Incubators - business arithmetic

    Many copies have already been broken in the battles Incubators vs Startupers.
    Break one more, through the knee.
    Breaking Spears - Don't Build Spears, Right?

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    Every new public incubation of incubators and angels in the direction of making an offer “which cannot be abandoned” on the habr noticeably educes the audience. Mugs of passion mostly glow around the idea of ​​“Give $ 10,000, but want 50% (or 20, or 70 - depending on the sensitivity of the respondent) in my future Google? Goats! (this is added to oneself because startupers value their karma). ” Here are links to some of the latest topics on the Startups blog: 1 , 2 .

    Yes, incubators are a normal cynical business, but this in itself is not a minus or a plus, especially considering that they do not bother to poke their hands in their safes and fill their pockets with rustling happiness. In fact, even if you are satisfied with the conditions that offer you, it is also important to understand - what are the financial goals of the incubator and how they correlate with yours. What is the incubator counting on when giving out its money? We’ll talk about this.

    paragraph 1.
    An incubator is a micro investment fund, its business is to earn money by investing its money in nascent projects. This means - they want to get a decent profit on their share in the company in the future, or to sell their share much more than they bought. What is a “decent profit”? Of course, each incubator has its own criteria, but this at least means many times more than just putting money in a bank on deposit.
    Let me remind you that bank interest on deposits in dollars range from 5% to 12% per annum. What is “selling a stake much more expensive”? From the same deposit considerations - if the incubator invested 10,000 in you and sold the stake in 3 years for X , then their annual percentage of profit =
    [3rd degree root of (X / 10,000) -1] * 100% .
    And this figure should be significantly higher than those 5-12% per annum in the bank. Let us take at least 30% per annum as the lower limit of incubator interest (although I think the majority are unlikely to work out of 30% - it is easier to speculate with laptops in Gorbushka for such profitability).
    X = (0.3 + 1) ^ 3 * 10,000 = 22,000 .
    Total cost of growth is necessary to provide for 120% or 2.2 times .

    point 2.
    At the same time, it is important that all startups on the Internet, without exception, are extremely risky - that is, the probability of their successful implementation in accordance with the business plan is low (roughly speaking, out of 100 projects, units will come out for planned capacity), which means that the incubator needs to make a risk adjustment, which leads to the requirements of a very high percentage of return on invested capital. For example, if an incubator invested 10,000 each in 10 projects and shot one , then it is necessary that the value of the incubator's share in this project grows to at least 100,000 , that is , 10 times . Otherwise, the total investment incubator 10 x 10,000 = 100,000do not even return, not to mention profit. An incubator needs to have at least several projects, because otherwise there is a danger that not a single shot will be fired and the incubator will lose all of its investments. For example, if the incubator has 10 projects , then with the industry average probability of firing (but actually lower) 1/100 , the probability that at least one out of ten will shoot is V = 10% . And if the incubator has 100 projects , then this probability is V = 63% . ( V = 1 - (0.99) ^ N ) where N is the number of startups at the incubator). So, for probabilistic reasons, an incubator with 10 projects should lay 10-fold growth (plus 900%)share value in each project, and an incubator with 100 projects - 100/63 = 1.59 (plus 59%) . This is without taking into account inflation and with a cumulative profit of the incubator 0 - we only go out to return the invested money. If you think that the probability of a shot is above 1%, you can easily count for any other parameter.

    Combining 1 and 2, we have: in order to exit from 30% per annum on invested funds, an incubator with 10 projects needs to lay the growth of the cost of its share in each project 2.2 * 10 = 22 times or 2100% . Namely - investing 100,000in 10 projects, of which 9 died, a successful one needs to be sold so that you get at least 220,000 for your package - this will provide 120,000 profit , which is equivalent to 30% per annum.
    An incubator with 100 projects needs to lay growth of 2.2 * 1.59 = 3.5 times or 250% . Having invested 1,000,000 in 100 projects of 10,000 each (of which 37% will die ), the incubator will sell its shares in 63 successful projects and get (63 * 10,000 * 1.59 * 2.2) = 2,200,000 or 1,200,000 profit , which is equivalent to 30%per annum The share in each successful one should be sold on average for 10,000 * 3.5 = 35,000 .

    It is easy to see even without additional variables (remember the joke about “pi with a bow,” are there physical facilities?) That for a small incubator a large share in the project is often a necessity rather than greed: after all, if the share is for example 20% , then the price of the only successful project sales will be 220,000 / 0.2 = 1,100,000 , and this can be absolutely unrealistic (a small project, a crisis, etc.). And if the share is 50% , then you need to sell the entire project for 220,000 / 0.5 = 440,000 . In general, the sale price of the project is inversely proportional to the share of the incubator, and selling cheap is much easier than expensive - oddly enough ...

    One more thing - the probability of a shot, as can be seen from the simple numbers, is a critical parameter. It is clear that the probability of a shot in a "competent" incubator will be higher than in the industry. The “competence” of an incubator will also affect its ability to seek further financing or sell a business - such an incubator has the right acquaintances and a credit of trust among plump customers. Ask yourself - the incubator with which I am going to tie the knots of the investment agreement has experience working with real business buyers in my topic (in the sense that you need to imagine who can be the final buyer of your startup - Yandex, for example, or AOL ) or investors of a higher level; whether he sold or brought to design capacity at least 2-3 projects (1 may be an accident); is he financially sound for

    all success. and incubators, and incubated. there is still an important topic about how Russian incubators are fundamentally different from Western ones, but they differ ...

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