What are the most likely reasons for startups to face "C-round death"?

Over the past two years, with the spread of wireless internet and smartphones, many of China's inefficient traditional industries have begun to be subverted and reconstructed. A new generation of internet companies can no longer rely on China's internet population growth dividend, but directly touch and nibble on the cheese, which is hundreds of, thousands of, or even tens of billions of dollars in traditional industries. In O2O, industrial chain electric business, internet finance, Internet Medical, intelligent hardware and other fields, Chinese entrepreneurs have ushered in an unprecedented wave-like opportunity.

In the past 15 years, to bat+ Sina NetEase Sohu as the representative of the first generation of internet companies, to Beijing east, 58 as the representative of the second generation of internet companies, as well as millet, drop as the representative of the third generation of internet companies have been systematically developed for the market a number of entrepreneurs with high starting point They and this wave of entrepreneurial opportunities hit, Ganci, burning.

At the same time, the capital world is playing an instrumental role. A large number of previous investments in primary market, two-tier market profits were thrown back into the venture capital market, combined with the founders and executives of many listed companies that have already completed the original capital accumulation, which led to an unusually easy fundraising by Angels and VC funds in 2014. About 2014 China VC fundraising amount, CV statistics is 12.7 billion U.S. dollars, an increase of 170%, the Qing branch of the statistics is 19 billion U.S. dollars, an increase of 175%, two institutions statistics although the total amount of the difference is relatively large but the growth rate is roughly the same. Such an environment also prompted Zhang, Cao Yi, they only in a very short time to stab the young partners alone to melt the money of that layer of window paper, a group of whenever, and even after the leading VC fund emerged. (If the retroactive, Jingwei's Zhang Ying should be earlier VC uprising, but at that time such a rare event, did not form a prairie.) ）

As a result of the founder's experience and background, the new generation of VC basic are cast Angel and a round, at most to B round. The market in the old VC also sigh B round after the project more and more expensive, start-up companies are not too big to fall, has been too expensive to chat, so also in succession to the early battlefield transfer.

In addition to these traditional angels and VC funds, many other early projects of the Nuggets are also a lot of--bat Millet came, Jingdong 58 came, Wanda Fosun came, a-share big guys came, the founder of the shares also came. They are like the New Year's Eve friends in the circle of red envelopes as wayward to the early entrepreneurs to spread money.

So we saw such a scenario, but everything is generally reliable, people are basically reliable, investors give money when the eyes almost half open, the entrepreneur takes money when the hands are almost inserted in the pocket.

According to the statistics of it oranges, 2014 to the Angel round to invest in the company reached 812, to get a round of 846, to get the B round also has 225. These are still reported. According to our observations, the companies that actually got the Angel, A and B rounds over the past year are likely to be much higher than these figures.

But here's the problem. The angel took out, a round to take out, B round take, the next C round how to do?

Because the different companies in the industry, development speed, financing rhythm is not the same, so some people's C round from the scale may be equivalent to other people's B-round or D-round. The C round mentioned in this article, basically refers to those that have not yet formed the scale of income or proven business model, after the previous round of investment valuation between 30 million to 100 million U.S. dollars, hope that the previous round after the end of the 3-9 months after the integration of 30 million to 200 million U.S. dollars and to the valuation of 31 billion dollars before the round.

At the beginning of 2014 and early 2015, we saw early casting (angels, investors in A and B-round (Part D, E and F) are active, while investors are showing increasing caution in the medium term (Part B, C and Part D) phases. "." According to the statistics of it oranges, there were only 82 in 2014 to complete the C round financing.

Even according to the relatively conservative figures mentioned earlier, there are more than 800 companies that received a round of financing in 2014, and more than 200 for the B round, as the gap between financing rounds in the fast-growing emerging industries is shrinking rapidly, and many startups are only a year apart between a and C rounds. So there will be a large proportion of these 1000 companies that need to get to the C round in 2015. Plus those companies that melted the B round before 2014, the company that needed to get the C round in 2015 would be less than 1000. If 2015 years or less than 100 to get the C round, which means that 90% of entrepreneurs need to face the possibility of "C-round death."

Why is that so?

First, valuations exceed 100 million trillion dollars, and are already beyond the comfort range of most VC. Eventually in the capital market market value of real more than 1 billion U.S. dollars companies are not many, more than 100 million U.S. dollars in valuation will let many VC feel that the ceiling of investment appreciation is fast approaching. In many emerging areas, financing companies in this phase have not yet formed provable business models or clear enough lead, so it is difficult to really enter the comfort range of most pe.

