In the past two years, with the popularity of wireless Internet and smart phones, many inefficient traditional industries in China began to be subverted and reconstructed. Finally, the new generation of Internet companies can no longer rely on the bonus of China's Internet population growth, but directly touch and chew the cheese of traditional industries, which is often hundreds, thousands or even trillions. In many fields, such as O2O, industrial chain e-commerce, Internet finance, Internet medical care, intelligent hardware and so on. Entrepreneurs in China have ushered in an unprecedented wave of opportunities.
In the past fifteen years, the first generation Internet companies represented by BAT+ Sina Netease Sohu, the second generation Internet companies represented by JD.COM and 58, and the third generation Internet companies represented by Xiaomi and Didi have systematically trained a number of entrepreneurs with high starting point and facing the market. They hit it off in this huge wave of entrepreneurial opportunities and their passion burned.
At the same time, the capital sector is also adding fuel to the flames. A large number of funds that had previously invested in the primary market and made profits in the secondary market retreated to the venture capital market, and many founders and executives of listed companies completed the initial capital accumulation, making it extremely easy for angels and VC funds to raise funds in 20 14 years. With regard to the amount of funds raised by China VC in 2014, the CV statistics are 127 billion USD, up170% year-on-year; The statistics of Zero2IPO were $654.38+09 billion, up 654.38+075% year-on-year; Although the statistical data of the two institutions are quite different, the growth rate is roughly the same. Such an environment also prompted Zhang zhen and Yi Cao to rise up against each other. They broke the window paper that young partners can't make money alone in a short time, and a number of venture capital funds led by the post-70s, post-80s and even post-90s came into being. (If we go back, Zhang Ying in Jingwei should be an early VC counter-attacker, but at that time, such incidents were rare and did not form a prairie fire. )
Due to the founder's experience and background, the new generation VC basically voted for angel and A round, and voted for B round at most. The veteran VC in the market is also lamenting that the projects after the B round are more and more expensive, and the startups are not too big to fail, so they are also moving to the early battlefield.
In addition to these traditional angels and VC funds, many other gold diggers of early projects are also flocking-BAT Xiaomi, JD.COM 58, Wanda Fosun, A-share tycoon and founder of China Stock Exchange. They like to give red envelopes to friends on New Year's Eve and throw money at early entrepreneurs willfully.
So we saw such a scene, but generally speaking, everything is reliable and people are basically reliable. When investors give money, their eyes are almost half closed, while entrepreneurs put their hands in their pockets when they take money.
According to the statistics of IT Orange, in 20 14, 8 12 companies got angel round investment, 846 companies got A round and 225 companies got B round. These are still reported. According to our observation, the companies that actually got the Angel Wheel, the A Wheel and the B Wheel in the past year are likely to be much higher than the above figures.
But here's the problem. Angel is finished, Round A is finished, Round B is finished, and what about Round C?
Because different companies have different industries, development speeds and financing rhythms, some people's Series C may be equivalent to others' Series B or D in scale. The C round mentioned in this paper basically refers to those rounds that have not yet formed scale income or verified business models. The post-investment valuation of the previous round is between 30 million and 654.38 billion US dollars. It is hoped that within 3-9 months after the end of the previous round, another 30 million to 200 million US dollars will be raised, and the pre-investment valuation will reach 365.438 billion US dollars.
At the beginning of 20 14 and 20 15, we saw that investors were very active in the early stage (Angel, Round A and Round B) and the late stage (Round D, Round E and Round F), but in the middle stage (Round B, Round C and Round D), investors became more and more cautious. According to the statistics of IT Orange, only 82 companies completed the C round of financing in 20 14.
Even according to the conservative figures mentioned above, there are more than 800 companies that got Series A financing in 20 14, and more than 200 companies that got Series B financing. Because the interval between financing rounds in fast-growing emerging industries is rapidly shortening, it takes only one year for many startups to turn from A to C, so a large part of these 1000 companies need to get the C round in 20 15 years. Plus those companies that have completed the B round before 20 14, there will only be more than 1000 companies that need to get the C round in 20 15 years, not less than 1000 companies. Suppose that in 20 15 years, less than 100 companies won the C round, which means that 90% of entrepreneurs need to face the possibility of "C round death".
Why is this happening?
First of all, once the valuation exceeds 1 billion dollars, it has actually exceeded the comfort zone of most VCS. In the end, there are not many companies whose market value really exceeds 654.38 billion US dollars in the capital market. The valuation exceeding 1 100 million dollars will make many venture capitalists feel that the ceiling of investment appreciation is approaching rapidly. In many emerging fields, most financing enterprises at this stage have not yet formed a verifiable business model or a clear enough leading pattern, so it is difficult to really enter the comfort zone of most PE.
