The Business Model of VC

At APEX, we love what we do. We get to invest in amazing technologies that help make tomorrow’s sports better than they are today. Plus, we get to work with great athletes who have the same convictions we do and the power to drive positive change.

We have been operating for a little over two years now and have invested in > 15 companies. In doing so, we find that we have similar conversations with different founders. Ultimately, we see investing as creating partnerships, and for a partnership to work, mutual understanding is key. We do our best to understand the business a founder is building, but there should also be no misconceptions about what we do as VC.

Since the sports, media and entertainment industries are growing very fast, but in our opinion are still in their infancy, we see that the best founders in the industries we invest in come from the world of sports itself. And it also makes a lot of sense to be fair. A physical therapist or nutritionist who has issues with game preparation would be a more suitable founder to solve this problem than someone with a banking/finance background (if you’re a banker doing something in this area, consider this a non-personal example and don’t forget to reach out to us :)). The same physical therapist or nutritionist wouldn’t necessarily be as savvy as the banker when it comes to understanding the entire fundraising process for an early stage startup.

The role of VC is to raise capital commitments from one or more sources and allocate it into a basket of startups/scaleups that fit the allocation strategy — investment thesis of VC. With a single investment in a fund, an investor gets a portfolio of investments, in APEX’ case in sports, media and entertainment. Any investor in a fund also wants to generate financial returns. Without getting into too much relatively irrelevant detail, any startup looking to raise VC capital needs to understand the following highly simplified basics:

• Let’s say you are speaking to a 50M fund;
• That fund will build a portfolio of about 30 companies;
• 50% of which are reserved for follow-on investments;
• The average first ticket would be the 25M/30, which makes the initial ticket to be around 850k;
• The fund looks to acquire >5% of ownership within a business (and maintain that ownership over time).

Some founders do, some founders don’t ask about the average ticket size when engaging with APEX. And some of the founders who ask it do it out of personal calculations, like “what could these people bring to my investment round.” But fund size, average ticket size, and portfolio size determine how VC would view you as a company, and read below to see why:

• Knowing or assuming that 9/10 companies will not survive, or less extreme, will not determine the majority of returns for a VC — in a portfolio of 30 companies, there should be 3 winners;
• These 3 winners must have the potential to return the fund, in this case the VC, the expected return for its investors;
• Knowing that > 5% ownership stake needs to be worth 50M, the startup must be worth 50M/5% 1B after exit (unicorn status);
• Depending on the industry, depending on the growth market, depending on profitability, and depending on market conditions, achieving this valuation requires significant recurring revenue;
• To achieve this recurring revenue, a significant market size is required (this could refer to an existing market or a new category).

It is important to understand the allocation plan of a VC because different VC’s have different allocation constructions and therefore some VC’s can invest in one company and some VC’s cannot invest in the same company. Larger initial tickets, a higher ownership in a startup, and an arguably denser portfolio lead to different investment strategies. Using the above example of a 50M VC Fund, but alternatively investing in 20 companies and targeting a 15% ownership stake in a company after the initial investment, they would make their “bet” that they would have 2 winners in their fund. And those 2 winners would have to return 75M each for a 15% ownership stake. This would mean that the valuation target for these companies would have to be 500M, which is half of the example above.

Hopefully this post will help great founders understand the sometimes complex world of VC. As APEX, we are committed to the continued growth of the sports tech ecosystem, and if we can help just one founder do that, we’ll already be happy with the results. As stated before, we believe investing is a partnership and a partnership starts with mutual understanding.