There are not many financial investors who can get a quick shot at this somewhat awkward stage. The most commonly mentioned and imagined are the few hedge funds and special categories of institutions (such as Tigers, coach map, Gao, DST, Japan soft silver and so on, and several medium-term Internet Project investment capacity of PE funds (such as Warburg, Pan-Atlantic, CITIC Industry, new days, etc.), plus individual have medium-term investment capacity of VC (such as Sequoia, IDG, H Capital, Orchid in Asia, today, etc. Among them, the entrepreneur most wants is the investor who is relatively less sensitive to valuations and willing to bet on the winners.

But this kind of investor has a common characteristic, is the money many people are few, basically is a person stares at "the whole chicken", Trinidad goes the solo. Although these people are super capable, they also use external agencies to help them boost their bandwidth, but they only have 24 hours a day. Therefore, although they may look at many projects at the same time, the actual entry into the operational phase of the project in any one two or three-month cycle usually does not exceed two. Even if it is Warburg, Citic industry, such as PE institutions, can really see the medium-term Internet projects are not many people, and then consider the internal capital investment requirements, personnel flow, fund cycle and other factors, a year down on average in the Internet field is one or two single, at most 35 single appearance.

At the beginning of the RAM, we saw that some of the companies that had traditionally focused on the C-round D-round began moving toward B. They would rather have a 80 million-dollar price in front of a company with a normal 60 million dollar valuation than a $500 million trillion worth of dollars worth of companies that should be valued at $200 million trillion.

In addition, a more profound change is affecting the founders before the C-round threshold today.

One of PayPal's co-founder Peter Thiel, in his famous book "from 0 to 1", suggested that the criteria for early investor selection should be "a project can earn back the entire fund." A recent article by TechCrunch author Danny Crichton, who believes that the source of investment returns for the entire VC industry is being focused on a handful of companies, so the only right investment strategy is to invest in those companies that have the opportunity to make the investors get super returns at all costs, And ignore companies that allow investors to make modest returns. Based on this logic, VC in order to be able to invest in these few winners, will be willing to overdraft 12 months, or even 24-36 months of price, so the market will be a spate of eye-popping valuations. The authors refer to this valuation overdraft phenomenon as "financing acceleration".

Those overdrawn valuations, called the founders ' stimulants, opened up a space for value fantasies. The problem is that projects that "can help VC get the whole fund" are destined to be rare exceptions. On the one hand, VC focus on a few winners, on the other hand, most of the entrepreneurs were other people's high valuations too early to lift their appetite high in the air. Almost a 80% of entrepreneurs feel they should be the exception, and only investors know that the exception usually means no more than 1 per thousand of the possibilities. In both the US and China, the push for a handful of special-case companies to "raise capital" is driving more non-exceptional companies to "accelerate death".

What are the most likely reasons for startups to face "C-round death"?

1. The source market is not big enough today

The so-called source market refers to the niche market that you are focusing on and trying to reshape today, not the sum of all the relevant or contiguous areas that you can extend to in the future when you become a platform.

If you want to get a 3 to 1 billion dollar valuation today, investors will need to see at least a chance to grow into a company of 3 billion to 10 billion dollars in three or four years. Unless the industry concentration is very high (such as Baidu in the search market), 3 billion-dollar companies usually need a target market size of more than 100 billion yuan to support, while 10 billion-dollar companies are likely to need a trillion-tier target market.

For hedge and PE funds mentioned above, only the target company's source market can reach 200 billion or 300 billion of the market size, they are more likely to be excited. Don't forget, they have more money and fewer people, so they have to look for a big enough chance. So in the case of C-round financing, if you focus on the source market in the foreseeable future (frankly, 3-4 years after the IPO) the potential scale is not 100 billion or 200 billion, then you need to give yourself the first warning of the small red flag.

2. Standing on the wrong slope

Almost every big hundreds of millions of, tens of thousands of billion market has a number of points of view, some people from the south slope, some people from the North Slope on the road. Take the hot O2O for example, in the housing market, you can start by buying a house, or from renting a home. In the Family service market, you can start from the laundry and also from the community to start with the market, in the car, you can start from the car wash and start from the maintenance can also start from the second-hand vehicle trading.