At this awkward stage, there are not many financial investors who can make quick moves. Several hedge funds and special institutions (such as Tiger, Cotou, Gaoyou, DST, Japan Softbank, etc.) are often mentioned and thought of. ) and several PE funds (such as Huaping, Transatlantic, CITIC Industry, Yu Xintian, etc. ) with medium-term investment ability, plus personal VCS (such as Sequoia, IDG, H Capital, Lan Xin Asia, Today Capital, etc. ) have the ability to invest in the medium term. Among them, the investors that entrepreneurs want most are often the first kind of investors who are relatively insensitive to valuation and willing to bet on the winners again.
However, these investors all have a common feature, that is, there are many people with less money, and they are basically staring at the "whole chicken" and riding thousands of miles alone. Although these people are superior in ability and good at using external institutions to help them increase their bandwidth, they only have 24 hours a day. Therefore, although they may look at many projects at the same time, in any two or three-month cycle, there are usually no more than two projects that actually enter the operational stage. Even PE institutions such as Huaping and CITIC Industrial are not many people who can really see the medium-term Internet projects. Considering the internal capital investment requirements, personnel flow, capital cycle and other factors, the average number of Internet projects in a year is one or two, with a maximum of three or five.
At the beginning of the Year of the Sheep, we saw that some companies that traditionally voted for the C and D rounds moved forward obviously and began to vote for the B round. They would rather give a price of $80 million for Series B in front of a company that should be valued at $60 million under normal circumstances than rashly show the stupidity of a $500 million valuation to a company that should be valued at $200 million.
In addition, there is a more profound change that is affecting entrepreneurs in front of the C-round threshold today.
Peter thiel, one of the co-founders of Paypal, put forward in his masterpiece From 0 to 1 that the criterion for early investors to choose a project should be "a project can earn all the money back". Not long ago, an article published by TechCrunch author Danny Crichton coincides with this. He believes that the source of investment return in the whole VC industry is concentrated in a few companies, so the only correct investment strategy is to invest in those companies that have the opportunity to make investors get super returns at all costs, ignoring those companies that can only make investors earn medium returns. Based on this logic, in order to be able to invest in these winners, venture capitalists will not hesitate to overdraw the price of 12 months or even 24-36 months, so there have been one after another jaw-dropping valuations in the market. The author calls this valuation overdraft phenomenon "financing acceleration".
Those overdrawn valuations, known as stimulants for entrepreneurs, open up the space for their value fantasies. The problem is that "projects that can help VC earn all the money back" are destined to be a few special cases. On the one hand, VC pays attention to a few winners, on the other hand, most entrepreneurs are awakened prematurely by the high valuation of others and hang themselves high. Almost 80% of entrepreneurs will feel that they should be those special cases. Only investors know that exceptions usually mean no more than one in a thousand possibilities. No matter in the United States or China, the forces that push a few special companies to "accelerate financing" are also pushing more non-special companies to "accelerate their death".
What are the reasons why startups are most likely to face "C-round death"?
1. Now the domestic market is not big enough.
The so-called source market refers to the segmented industry market that you are focusing on and trying to reshape today, rather than the sum of all related or adjacent fields that you can extend to when you become a platform in theory in the future.
If you want to get a valuation of $3 billion to $654.38 billion today, investors should at least see that you have the opportunity to grow into a company with a market value of $3 billion to $654.38 billion in three or four years. Unless the industry concentration is very high (for example, Baidu in the search market), a company with a market value of $3 billion usually needs a target market size of more than RMB 654.38+000 billion, and a company with a market value of $ kloc-0.000 billion is likely to need a target market of $1 trillion.
For those hedge funds and PE funds mentioned above, they are more likely to get excited only if the source market of the target company can reach the market scale of 200 billion to 300 billion. Don't forget, they have more money than people, so they must find enough opportunities. Therefore, as far as Series C financing is concerned, if the potential scale of the source market you focus on is not 1000 billion to 2000 billion in the foreseeable future (that is, IPO in three to four years' time), then you need to insert the first warning red flag.
Standing on the wrong slope
Almost every 100 billion and trillion market has multiple cut-in angles. Some people start from the south slope, and some people start from the north slope. Take the hot O2O as an example. In the real estate market, you can buy a house or rent a house. In the family service market, we can start with laundry, housekeeping and community e-commerce; In the automotive aftermarket, we can start with car washing, maintenance and second-hand car trading.
