It is not very often that we come to the term sheet stage with a company. We may feel like critical perspectives in our objectives and main incentives can go amiss when we do. To put things into perspective, both from the VC and the entrepreneur point of view, we have started this blog series to underline some key terms and discussions that emerge, particularly during the term sheet stage of a VC to start-up relationship. Every investor has a different set of theses as well as other possible quantitative models accompanying these theses. Our intention is not to detail any specific way 212 handles these; instead, we want to start a general discussion on all the concepts that matter. Irrelevant of the fund size, theses, or any other subjective constraint, we want to share perspectives on universally essential concepts. Let’s start with the basics: The term sheet is a document that will vary in length depending on how your VC chooses to operate things. Many great resources online, such as Ycombinator, will provide examples of term sheets. Also, this long-standing compilation of essential terms by Brad Feld and Jason Mendelson might prove helpful. If you believe you might want to refresh the basics on cap table calculations, Investopedia might be a good source. Without understanding the crucial terms and the most fundamental objectives, it is easy to fall into some common pitfalls. One of the most common places for misinterpretation is when valuing a company. Let us first identify some important questions about value. Later, we will specifically address company value.
Examining each of the above questions would exceed the scope of this blog post. However, these questions help remind us that valuation, as one of the key terms in the term sheet, is a multi-faceted and complicated topic.
Before we go into some of the interesting insights that we have found concerning valuation, let us briefly illustrate some essential viewpoints from a VC’s point of view.
Venture Capital funds aim to generate positive returns for their investors. Their day-to-day responsibilities consist mainly of analyzing opportunities, markets, and designing the appropriate quantitative models that would numerically work. In other words, VCs try to build scenarios on how an opportunity could or could not skyrocket to generate big returns.
Analyzing an opportunity never merely focuses on the tangible: healthy communication and partnerships are just as crucial to making a successful company. While some VCs have different views on what the partnership should look like, we at 212 believe that the founders know best. We try to position ourselves in a way that is in the know, yet never too intrusive, and accessible when we are needed.
While VCs’ views on this partnership can fluctuate, it is fair to say that the general inclination differs dramatically between developed and emerging markets. This dynamic is affected in multiple ways: Developed markets have abundant capital these days, whereas emerging markets still struggle in many aspects. Rules and regulations governing the tech & start-up ecosystem are at very different maturity levels, leading to many investors in emerging markets needing to “over-protect” themselves from certain loopholes. Start-ups in developed markets tend to approach fundraising more like a continuous process than a sporadic, cut-down-all-operations kind of intensive endeavor. They raise funds through successful marketing and communications throughout the whole year. All the above parameters and many more left unmentioned contribute to making valuation an even more complicated topic. All in all, it is safe to say that start-ups from the emerging world should not start comparing themselves with their developed competitors from day one. It might be a big blocker for all parties involved and might not reflect reality.
Regarding reality, inflated, unreal growth is another critical issue: To keep on telling the story of a unicorn-to-be, or a decacorn-to-be, founders and investors, and everyone on board, agree to dim some facts and polish others. For a grand example, please take a look at the case of WeWork in this perspective by the New York Times.
So what is the right way to value a company? As we explained earlier, several factors could inform the number you were hoping for being different from the VC’s final number. Since start-ups are very new companies without a steady cash flow or other financial histories that would allow regular valuations using DCF or other methods, we have to look to other tools to do accurate valuations. The most common way that VCs value any start-up is by using market multiples. They will observe recent exits and the current landscape of your given industry to extrapolate a fair valuation. However, your given industry is not the only basis of this valuation method. Factors also include which country you are in, the economic variables of your region, and many other variables. That is part of the reason why many American start-ups often receive higher valuations than those of their European counterparts. However, over the last few years, a massive trend has seen American VCs look for investments elsewhere in the world like Europe or MENA, which has significantly boosted valuations in these regions.
So how should start-ups and investors go about discussing valuation? As upfront as possible. Scarbrough and colleagues’ 2013 exploration of the role of trust in deal-making for early-stage technology ventures are only one of many good examples of this rule of thumb. The article investigated a sample size of over 100 start-ups and discovered that communication and competence efficiently help build trust. In conclusion, VCs love founders who have shared responsibility and are fully upfront about everything going on in their business, whether positive or negative.