But not all slopes have the same opportunity. Although there are always exceptions, in general

--high-frequency hit low-frequency than low-frequency hit high-frequency more opportunities;

--just need to succoured just need more opportunities;

--not limited by the scarce resources of the dozen are constrained by the scarce resources than by the scarce resources of the dozen not subject to scarce resources more opportunities;

The platform effect is weaker than platform effect, and the platform effect is stronger than that;

Economic model good economic model is worse than economic model to play economic model better chance.

So, no matter how big the market is, if someone else's slope is better than yours, then you need to give yourself a second red flag for warning.

3. On their own slope is not the first second and the gap with the first two large

Many markets will have old old four living space, but not all old old four have the chance to get the C round. Those who invest in the C-round are also concerned about cost-performance, but overall they are more concerned about the eventual opportunity for the company to be big enough to lead the industry.

In the market segments where most scale effects and network effects are evident, second, if you want to get a C-round from the first-line fund financing, in addition to the source market must be large enough, but also need to have two other prerequisites: first, with the number one market share can not be too large, preferably within 50%; If the first is already invested in one of the bat's, it's best to have another bat behind you. Old if you want to get a C round of financing, the two conditions are: the gap is less than 20%, and the top two are not all invested by bat.

Take a taxi software market as an example, fast as the market dick is because the previous mentioned three conditions are available, just got the tiger's C-round and soft silver D-round, also have the Spring Festival before the shaking of the merger. At that time in Beijing hit shook because did not have the other two conditions, so sadly away from the field. (There will be a special report on rocking in the March issue of the Entrepreneur magazine). Because it is strictly speaking of the business car market and drop fast in the taxi market is to travel this large market is the south slope of the North Slope, but now it looks like the north slope of the road is easier than the south slope. ）

To sum up: in the market of scale effect and network effect is obvious, if you are not the market first or second in the melting of the C round and the big gap with them, you need to give yourself a third warning of the small red flag.

4. The valuation growth curve is too steep and the "VM" index is above 0.5

First, let me tell you a secret-unlike those in traditional industries with predictable cash flows, those "flying in the sky" in the emerging hot spots, no one really knows how much they are worth. Investment banks do not know, investors also do not know, are based on feelings. Some so-called comparable transactions, is often not comparable, and more importantly, the valuations of those so-called comparable transactions may be wrong in themselves – the so-called valuation benchmarks in many emerging areas are essentially the work of one or two "over-the-counter investors" (investors willing to give the valuations that most investors are unwilling to give), Have not come and proved right and wrong. The only thing investors can do is to figure out if the target company has to win, if it is to rely on the speed of implementation, personal charm, value-added services and other factors on the basis of selling price discount, and sometimes even do not hit the fold as long as can be selected on the line; Financing companies can do is to maximize the first three months of financing and financing The business curve of the period (in fact, this phase is mainly the user curve) to do beautiful let oneself have a high price of capital; what investment banks can do is to create a favourable supply and demand posture and a trading atmosphere for financiers by creating a buyer's competition. This is the valuation.

Under this premise, the most influential factor in the C-round financing is actually three:

1. The real valuation of the competing goods in the same-round financing (if it is the competition to finish first). Note that the competition is not taxed outside the PR value is not counted, is true in black and white valuation. The investment circle is small and the real valuations are largely hidden.

2. Relative to the operation of competing goods and market position.

3. Valuation, financing and delivery time of the previous round of financing. If the competition first melts, then (1) and (2) more important, if it is their own first integration, then (3) more important.

Next, the emphasis is (3). All kinds of reasons can talk about heaven, various methodologies can also be sprayed out flowers, but ultimately investors often have a psychological bottom line need to stick. This line says that the popular point is investors ' "silly cordon"-once trading valuations exceed this line, investors can easily start to doubt whether they will become the industry's laughingstock.

To understand this, we need to invent a concept: The VM index, V is the value, and M is the number of months. The VM index refers to the difference in valuation between the current round of financing and the previous round of financing (valuation before the current round) divided by the number of months between two rounds (the number of calendar months between the expected signing month and the front wheel delivery month), for example, if the valuation before the current round is 3 times times the value of the previous turn and the time interval between the two rounds is 3 months, The VM index is 1, and if the value is 3 times times the two-wheel interval is 6 months, the VM index is 0.5.