But not all slopes have the same chance. There are always exceptions, but on the whole-
-There are more chances to play high frequency than low frequency;
-just need to fight, just need to have a better chance than not just need to fight;
-Not subject to the struggle of scarce resources, and there are better opportunities to be subject to the struggle of scarce resources than to be subject to the struggle of scarce resources;
-People with strong platform effect and weak platform effect have more opportunities than those with weak platform effect;
-A good economic model has a better chance to play with economic models than a bad one.
Therefore, no matter how big the market is, if the slope of others is better than yours, then you need to insert a second small red flag for early warning.
3. It is not the first and second on its own slope and there is a big gap with the first and second.
Many markets will have room for the old three and the old four to survive, but not all the old three and the old four have the opportunity to get the C round. Although those funds that voted in the C round are also very concerned about cost performance, in general, they are more concerned about whether the company will have a big enough opportunity to lead the industry.
In most market segments with obvious scale effect and network effect, if the second child wants to obtain the C-round financing of first-line funds, in addition to the large tourist market, he needs to meet two other preconditions: First, the market share gap with the first place should not be too large, preferably within 50%; Second, if the first place has been invested by one of BAT, it would be better to have another BAT later. If the third child wants to get the C round of financing, these two conditions are changed to: the gap with the second place is within 20%; Not all the top two are invested by BAT.
Take the taxi software market as an example. As the second child in the market, Aauto Quicker got Tiger's Round C and Softbank's Round D, and it was only because the three conditions mentioned above were met that there was a shocking merger before the Spring Festival. At that time, Beijing, which was a smash hit, did not have the other two conditions, so it left in a daze. (There will be a special report on swagger in the March issue of Entrepreneur Magazine) (Easy is not the third place, because strictly speaking, the commercial vehicle market where it is located and the taxi market where Didi Kuai was located at that time are the south slopes of this big market, but now it seems that the path on the north slope is easier to climb to the top of the mountain than that on the south slope. )
To sum up: in a market with obvious scale effect and network effect, if you are not the first or second in the C round and there is a big gap with them, you need to insert a third small red flag warning.
4. The growth curve of valuation is too steep, and the "VM" index is higher than 0.5.
Let me tell you a secret first-unlike those enterprises with predictable cash flow in traditional industries, those "flying pigs" in emerging hot fields, no one really knows how much they are worth. Investment banks don't know, and neither do investors. It's all about feeling. Some so-called comparable transactions are often not comparable; More importantly, the valuation of those so-called comparable transactions may be wrong in itself-the so-called valuation benchmarks in many emerging fields are essentially written by one or two "out-of-scope investors" (investors who are willing to give valuations that most investors are unwilling to give), which have not yet arrived and have been proved right or wrong. What investors can do is to find out whether the target company must win. If so, they should try their best to rely on factors such as execution speed, personal charm and value-added services, and make a discount on the basis of the selling price, sometimes even if they can be selected. What financing enterprises can do is to make the business curve (in fact, this stage is mainly the user curve) as beautiful as possible in the first three months of financing and during the financing process, so as to have high-priced capital; What investment banks can do is to create a favorable supply and demand situation and trading atmosphere for financiers by creating buyer competition as much as possible. This is the valuation.
Under this premise, there are actually three factors that have the greatest impact on the valuation in the C round of financing:
1. Real valuation of competing products in the same round of financing (if the competing products are completed first). Note that the PR valuation that competing products boast of not paying taxes is not counted, but it is a true black-and-white valuation. The investment circle is very small, and the true valuation can hardly be hidden.
2. Operating ability and market position relative to competitive products.
3. Valuation, financing amount and delivery time of the last round of financing. If competing products melt first, (1) and (2) are more important; If you melt first, then (3) is more important.
Next, focus on (3). All kinds of reasons can be exaggerated, and all kinds of methodologies can be exaggerated, but in the end investors often have a psychological bottom line to stick to. The popular point of this line is the "stupid warning line" in investors' minds-once the transaction valuation exceeds this line, investors will easily start to doubt whether they will become the laughing stock of the industry.
In order to understand this matter, we need to invent a concept temporarily: VM index, V is the valuation, and M is the number of months. VM index refers to the valuation difference between this round of financing and the last round of financing (pre-investment valuation/post-investment valuation) divided by the number of months between the two rounds (calendar months between the expected signing month of this round and the delivery month of the front wheel). For example, if the pre-investment valuation of this round is three times that of the previous round, and the interval between the two rounds is three months, the VM index is1; If the valuation is still 3 times and the interval between the two rounds is 6 months, the VM index is 0.5.