Thank you: Kaan Kermen for co-writing this piece with me Emre Hacıyunus Şimal Gezer
]]>Restaurants, cafés and grocers procure a substantial portion of food and beverage products from local businesses. These are the authentic products that drive consumer choice. After all, no one appreciates a mass-fabricated bagel or coffee when they go to a café. Patrons expect authenticity, quality, and experience.
The economy is challenging for small businesses. It has been even harder since the days after the pandemic’s emergence and facing more than a year-long change in humanity’s existence.
While thousands of local businesses around the globe have a hard time keeping their head above the water, demand for a better quality of life is growing. Communities are coming together to grow food and produce goods with a focus on better craftsmanship as in the time before the Industrial Revolution.
Better craftsmanship and better design of everyday nutritional items, beverages and everyday objects are easier said than done. Local businesses not only need to make great products (which is often the primary reason the owners started their businesses) but they also need to take care of fulfillment and logistics. This is where things get tricky: small business owners are neither logistics experts, not do they have the scale to create efficient operations.
Metrobi is there to bridge production and logistics with their technology and community: with only a couple of clicks, they help small businesses deliver to further-reaching locations more than ever before.
For the last four years, we had the incredible opportunity to observe how the CEO, Oguzhan, has persistently outperformed in various transportation-focused endeavors. The logistics optimization algorithms developed utilizing state-of-the-art research and the cleverly designed growth engines that power the lean team are the solution’s backbone. Daniel, the COO, drives the flexibility, excellent customer support and real-time fixation on success.
Currently available in the US and continuing their expansion in various cities across the country, Metrobi empowers small businesses by taking care of their logistics operations. At just the right time, they are playing a crucial part in tending to post-pandemic economic wounds. They are backed by algorithms developed in-house to optimize costs, reduce risks and monitor logistics. The whopping word-of-mouth is not a big surprise.
A few customer success stories have grabbed our attention: Dorchester Brewing Company started selling their craft beers to liquor stores and increased wholesale revenue. According to the owner, Matt, this was not possible before Metrobi because they didn’t have a bulk order fulfillment system. Jacobson Floral increased their geographical coverage and boosted deliveries to independent florists. That was possible with Metrobi’s flexible fulfillment network. BoardsByMo doubled their charcuterie orders because the founder, Mo, didn’t need to focus her time or energy on fulfillment operations anymore. Metrobi provided her business with an end-to-end solution.
And this is just the beginning.
We are delighted to announce our investment in Metrobi and excited about the journey ahead.
]]>We are excited to announce our investment in Avatao. Co-founded by Mark & Gabor, the team develops gamified, secure-coding training for software developers and other technology roles using real-life scenarios.
Companies from a variety of industries are racing to move into the Cloud in order to digitalize their critical processes. In 2021, companies and individuals provide online systems with critical information, which requires trust in order to safeguard social and financial wealth.
Since the dawn of the Internet age, the idea of an anonymous hacker hiding behind a computer screen has infiltrated collective imagination. It is a natural instinct to seek and demand safe online systems. How is it possible to understand, though, whether the systems are trustworthy and safe?
We at 212 believe that the builders of Avatao really know how to create secure systems. This belief is resonated in their approach: Identifying security as one of the fundamental features that define the quality of software engineering, they design playful and practice-oriented training solutions for developers to internalize the principles of secure coding. This helps organizations grow the skill sets of their developers, build more reliable systems, improve their services and avoid large fines as well as business losses.
Avatao’s flagship product helps developers combat scenario after scenario, providing step-by-step instructions and a conversational learning interface in parallel. Scenarios make up entire learning modules that are customizable to the client organization’s specific use case and technology stack. In a playful manner, developers learn ways to act against some of the most widespread security issues such as injection attacks, cross-site scripting, broken authentication issues or configuration problems, and learn about the different aspects around third-party vulnerabilities, API- and smart-contract security; just to name a few. This targeted practice builds the foundation of a successful security program and also allows customers to pass critical compliance requirements, for example, in ISO 27001 or PCI-DSS audits. Composed of both SME- and enterprise-level players, Avatao’s clientele spans the full range of industries around the world and includes the fastest-growing technology companies in last-mile delivery as well as incumbents in travel and entertainment across Europe.
Avatao will use the funds for increasing go-to-market efforts in Europe and in the US. Also, it will expand an exciting content library to include more exercises covering secure coding best practices and secure DevOps.
