The basics of finance and investment seen from the perspectives of founders and angel investors. (Lee Taek-gyeong)
Key points from that forum
> Types of investors
Angel investment — intuition-based investing
Series A —
B, C (pre IPO) — when operating profit (partially) shows up
IPO
* Plan out in advance at what point you hit BEP and how much investment you want to take.
* Investment is ultimately just a means. If there's no need to preempt and you can do it on your own, you don't have to wear yourself out chasing investment.
> Valuing a company
- Investment in a private company
- The law of supply and demand (auction and competition)
- When Competitor A and Competitor B are competing in a bid / M&A
- You need lots of buyers first (at least 3 teams / investors are also customers)
- Customer-based (by vertical / conversion rate to paying customers)
- Profit-based (EBITDA, PER)
- The investor's mood
- 'Product you want to sell' < 'product they want to buy'; sufficient market size and growth (from the investor's perspective, can they realize returns: typically over 400–500%)
- Growth strategy and budget (how strategically you'll use the invested money)
> Founding/management is a problem-solving process
- Customer needs (problems / NOT: build the product you want to build first and then position it... X)
- An appropriate solution (but consider competitive edge and problem-solving ability...)
- The related competitive edge
- An appropriate revenue model (marketability)
> People, more than the item!
- The item can change along the way.
- In the early stage there's inevitably little you can show.
> What kind of people?
- Passion is the baseline. "Vision and grit."
- Qualities over credentials: problem-solving ability.
- The logical soundness of the business model (item)
- Core competitive edge and qualities related to the item
- Action over talk
- Mutual trust / compatibility among members
> Types of shares
- Common shares, preferred shares (with voting rights), convertible bonds (the joker — bonds convertible into shares, with relatively low interest), bonds with warrants (tilted to investor benefit)
> Capital increase
- Total equity adds up to 100%
- Capital increase and dilution!!!
- Pro-rata rights issue to existing shareholders (same ratio / conditions, forfeited shares reallocated)
- Third-party rights issue
- Bonus issue (a sleight-of-hand / paid out of capital surplus)
- Commercial law and priority
> pre-money VS post-money valuation
When it's 20% or higher, the distortion for each condition becomes serious, so
you need to convert post-money valuation back to pre-money.
> Hong Gil-dong decides to invest 500 million KRW in Gugol
pre-money = pre-money 15 + investment 5 → 20%
> Conventions by stage
- Redeemable Convertible Preferred Shares — RCPS (redeemable only out of profits / most common)
- Common shares (almost never / only for strategic investors)
- CB
* Make sure to check founder personal guarantees! — verify the details around management failure, don't skimp on lawyer fees
> VC investors also ultimately have to return profit to the fund of funds
> IPO
- To take in large amounts of capital easily, frequently, and quickly to fund service-oriented business
- Stock options
> Startup > M&A > Startup
> Starting up for investors vs starting up for yourself
> Check BEP timing