Take Xiaomi Company, which is recognized as the company with the fastest rising valuation, as an example. The interval between the A round and the B round is only two months, but the valuation has increased by more than four times (because the launch of Xiaomi 1 has achieved unprecedented success), and the VM index has reached 2. 1. After 10 months, the VM index of round C decreased to 0.4, 12 months, and that of round D decreased to 0.2.
Even for pigs in hot industries, the VM index of round C cannot exceed 0.5. In other words, if your valuation after the B-round investment is $50 million, then the valuation before the C-round investment after 6 months should not exceed $65.438+$50 million in principle; 12 months later, the pre-investment valuation shall not exceed USD 300 million in principle.
Of course, this is not absolute, and there may be some ups and downs according to the actual situation. For example, if the financing enterprise really experienced a particularly explosive growth between the two rounds, or there was a landmark event that seriously affected the future expectations of the enterprise, then it is possible for the VM index to exceed 0.5. For another example, if B's post-investment valuation is only $20 million to $30 million, it is also possible that the VM index of Round C exceeds 0.5. For example, the interval between Round B and Round C exceeds 12 months. Unless you maintain an annual growth rate of more than 400% during this period, the VM index should be lower than 0.5.
In today's market environment, the VM index should not exceed 0.5 in principle. Once it is exceeded, investors will doubt themselves. At this time, even if you don't want to give up the project easily, you will hesitate; They will probably try to delay the delivery time, let themselves read the data for one or two months, and at the same time try to find some psychological balance in other aspects.
Therefore, if you are not the most beautiful star in the whole galaxy, and the VM index of round C is obviously higher than 0.5, then you need to insert the fourth small red flag to be vigilant.
If you only plant one of the above four small red flags, you may not be too nervous. But if you have three or even four, please be prepared-round C may be your death.
How to avoid "death in round C"?
1. Maintain certain valuation flexibility to avoid being misled by other people's false valuations.
At present, there is a very bad atmosphere among domestic entrepreneurs, that is, they falsely report the financing amount and valuation, some are 2 times 3, some are deliberately confusing RMB and US dollars, and the most extreme thing is that the financing amount quoted is even higher than their own valuation. Of course, these people usually don't hold public press conferences to report false valuations, but spread them through various public relations, big and small, and help themselves mislead the market with other people's mouths.
At the end of last year, at the Dark Horse Conference, I specially put forward the concept of "building a credible China, starting from ourselves". We can choose not to publish the financing amount and valuation, but if we want to publish it, let's publish the real figures. "Recently, Mr. Xu Xiaoping also put forward the initiative of' Let's eliminate the phenomenon of false investment' through Weibo.
For entrepreneurs who come out for financing, the worst situation is that they are misled by the wrong financing amount and valuation misinformed by the market, and the other two hang themselves when they talk about it. This may be what the originator of the error message wants to see. Founders naturally tend to overestimate the value of their own enterprises, so they will be willing to believe the exaggerated figures quoted by others, thinking that they can win more benefits for themselves. However, such a mentality will harm oneself, because no investor will take the false valuation spread in the market as a reference for his valuation.
The correct way is to make full use of your existing network of investors and financial advisers and learn as much as possible about the true valuation and financing amount of competitors. There is no windtight wall in the world, and many professionals in China generally have professional ethics problems in confidentiality, so it is not as difficult as expected to find out the real situation. Even if you can't know the true valuation of competing products, you can work with your financial advisor to establish a relatively reasonable and supportive valuation range according to different dimensions. The most important thing is that entrepreneurs should be flexible about the valuation range. If the market response is not as enthusiastic as expected, they should be prepared to adjust the valuation at any time. Only the business made is the business, and only the paid valuation is meaningful.
2. Certainty is more important than valuation, and time is the best. Give certainty and time enough discounts.
In the C-round stage, the first priority should not be prediction, but certainty, and time corresponds to certainty. The financing transaction is really completed only after delivery. So whoever can sign and deliver the contract as soon as possible can give the financing company the greatest certainty.
For investors, if they want to complete the transaction quickly, they need to have two prerequisites: first, investors know the industry-the valuation is hundreds of millions of dollars, and no institutional investor will write a check rashly without fully understanding the industry. Therefore, don't waste too much time for those investors who find that the other party doesn't know much about the industry after talking once. Second, investors can make local decisions, preferably one or two people can basically make decisions or at least substantially influence them. More and more business models in China are deviating from those in the same industry in the United States, so if the investment committee needs to get the votes of partners in Silicon Valley, new york or London or Paris, the uncertainty will increase greatly.