Looking beyond the subject matter of security that is of utmost importance nowadays, at 212 we also appreciate how Avatao enables professional growth, both on an organizational and an individual level.
As Socrates posits: Education is the kindling of a flame, not the filling of a vessel. 212 always strives to kindle new flames.
]]>Ona semi-warm pre-autumn evening, I was re-skimming the notes I made within the last couple of months as part of a fall cleanup. I was initially hoping to find exciting topics to revive and follow-up on in winter.
Soon after defining this objective, I understood this little exercise had quirky side benefits. I quickly realized that each startup’s name called for a certain feeling in the gut — the company names jumped out at me like different flavors. Flavors that come out through a mixture of every decision parameter I can decipher.
These parameters are frequently part of our forward-looking discussion points with the team. We continuously try to develop systems that would rationalize decision-making within the team and document it for future use.
By now, I think we are all slowly concluding that there are millions of these parameters. It is impossible to be aware of and document all of them.
Some are based on hard facts, analyzed, and explored with the right methods. One of our team mates Sercan will talk about some of these points in his blog post soon.
Other parameters are harder to surface. They rely on many factors ranging from our childhood to current lifestyle and, finally, to everything we have learned. I’d like to showcase a tiny fraction of these parameters, which I believe has contributed significantly to the flavor I mentioned above.
The synesthetic robot that I am, I clustered the startups I have met over the past months into four different categories.
After reviewing the details, I realized that my clusters were highly dependent on our communication’s flavor. In the remainder of this post, I’d like to showcase these clusters and make my position transparent on how the relationship with the startups within these clusters impacts the wider Investment team and me here at 212. I hope it is helpful for the founders out there.
These teams deliver the freshest news. They have a short, well-structured, sometimes eye-pleasing, update mail in place. Packed with the latest news, delivered fresh to the inbox every week, bi-weekly, or monthly, like a neat little newspaper. They typically contain some relevant metrics, including the MRR, number of users and clients, something meaningful about churn, along with some qualitative feedback from the client on a recent feature. Additionally, any other non-metric piece of information on which the founder wants the wider circle’s opinion.
I feel a click away from them, and it is as if we are partnering up somehow already. The brief glance sparks connections, and we bring value by connecting them with others or share some recent things that we came across. This type of broadcasting permits a new learning circle to flourish. I love the lemons.
Additionally, I feel it is a good exercise for anyone that strives to stay connected to a large, highly specialized network.
Although not around all the time, some teams like to show up after the initial ping that comes from us. I’m not going to claim that this is the ideal case or the opposite, but the teams that manage to give a very satisfying inflow of information are also close to our hearts — when they are able to show up. It is intense learning whenever they come our way.
Giving a satisfying inflow of information is easier said than done, and I believe the teams that can do it in periods shorter than average are always impressive. The communication partner quickly gets the impression that the team has their stuff together. In our case, they have excellent quantitative and qualitative metric-based performance tracking systems in place, are continuously building and testing their assumptions on future growth, and design the organization as needed.
It is easier to build trust with good chocolates.
Some flavors make or break the dish, and you can’t ignore their taste. For me, and a critical mass of the world’s population (that I had the chance to meet and talk about cilantro), cilantro is one such flavor. Communicating with some teams makes me feel like we are the cilantro in their dish. I don’t think this is an accurate view.
While I think cilantro generally breaks the dish, I don’t intend to argue how bad cilantro is. I don’t believe VC’s can make or break the game teams are playing. It’s not in the VC’s interest to dominate the gameplay, to push for a decision that founders don’t agree with, or to slyly nibble on company shares. In our view, solidarity has the highest return — in financial and social capital.
While I know many don’t agree; cinnamon pleases me instantly. Gives a nice twist when added to traditional dishes. Cinnamon is my precious. I don’t want to spoil my cinnamon feelings by overdoing it with some challenge that forces me to shove a spoonful into my mouth and ruin my taste buds. No, I want to keep cinnamon as pleasant and light as it is in my life, forever. I feel some teams similarly approach their product and business. It is way too precious to hear anything negative. Some also don’t want to bury themselves in too much hassle and work to the extent of burn-out. This aspect sometimes shows itself in their speed of response to emails or data requests.
It is understandable. Still, it raises the question — will this team push through? We all need to push through.
]]>