As a startup founder, you really need to understand how venture capital works

Welcome to TechCrunch+ Friday

“Venture capital” is semantically equivalent to “dangerous money,” which is part of its mystique.

Essentially, VC is a high-stakes extreme sport in which top players can accumulate startling amounts of wealth and power. And sometimes, a massive pile of investor cash burns so brightly, it gets picked up on satellites.

But where does all that money actually come from, and how do VCs actually make money? Prior to joining TechCrunch, reporter Haje Jan Kamps worked at VC fund Bolt, where he interacted directly with early-stage founders.

“Once you’re on the VC-fueled treadmill, you can’t easily step back off,” he writes. “The corollary of that is that I suspect a lot of founders don’t really know how venture capital works.”

In this comprehensive explainer, he deconstructs venture capital to help readers understand how investors think about risk and return, pro-rata rights, and why “VC investing is a hits-driven business.”

It should go without saying, but it’s a bad idea to pitch an investor if you don’t have a solid grasp of how they operate.

“As a startup founder, you’d never dream of selling a product to a customer you don’t truly understand,” writes Haje. “Not understanding why your VC partner might be interested to invest in you is dangerous.”

Thanks very much for reading TC+ this week!

Walter Thompson
Editorial Manager, TechCrunch+
@yourprotagonist

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Planning to use your startup equity as collateral? Good luck

Employee incentives are one of the oldest brain hacks. Offer the right person enough equity and delicious snacks, and they will gladly work 60+ hours/week or take part in a weekend dev sprint.

But workers who are interested in accessing liquidity have just two options: wait for a tender offer from their employer, or find a private buyer in the secondary markets.

“You could claim the system is broken. I happen to agree,” says Max Brenner, part of the founding team at Compound.

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Why do startup valuations go down when interest rates go up?

The U.S. Federal Reserve has hiked interest rates to tamp down inflation, just one of several factors that are driving down startup valuations these days.

But why?

Higher inflation directly impacts access to capital, your customers’ ability to pay, and not incidentally, the service you’ll receive from providers (which includes your own employees).

“If your customers benefit from inflation, then there’s a good chance that your company will too,” says Equidam founder, Daniel Faloppa.

“In most cases, though, when your customers benefit, your service providers suffer.”

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Pitch Deck Teardown: Mi Terro’s $1.5M seed deck

In March, Mi Terro raised a $1.5 million seed round to scale up efforts to turn agricultural waste into proteins that can be used to replace legacy plastics that have fouled our environment.

The company’s founders shared a 15-slide pitch deck with TC+ that runs through their plans to use spent grain to create material for everything from contact lenses to detergent pods.

Or, as the closing slide states, “Drink more beer, reduce more microplastic.”

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Dear Sophie: How do I get an O-1 visa to freelance on web3 projects?

Dear Sophie,

I’m a UX/UI designer in Europe working at a web3 company in the United States.

I would like to resign from my current position and move to the U.S. to pursue work that allows me to have more autonomy, flexibility and the ability to take on a variety of projects with different clients in the U.S.

How can I make that happen? Thanks for your help!

—Worldly web3 Wonder

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Choose your angel: Learn how they invest and what motivates them

The “choose your fighter” meme can be traced back to the video game Mortal Kombat, but it’s also relevant for seed-stage founders who are looking for an investor.

Making money is top of mind for every angel, but according to Mack Kolarich, VP of Assure Analytics, most of them also “have a second or third motivator driving them to invest in startups.”

In a TC+ guest post, he lays out several factors entrepreneurs need to consider when investor-shopping: Are they supporting a local ecosystem? Do they write direct checks?

“Armed with this knowledge, you can strategically select the right partner for your business,” says Kolarich.

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5 investors explain why longevity tech is a long-term play

In the United States, average life expectancy has fallen for two years in a row. In 2019, it was 78.86 years, but by 2020, that figure shrank by 2 years and 3 months.

The decline was due to COVID-19, but reporter Anna Heim interviewed five investors who are backing startups developing technology that may allow us to live longer, healthier lives.

Longevity is a nascent vertical today, but “the space is only getting started now and will infiltrate all aspects of our life in the next five to 10 years,” said one respondent.

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