So it's quite important to explain the dynamics between what A, B,
C really is and how you as interpreter might see us, but actually how we need to see ourselves.
Because much like a company, our shareholders, we have shareholders are called limited partners.
They are these are individuals, high net worth individuals, pension funds,
sovereign funds of different countries that decide in their portfolio allocation that they want to do private equity.
And within private equity to do venture capital with a venture capital to do early stage funds and they allocate some money to that.
Their expectation is that you're going to give them a return superior to other asset classes.
They might have been less risky over a specific time period, and most venture capital funds have a ten year horizon.
On the other side, you have the entrepreneurs who see us as a source of funding and a source of hopefully value add in helping them scale.
And the reason I highlight this,
because you have to think about the dichotomy of those of shareholders and clients we are or clients is the entrepreneur.
And if we serve them properly and we support them properly, they will have hopefully an exit,
which means we can serve our shareholders by giving the return they want.
But sometimes the misalignment between the two LPs have a I have a finite fund, I have a ten year fund.
If I invest in a company in year four,
that means I need to figure out a way for that company to give me money back to give to my shareholders by year.
Well, six years later, by your ten.
Except if you have Facebook where you can go back to your investors and say, hey, you know, they're doing well, they haven't gone public yet.
Can I have a couple more years? And hopefully most investors would have said yes.
And Excel, which was one of the early backer of Facebook, did quite well and so that their LPs.
Secondly when I look at my my portfolio allocation and how actually create the the portfolio structure of what I invest in.
I need to balance crazy risk like Nicholas, your 15 year old kid with two employees with a more mature company,
probably a SAS business with 50 employees,
5 million, 10 million run rate need to balance that out between timing between when I'm investing and then path to exit.
And so the way we've tried to balance that out is by having also geographic disperse city which allows us to
de-risk by finding companies in New York or London or Berlin or Stockholm and trying to select the best ones.
But very few people, I think when they talk and think about VCs, think about the fact that my my job,
the guy who can actually fire me is a Canadian sovereign fund manager who's giving me a lot of money to go find entrepreneurs like you.
And the fact that I need to serve them by actually delivering on the results and the results for me,
what I'll be measured on the way I make money is by having a next set of significant size so that I can return enough to the fund.
Right? So just quick, simple economics. On the way VC funds work, most of them are on to two and 20 model.
Every year I get 2% of the commitment to pay for my rent, my salary, the vast number of flights that I take every year and the staff that we have.
And then if I have an exit and I return the fund, everything above the fund itself, the profit gets split 80% to the LP, 20% to me.
So I'm not in the money until I return the fund. So I assume make it simple that you have $100 million fund, you two have had exits of 100 million.
Your piece of the business has to return 100 million.
And until you get to 101 million, units are making any money or any significant money from from the exits.
So we are strongly incentivised to actually focus on on the exits,
which sometimes putting my entrepreneur hat back on is a misalignment with what the entrepreneur wants to do, which that should build out scale.
Maybe the ramp up path is a bit different from this kind of ten year forced curve,
which is where a number of new kind of funding models started coming into play.
It's such a good answer. In the last couple of years with the emergence of Kickstarter and Angel List and Lending Club is actually.
Democratised the access to funding for entrepreneurs. I know some people.
I've seen this graph. It's founders, founders, funders and founders.
The name of the website. It's a great illustration of the kind of the value chain of a start-up and how different people come into play.
So you and your co-founder are sitting here and come up with a brilliant idea.
You effectively own half of the company each.
You go to mom and Dad and convince Mom and Dad to give you a couple thousand dollars to at least pay for the server costs on Amazon Web Services.
You launch an app on the App Store. Hooray, you're alive. You have a company.
And at some point you turn to angel investors to actually give you some more funding via the Oxford SBS Fund,
be it the number of various angel groups that exist in London and here they part ways with some of their money.
And at that point, you start diluting yourself, you start giving out more equity.
At some point you reach scale and you start talking to institutional investors, people like me.
People have that relationship with LPs who have a focus on the exit.
A couple of years down the road.
Typical rule of thumb, when you are looking at a VC round, you're talking about somewhere between 20 and 30% dilution in that round.
What does that mean? If you actually raised let's keep it simple, $3 million at a $7 million pre money valuation,
that means your company is now worth $10 million and you gave away 30% of your company for $3 million.
So what happens as you sequence various funding cycles is if you're given away, you're giving away 20 or 30% in each round after series D,
the amount of ownership that the entrepreneur has is getting reduced significantly.
So should you actually hit an IPO by that point,
you might be worth hopefully $500 million and you only have 10% of the company, but it's 10% of $500 million.
And I highlight this because a lot of people get very, very, very focussed on dilution and how much of the company you own.
And I think dilution is critically important because that means that's the value to you of the business and how much you own,
but it don't equated with control. There's different ways in which you can maintain control of your company.
Different class voting shares such as Facebook and Google have agreements on veto rights.
Focus more on the value of that money in terms of scaling up the business and focus more on whether that money is going to take your
valuation from 10 million to 100 million because it gives you the cash effect to put fuel on the rocket ship and take it and take off.
So if you end up exiting an IPO and you only have only have 10% of $500 million company, hopefully that's still a good exit as an individual.
But this graph actually I always share it with my friends are doing angel investing
because it also shows to them the angels that unless they have enough cash,
they're going to get diluted down the down the path too.
So before creating wise so the fund we were a white sub was actually an angel vehicle for my partner and I.
And our biggest issue is that at some point you run out of money or you should, that you're putting in this risky asset class.
Secondly, that you can't follow on on each investment round.
So effectively, if I invest in Uber as an angel and I put in $50,000 at the next round to keep my percentage ownership,
I would have had to put in $500,000. And then for this crazy $22 billion valuation, I would have to put in several million dollars.
So either as an angel you get diluted or worst case scenario, the company crashes and you lose everything.
So angel angel investor investing is definitely risky.
The sense of I mean, I would not I would call it gambling, right? I think some US business school professor analysed angel investing and said
that unless you can have the capacity to do over 40 deals in your portfolio,
it's unlikely you will return to X on your on your angel investing.
So that's a lot of risk for only two X bunch of other asset classes.
It can probably give you that in the same timeframe.
I mentioned that for people in the room who might also be considering angel investing as as an interesting path.
It's fun because you get to work with entrepreneurs, but it's definitely is definitely Vegas money.