The Start of a Startup - Memo

To: Professor Hansen

From: Livia 

Subject: The Start of a Startup

Date: June 5, 2015

The Start of a Startup

Intro

In today’s age of innovation, it’s easy to stumble upon an article - or 500 articles - on the latest tech startup. Many of these articles explain in great detail the business venture, but many of them don’t explain how the startup company acquired the capital necessary to fund their venture. Startup companies often receive funding from Venture Capital Private Equity Firms.

The term “Venture Capital” means what it sounds like. “Venture” refers to the new business venture seeking “Capital,” or seed money to be used to grow the company. “Private Equity” refers to an entity separate from the startup company.

Overview of Private Equity

Private Equity Firms specialize in pooling together money from investors - specifically pension funds, high net worth individuals, or sovereign wealth funds. There are a variety of ways a Private Equity Firm can invest the investors’ money. A few well-known private equity investment vehicles are real estate and venture capital, or startup companies. Investors look to Private Equity Firms to advise them on how best to invest and grow their funds for long periods. The Private Equity firm will match an investor’s desired rate of return and risk level.

Venture Capital Private Equity, The Job

I interviewed an associate named Mike Cooke at TA Associates, a Venture Capital Private Equity Firm. His main job components are the following:

·      Investor Relations

·      Financial Analysis of potential startup company investments

·      Monitoring previous startup company investments

Investor Relations

The Investor Relations part of Mike’s job involves:

·      Cold Calls

·      Risk Assessment of investing in a startup

·      Investor Education

On a daily basis, Mike Cooke cold calls potential investors. He reaches out to different funds or high net worth individuals to educate them on the value of investing with TA. No investors = no money = no investment, or commission for Mike.

TA Associates investment’s key selling points are their unusually high returns in comparison to other assets. Investing or buying a share in a startup company in the early stages of development has potential for a very high return, but also a significant amount of risk because the company usually banks on a brand new idea becoming successful. Mike convinces potential investors that TA Associates has the expertise to mitigate the risk of potential failure.

Mike then educates the investor on the strategy TA Associates uses when buying a share of a company. TA doesn’t just buy a share of the company, Mike also negotiates a seat on the board of the company for one of his associates. Mike communicates this strategy to investors as assurance that the company TA invests in will have an expert advisor on the board of directors that the investor has access to.

Financial Analysis

Sometimes investors are so pleased with the returns TA Associates earns that they want to invest in another startup company. Mike actively searches for new companies to invest in.

The exact methods Mike uses to find and evaluate financial stability of new companies are complex. To simplify, the list below shows list of metrics Mike uses when picking potential startup investments.

·      Searches for new companies that are losing money – the Headquarters of TA Associates is located in Silicon Valley, so this is not a hugely difficult task

·      Analyzes feasibility of turning those companies around

·      If the company looks promising, creates a financial model to project what returns could be if the company is redirected

Mike works with a team of experts at TA to complete the analysis. Their process is thorough and many experts at TA must analyze the company before taking a risk with their investor’s money.

Monitoring

The financial analysis section explains how Mike Cooke hunts for new companies to invest in, but what about companies that TA Associates already invested in and must monitor to ensure the right returns are still made?

DigiCert Example:

A few years ago, Mike Cooke found a new company to invest in, named DigiCert. His role in the company is not over. Although Mike couldn’t tell me too much about the strategy behind TA’s investment in DigiCert, he did mention that he placed a TA Associate with expertise in tech consulting and management on the board of directors of the SSL encryption service company. SSL encryption is a fancy term for a type of web-based security system that big companies use for safe web-based sharing of important, top-secret documents.

Until the returns of his investors are made, Mike directs the company on strategy and management. Once a startup, DigiCert, now maximizes profitability and it’s leadership makes educated expansion decisions with guidance from Mike and his associate.

Still not for You?

Maybe DigiCert isn’t your thing. Maybe you don’t care about SSL encryption, and I can guarantee you I had no idea what that was until I wrote this memo.

Many other well-known companies now weren’t so well known in their early stages.

Qualtrics, LinkedIn, Dropbox, and Oracle were all funded by Venture Capital Private Equity Firms. Without the funding, those companies would not have evolved as quickly as they did, and they certainly would not have been available to You, the consumer, without that necessary funding and direction from professionals like Mike.

Readability Statistics

Passive Sentences: 12%

Flesch Reading Ease: 47.1

Flesch-Kincaid Grade Level: 11.3