For example, the millet company, the fastest-rising valuation, its A-and B-round between only two months, the valuation has increased by more than 4 times times (since the introduction of Millet 1 is unprecedented success), the VM index up to 2.1, 10 months after the C-round VM index to 0.4, 12 months after the D-wheel VM index to 0.2, 16 months later, the E-round (the latest 45 billion dollars) VM index rebounded to around 0.3.

Even for pigs in hot-spot industries, the VM index for the C-round should not normally exceed 0.5. That is to say, if your B-round is valued at $50 million, then the C-round should not exceed $150 million in principle if it is to be in the 6-month period, and in principle should not exceed 300 million dollars if it is to be merged in 12 months.

Of course this is not absolute, according to the actual situation can have some fluctuation. For example, a VM index of more than 0.5 is possible if the financing company really has a particularly explosive growth rate between the two rounds or a landmark event that seriously affects the company's future expectations. For example, if B's valuation is only 20 million or 30 million dollars, the C-round VM index of more than 0.5 is also possible. For example, if the B and C wheels are spaced for more than 12 months, the VM index should be less than 0.5 unless you maintain an annual growth of more than 400% over the period.

In today's market environment, the VM index should not exceed 0.5 in principle. Once it is over, investors will doubt themselves. At this point, even if they are unwilling to let go of the project, they may hesitate to find a way to delay the delivery time so that they can look at the data for a month or two, while schoolwork the psychological balance as much as possible on other terms.

So if you're not the most beautiful star in the Galaxy, and the C-round VM index is significantly above 0.5, then you need to plug yourself into the fourth red flag to alert.

If you have only one of these four small red flags, you may not need to be overly nervous. But if four of you have three or even four are all set, then be prepared to--c the wheel may be your death.

How to avoid "C-round death"?

1. Maintain a certain degree of elasticity of valuation to avoid being misled by others ' false valuations

Now there is a very bad culture in the Chinese entrepreneur Group, which is to make up the amount of financing and valuation, some by 2 times 3, some deliberately confuse the renminbi and the U.S. dollar, the most extreme even reported the amount of financing than their own valuation is higher. Of course, these people usually do not blatantly open a press conference for false valuations, but through a variety of public relations large trumpet to spread, their own noncommittal, use other people's mouth to help mislead the market.

I was at the end of last year at the Black Horse Congress has specifically proposed "to build good faith in China, starting from their own." We can choose not to disclose the amount of funding and valuations, but if so, let's publish the real numbers. Recently, Xiaoping teachers also used Weibo to put forward the "everyone together to eliminate the phenomenon of investment fraud" initiative.

For the entrepreneurs who come out to raise money, the worst case scenario is that they are misled by the erroneous financing and valuations of the market, and they hang themselves in the sky. And that's probably what the wrong message's originator wants to see. The founders naturally tend to overestimate the value of their business, so they will be willing to half-hearted the exaggerated figures they have quoted in the belief that they can gain more for themselves. But this mentality will hurt itself, because no investor will take the false valuations spread in the market as a reference to their valuations.

The right thing to do is to make the best use of the network of existing investors and financial advisers to know as much as possible about the real valuations and financing of competitors. The ears of the world, coupled with the widespread problems of professional ethics in the confidentiality of many professionals in China, it is not as difficult to find out the real picture. Even if you cannot understand the real valuation of the auction, you can work with your financial advisor to establish a relatively reasonable and supportive valuation range based on the considerations of different dimensions. Most importantly, entrepreneurs have to maintain a certain degree of flexibility in the valuation range, if the market response is not expected to be enthusiastic at any time to adjust the valuation of the preparation. Only a deal is made, and only the valuation that is paid is meaningful.

2. Certainty is more important than valuation, time is on, give certainty and time enough discount

In the C-round phase, the first priority should not be valuation, but certainty, and time is the corresponding certainty. A financing transaction is really done only if it is delivered. So who can sign and deliver the fastest, who can give the most certainty to the financing company.

For investors, there are two prerequisites for a quicker completion of a transaction: first, investors have an understanding of the industry – valuations are worth hundreds of millions of of dollars, and no institutional investor can write cheques without fully understanding the industry. Therefore, do not waste too much time on investors who have talked once and found that they do not understand the industry. Second, investors can make local decisions, and it is best for one or two of people to make decisions or at least materially influence decisions. A growing number of Chinese business models are deviating from the pattern of the US industry, so the uncertainty will rise sharply if the decisions of the Board require the votes of partners in Silicon Valley, New York or London and Paris.