For those investors who have a deep understanding of the industry, make quick decisions and have a chemical reaction with the team, it is very worthwhile to give some concessions to promote them to make up their minds as soon as possible. In a market segment, whoever completes the C round of financing first will be the first to throw the problem to his own competing products, which is also a step closer to the next D round of valuation.
3. Leave enough time for Round C in the cash reserve.
The time interval between Round B and Round C has no certain regularity, which depends on the expansion speed, the key nodes of business development, the financing time of major competitors and other factors.
It is particularly important to leave enough time for the operation and completion of the C round of financing on 20 15.
Only when you don't need to go out for financing, you have chips in your hand. The normal financing process usually takes 9- 12 weeks. Although it occasionally happens that the C round will be completed in 20 days, there are far more cases in the market from start-up to delivery for more than 3 months than less than 3 months. This means that the cash in your hand, according to your current business plan and capital requirements, should be able to maintain the normal operation of the company for at least one year.
In other words, if the cash in your hand allows you to operate normally according to your own business plan 18 months after the completion of the B round, then theoretically you can concentrate on developing your business for at least 6 months, and then consider the financing of the C round. If you only have enough cash to last 12 months after round B, you'd better start a new round of financing within three months.
Of course, some companies will start planning the next round before the last round of money has been moved, which is usually due to the competitive situation, so I won't discuss it here.
4. Try not to give investors an exclusive period.
In our experience, in order to ensure that financing transactions can complete the specified actions within the specified time, a very important principle is to try not to give investors an exclusive period, and whoever goes with them will be quick. Even if it costs some money (such as paying a certain adjustment fee to investors who are not selected), it is worth it.
If we have to give investors an exclusive period, we would rather give them an exclusive legal document negotiation period after the adjustment is completed (generally not more than 10 days) than an exclusive period (generally 3-4 weeks).
Of course, to do this, we need to be more conducive to the company's trading situation. When the star holds the moon, the company can say whatever it wants. When it hangs on the tree, people just need to say no to end the conversation. Now the information about investors is becoming more and more transparent, and the time when financial advisers relied on asymmetric information is long gone. The real ability of financial advisers lies in whether they can provide enterprises with as many choices and as strong a negotiating position as possible by creating a trading situation that is as beneficial as possible to financing enterprises.
Don't be afraid to stand in line, it's not a bad thing to introduce strategic investors.
On a global scale, Internet giants are playing an increasingly important role in the financing and development of a new generation of startups. In China, almost all unlisted Internet companies with a valuation of $654.38 billion have BAT. According to media reports, Tencent alone invested in at least 40 companies in 20 14, involving an investment of 8 billion US dollars.
If you didn't introduce the Big Four of BATX or the "top leaders" like JD.COM, 58, Meituan, Vipshop and Ctrip in earlier rounds, it's time to seriously consider introducing the war investment in the C round ... The value they can bring to the invested enterprises is not only capital, but also help and collaboration in business and resources. In addition to these well-known Chinese stocks, many A-share companies have also begun to invest intensively in emerging industries.
Entrepreneurs are often worried about standing on the same line as the giants, but this is really not something they should consider in today's environment. In front of the C round, it is very important to survive. How to spray accounts in the media will not deceive people, and the two armies will win when they meet. Moreover, after the rapid decline, more shocking mergers and acquisitions between BAT are gestating. Fathers don't even mind their children sleeping together, so children don't have to worry about which father's money will annoy other fathers.
In fact, in most Internet-related fields, based on the unique ecology of the Internet in China, queuing will happen sooner or later. In this case, instead of queuing late, it is better to queue up early, get ahead of your competitors and introduce the giants that are most beneficial to your future development. Moreover, the current Internet giants and middle-level leaders have become more and more ecological and patterned, and they know how to help without chaos. In this regard, it should be said that after Tencent's 3Q war, it learned from a painful experience and set a commendable benchmark for the industry. Three mountains are becoming three backers.
Under some special circumstances, strategic investors who have made particularly valuable contributions can also be introduced as springboard for the B and C rounds. Call it B+ or Pre-C, it doesn't matter what you call it. Its essence is to use the unique value contribution of strategic investors to boost the price increase of C round through back-to-back trading arrangements. In this way, even if the valuation of strategic investors is discounted, the overall valuation of the C round will be significantly improved. We have recently adopted this strategy in more than one transaction.
Finally, I want to say that entrepreneurs in China today are the most enviable group in the world. They will encounter many bumps and even despair on the road to starting a business, but the life of starting a business is a life worth remembering at the age of 80. Jin Youmei wishes all entrepreneurs and friends good luck in the Year of the Sheep, facing the sea, and every round of financing is full of flowers.