY rate Current ARR = $2 Mio Implied EV = 7.6 x $2 Mio = $15.2 Mio Price = $15.2 Mio - 20% = ~$12 Mio

Source: https://goo.gl/XE5e6T

https://goo.gl/XE5e6T

– Reid Hoffman

“VCs are ‘Creatures of Herd’”

INVESTOR HERD IN RIDE-SHARING STARTUPS

Source: theinformation.com

Tips: Find multiple investors to invest in 1 investment round

http://theinformation.com


Demand


before VC pitch



Conglomerate Family Backed VC Foreign VC

Local & JV VC Corporate Backed VC(Foreign & Local )

VCs OPERATING IN SEA (ACTIVE)+/- US$ 4.5 Bn of capital is ready to be deployed

Source: mapofthemoney.com

http://mapofthemoney.com

Source: CB Insights & KPMG 2015 Report - Global Analysis of Venture Funding

Center of Gravity is Shifting Towards Asia

0

35

70

105

140

2011 2012 2013 2014 2015

North AmericaEuropeAsia

Asia % of Total

Investments in VC-backed Companies

13% 11% 13% 24% 31%

Asian Deals are Getting Bigger

2011 2012 2013 2014 2015

# of deals Investments ($B)

$39.70$20.60$6.40$4.70$6.20

445566

826

1,143

1,446

Quarterly Tech Exit Volume: Asia

0

40

80

120

160

Q2'15 Q3'15 Q4'15 Q1'16 Q2'16

4346

11

908383101

135M&A IPO

ASIAN EXITS IN H1 2016

Asian exits increased slightly in Q2’16 with 90 acquisitions and 4 IPOs. Activity is still down from Q2’15 highs, but is on an upward trend over the last two quarters.

Source: CB Insights - Tech Exits Report H1 2016

● SEA tech funding still growing in Q2 2016, albeit slower pace

● SEA has not seen many Series B investors to go for companies invested in the recent seed boom

● Anticipating Series B readiness, SEA startups are shifting towards business model with clear path to profitability

• B2B business models• Vertical integration trend for e-

commerce companies

● Large series B investors are gearing up to invest in the market

• Alibaba gets aggressive in SE Asia, plans to both invest and acquire, other Chinese companies follow

Source: Techinasia, e27

SEA Tech Funding Q1 2015 - Q2 2016

0

15

30

45

60

Seed Series A & Above

43

53

3

19

2014 2015

Source: Tech in Asia (https://www.techinasia.com/breakthrough-year-indonesias-startup-landscape-2015-infographic)

VC Investments in 2015 shows a significant rate of growth compared to 2014

Indonesia Startup Funding 2014 & 2015

https://www.techinasia.com/breakthrough-year-indonesias-startup-landscape-2015-infographic

“How VCs Make Money Out of Their Business?”


Supply

1. VC’s Business Model

2. Investment Returns in VCs


Supply



VC Fund Structure

• Most VCs are fund managers - they’re doing their investment activities using money they raised from their LPs for a certain investment period

• LPs are usually expecting their VC funds to have 3x-5x return rate

So Far, VCs Have Yielded Better ReturnsVCs have shown better returns to investors, particularly after 2011

Source: Cambridge Associates

12.90%

21.20%

16.20%

10.90%

4.20% 5.90%

13.30% 13.00%

11.20% 10.90%

1.40%

15.10%

12.60%

7.30%

5.00%

2015 2013-2015 2011-2015 2006-2015 2001-2015

AnnualizedReturnsonUSVC,PE,andPublicMarketInvestments

VCFunds PEFunds S&P500

VC’s Business Model

1. Management Fee

2. Carried Interest

Management Fee

“A fee charged by VCs to their LPs as a compensation to manage their fund - usually the fee is utilized to cover

operational expenses, taking 2%-3% out of the total fund size”

E.g:

• VC Firm A raised a $300 Mio, 5-year fund

• Management fee = 3%

• Total management fee = 3% x $300 Mio = $9 Mio

• Annual opex = $9 Mio / 5 = $1.8 Mio

Carried Interest

“A fee charged by VCs to their LPs from the earned capital gains out of their investments - usually the fee is taking

20%-30% out of the capital gains received”

E.g:

• VC Firm A invested $10 Mio to startup X with $50 Mio

post-money valuation —> Ownership = 20%

• 5 years later, the company is acquired for $200 Mio

• Ownership value at exit = 20% x $200 Mio = $40 Mio

• Capital gain = $40 Mio - $10 Mio = $30 Mio

• Carried interest = 20% —> 20% x $30 Mio = $6 Mio


Supply



This is THE Real Sh*t

• VC Firm A raised $200 Mio fund - invested $1 Mio for 20% of

Startup X with $5 Mio post-money valuation

• Startup X is acquired for $1 Bn (Unicorn!!)

• Ownership at exit +/- 15% (dilution) —> $150 Mio

• LP’s return expectation of funds = 3x —> 3 x $200 Mio = $600

Mio

• $150 Mio / $600 Mio = 25%??

Conclusion: The fund needs 3 more unicorns

It’s a Tough Market for Venture Returns

Source: Mattermark

Most startups experienced really tough time in raising their follow-on investment round

Power Law6% of deals produce 60% of returns

Source: Horsley Bridge

Returns are Incredibly Skewed


“Babe Ruth Effect”: Hit big or miss big

The home runs for good funds are around 20x, but the home runs for great funds are almost 70x.

Most Investments Lose Money


Venture capital is a risky business

Surprisingly, great funds lose money more often than good funds do

TVPI = Total Value Paid-In Ratio

VC’s Return Metric

This ratio usually reflects the minimum level of return that investors would expect from their investments in a fund.

TVPI =

VC’s Return Metric

CFR + NAVT

CFP

CFR = Total Cash Flow received (capital gains from previous investments)

NAVT = Net Asset Value at the time of calculation

CFP = Total Cash Flow paid in to the fund (incl. management fee & carry interest)

Conclusions

1. Find out about VC’s Investment Thesis, Preferred

Ticket Size, and Preferred Investment Stage before

meeting them.

2. VCs price businesses, not value them

3. VCs are “Creatures of Herd”

4. VC is a super competitive business - power law

distribution is imminent.

5. VC is a game of outliers - finding the “grand slam” is

the key

Recommended Readings

Mastering the VC Game Jeffrey Bussgang (2010)

Venture Deals Feld & Mendelson (2011)

Q&A

Thank You