FAQs SectionsGetting Started Investors Entrepreneurs About Seismic Educational Questions Directional Questions
Disclaimer – This section is for informational and educational purposes only. This information does not reflect Seismic Capital Company’s investment philosophy or processes.
1) What is venture capital? How does it differ from other forms of financing?
Venture capital is a form of financing for startups and early-stage companies that have high growth potential. Venture capital firms like Seismic provide funding to these companies in exchange for an ownership stake. The goal is to create significant returns on investment.
2) Venture capital has delivered significant returns to investors over the past two decades at least, and has often been categorized as the best-performing asset of all asset classes. Why does Seismic find the need to change the model?
Seismic believes the overall model can be significantly improved in two areas.
-First, the general public has been excluded from investing in venture capital. There are structural reasons for this, but Seismic has upended this practice. With Seismic, just about all investors can participate.
-Second, regarding deploying capital into companies, Seismic believes venture-backed companies should spend virtually all of their time on the things that make them unique: developing technology, building products and acquiring customers. We are opposed to our companies spending time on admin, human resources, payroll, legal, accounting and the like, so we provide that to our companies as a part of the investment we’re making in them.
There are growing calls for a more diverse, inclusive, and sustainable approach to venture capital that takes a longer-term view and prioritizes the success of founders and portfolio companies over short-term financial gains. This is why Seismic provides patient, long-term capital to our portfolio companies. We’d rather have them concentrating on changing their industry, or creating a new one, than chasing the next capital round.
Venture capital has created outsized returns for a few lucky (super rich) investors in the past decade. Seismic Capital makes it possible for all investors, including retail, to participate. Now, you don’t have to be a wealthy person, family office, institutional investor or pension fund to seek VC-level returns. Our investment process seeks potential unicorns (private companies that reach a billion-dollar valuation before going public or being sold). We want to nurture ideas that can revolutionize industries. More and more evidence shows that outperformance is closely tied with sustainable and ethical business practices. We will only invest in companies that meet environmental, social, and governance (ESG) standards.
3) What types of businesses do venture capitalists typically invest in?
Venture capitalists typically invest in early-stage, high-growth companies with significant potential for scaling and generating substantial returns on investment.
These companies are typically in the technology or life sciences industries, although VCs may also invest in other fields such as renewable energy, fintech, or consumer goods.
4) What are the risks and potential rewards associated with investing in startups?
There are levels of risk with all types of investments. Investors who are willing to accept the risks associated with investing in startups can potentially benefit from significant returns if the company is successful. Seismic believes its business plan to provide not just capital but administrative and advisor support will make it more successful in nurturing startups than the general VC population has been. This is a bold statement, given that VC has been the highest-performing of all asset classes for many years.
When investing in startups, risks to keep in mind include uncertainty, illiquidity and high-failure rate.
-Startups are typically in a high-risk, high-reward phase of their development. There is often a great deal of uncertainty around whether the business model will be successful, how quickly the company can scale, and how long it will take to achieve profitability. -Investing in startups is often illiquid, meaning that investors may not be able to easily sell their shares or exit their investment. This can make it difficult for investors to realize a return on their investment in the short term. -In certain situations when a startup fails, investors may lose their entire investment.
Often with high risk, comes high reward. Potential rewards include high returns, early access to innovative technologies, and portfolio diversification.
-Successful startups have the potential to generate significant returns for investors, with some companies growing to become multi-billion-dollar enterprises. For example, investors who got in early on companies like Amazon, Facebook, or Google have seen significant returns on their investment. -Investing in startups can provide early access to innovative technologies and products that have the potential to disrupt entire industries. This can offer investors the opportunity to invest in the future before it has become widely recognized. -Investing in startups can offer diversification benefits for investors who are looking to spread their investment portfolio across multiple asset classes.
5) How do investors in early-stage companies evaluate potential investments, including the due diligence process?
In Seismic’s case, as the investor, you are investing in a portfolio of companies as we assemble it, not a single asset. We review transactions and evaluate these companies on your behalf.
At a more generic level, investors in early-stage companies typically evaluate potential investments using a variety of criteria to determine whether the opportunity is a good fit for their investment strategy and risk appetite. Some of these criteria include:
-Assessing market opportunity -Evaluating the founding team for its experience, skills, and track record -Reviewing the business model to evaluate viability and scalability -Evaluating the startup's intellectual property, including patents, trademarks, and trade secrets, to determine whether the company has a defensible competitive advantage -Assessing the startup's financials, including revenue, expenses, and cash flow, to determine whether the company has a realistic path to profitability
As the investor, it’s crucial that we do our due diligence before making an investment in a startup. Several areas of due diligence to focus on include:
-Reviewing financial statements, tax returns, and other financial documents to evaluate the startup's financial health and performance. -Conducting interviews with key members of the startup's team, including the founders, to assess their experience and expertise. -Reviewing legal documents, such as incorporation documents and contracts, to verify that the startup is in compliance with all applicable laws and regulations. -Conducting market research to evaluate the startup's market opportunity and competitive landscape. -Checking references and conducting background checks on the startup's key personnel. Seismic follows all these steps, and where possible, we rely on arms-length third-party experts, to ensure the best possible outcome.
6) What are the key factors that can lead to success or failure of a startup? How do investors help mitigate risk?
Some of the key factors that can impact a startup's chances of success include:
-Being able to identify market opportunities. The startup needs to offer a product or service that provides real value to customers and solves a significant problem. It needs to have a defensible competitive advantage and be able to compete effectively against other companies in the market.
-The founding team needs to be experienced, skilled, and committed to the success of the company. They should have a track record of executing on their plans and be able to adapt to changing circumstances.
-The startup needs to have a viable and scalable business model that can generate significant revenue and profitability.
-The startup needs to have realistic financial projections and a clear path to profitability.
Investors may mitigate risk by conducting thorough due diligence on potential investments and by providing support and guidance to portfolio companies.
7) How do venture investors measure success and what are the common metrics used to evaluate the performance of a portfolio company?
Investors will evaluate revenue, gross margins, runway and valuation. Investors will also evaluate factors such as market size, competition, team dynamics, and overall market trends to determine the potential for success of a portfolio company.
8) How do venture investors value a startup and negotiate deal terms with founders?
Valuing a startup is one of the most challenging aspects of the venture capital investment process, as startups are often pre-revenue or have limited operating history.
At Seismic, we leverage market comparables, discounted cash flow, and a host of other metrics to establish a range of valuations, then we discuss with the company and agree on a number. These outcomes help calculate which party/parties owns how much at the end of the day.
9) What are the current trends and outlook for venture capital, and how can founders best position themselves to attract investors?
-Several current trends include:
-Increasing diversity and inclusion
-Shifting towards ESG investing
-Rise of alternative financing models like crowdfunding
-Continued emphasis on technology
The expansion of the global VC market
Founders should focus on building a diverse team with complementary skills and a track record of success, as well as building a strong customer base and demonstrating revenue growth. Founders should be able to clearly articulate their strategy for generating revenue and achieving profitability. Their pitch should be compelling, while clearly communicating their vision, the problem they are solving, and their unique value proposition. The pitch should be tailored to the specific interests and criteria of the investors being targeted. Founders should also look to network and seek out mentorships to connect with potential investors.
10) What is the difference between the several ways to invest in startup companies? (Angel investing, venture capital, crowdfunding, accelerators and incubators)
The key difference between these various ways to invest in startup companies is the type and amount of support provided, as well as the stage of development of the companies being invested in. Angel investors and crowdfunding are often used in the early stages of development, while venture capital, accelerators, and incubators are often used later on when the companies are ready to scale.