What do AI, Medical Innovation and Venture Capitalists have in common? Dennis Koenig reports on our Next Entrepreneur workshop with guest speakers from Seervision, Hylomorph and Verve Ventures
What is the probability of being successful with venture investment? Low.
Out of 100 venture capital investments made from 1985 to 2014, investors received less than their initial investment back from just under half of the cases, and only in 6% of cases were they able to increase their money at least tenfold. Hence, to increase the likelihood of a successful investment, it’s central to look at start-ups with the right perspective. For example, Verve Ventures assesses over 5000 companies annually, only to ultimately shortlist 54 start-ups. In order to do so. it is crucial to understand different business models and their respective key metrics. David Sidler of Verve Ventures illustrated this with the example of two classic business models: software-as-a-service (SaaS) and MedTech.
SaaS is a mix of a business model and a product description. The product is classically hosted in the cloud and can be used via browser or app. It is more or less a textbook example of the term scalability. When assessing such a business model, the focus is primarily on the customer and his behaviour: How long can the customer be retained and how much revenue will the company generate with him during this time (customer lifetime value)? How high are the costs incurred to acquire a new customer (Customer Acquisition Cost)? If you discover a company that manages to generate a Customer Lifetime Value that is three times the acquisition cost over the long term, it looks like an interesting business model. Classically, it should also take no longer than 12 months to earn back the acquisition costs of a customer. The decisive factor for a high customer lifetime value is not only the expected
revenue from the customer, but above all the customer’s loyalty. This can be described in terms of churn, the rate of lost revenue due to lost customers. Successful software companies can show negative churn, i.e., increasing sales from existing customers. Negative churn makes the difference between linear growth (not so attractive) and exponential growth. A software company’s product should be a secondary concern for investors – it’s all about reliable data for revenues and costs.
MedTech companies are a different story. Here, it’s all about the product and what it takes to bring it to market. The main thing to keep in mind is regulatory requirements, which depend primarily on the risk to the patient that would result from a product malfunction. For such an approval process, one should plan on an average timeline of 40 months and USD 24 million in costs.
We were fortunate to have the opportunity to discuss with the co-founders and CEOs of Seervision (SaaS) and Hylomorph (MedTech) after this intro by David Sidler. It became clear that successful founders have one thing in particular in common: They are able to take on different roles – both have evolved from absolute experts in their field to leaders with responsibility for a company, employees and investor money. And both have had to learn not to answer calls at three in the morning!