For those investors who have a deep understanding of the industry, can make quick decisions and have chemical reactions with the team, it is worthwhile to give certain discounts to push them to resolve as quickly as possible. In a market segment, who first put the C round of financing to complete, who can take the lead to throw the puzzle to their own products, but also from the D-round valuation a step closer.

3. Allow long enough time for the C-round in terms of cash reserves

There is no pat on the interval between B and C, depending on the expansion speed, the key node of business development, and the financing time of the main competitor.

One thing is necessary, is to give the C-round financing operation and completion of long enough time, this is particularly important in 2015.

Only in the case of non-financing can not go out to raise money, the hands of chips. A normal financing process usually takes 9-12 weeks. Although there will occasionally be more than 20 days to fix the C-round situation, but the market from the start to delivery more than three months of cases than the case of more than three months. That means you have the cash in your hand. When you start the C round, you should at least be able to maintain the company's normal operation for a year or so, in line with current business planning and capital requirements.

That is, if the cash in your hand after the B-round is ready to run for 18 months in accordance with your business plan, then theoretically you can devote at least 6 months to focusing on the business development and then consider the C-round financing. If you have enough cash in your hand to last 12 months, you'd better start a new round of financing within three months.

Of course, there will be some companies on the turn of the money has not moved to start planning the next round, this is usually out of competition situation, it is not discussed here.

4. Try not to give investors exclusive period

In our experience, to ensure that financing transactions can be completed in the prescribed time, a very important principle is to try not to give investors exclusive period, who to go with WHO. It is also worthwhile to pay some monetary price (for example, to pay a certain fee for an investor who has not been selected).

If we want to give investors exclusive period, we would prefer to give investors a period of time (usually not more than 10 days) of the exclusive legal document negotiation period, also do not give investors exclusive (usually 3-4 weeks) exclusive period.

Of course, in order to achieve this point, it is necessary to compare the business situation in favor of the company. Zhongxingpengyue when the company how to say that the conditions are exported, a tree hanging when the mention of what conditions people only say no dialogue is over. Now the information about investors more and more transparent, financial advisers rely on asymmetric information to eat the era has long been turned, the real ability of financial advisers is to create a financing enterprise as far as possible to provide the most favorable trading situation for enterprises to maximize the choice of space and as strong as possible negotiating position.

5. 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 of the Internet companies that are valued at $1 billion trillion and have not yet listed have a bat. Tencent alone, according to media reports, invested at least 40 companies in 2014, involving an investment of $8 billion.

If you did not introduce BATX in the earlier rounds of the four giants, or Jingdong, 58, the United States, only goods will, Ctrip such "Middle Head", then the C round should seriously consider the introduction of the war. The value that they can bring to the invested enterprise is in addition to the money and the help and coordination of business and resources. In addition to these familiar stocks, many a-share companies are also starting to invest heavily in emerging industries.

Entrepreneurs tend to be wary of the big players, but it's really not something they should be thinking about in today's environment. C round before, survival important, the media how to spray accounts will not deceive, the two armies meet drum win. Moreover, after dropping fast, more cross bat mergers are being nurtured. Dads don't even care if the kids are sleeping with each other, and the kids don't have to worry about what Dad's money will annoy other dads.

The fact is that in the vast majority of Internet-related areas, it will happen sooner or later, based on the unique ecology of the Chinese Internet. That being the case, it is better to be in the early race than to be in the competition to bring in the Giants that are most conducive to their future development. Moreover, today's internet giants and the Chinese have become increasingly eco-conscious and the concept of a pattern, know how to help not chaos. In this regard should be said Tencent 3Q after the bitter experience, for the industry set a worthy point of praise benchmark. Three mountains are turning into three big backers.

In some special cases, it is possible to introduce strategic investors who have a particularly valuable contribution as a springboard for B and C rounds. Whether it's called B + or pre-c or whatever, its essence is to make use of the unique value of strategic investors to contribute to the price of the C round through back-to-back trading arrangements. In this way, even if the valuation of strategic investors is discounted, the overall value of the C round will be significantly improved. We have adopted this strategy recently in more than one transaction.

Finally, I would like to say that today's entrepreneurs in China are the most enviable group in the world. They are in the road of entrepreneurship will encounter a lot of bumpy even into the desperate, but entrepreneurial life is worth at 80 years old when the memory of life. I wish all the entrepreneurs friends good luck in the goat's day, facing the sea, each round of financing is spent.