Six degrees of early-stage ventures Marc Felske Darwin College University of Cambridge April 2020 This dissertation is submitted for the degree of Doctor of Philosophy I dedicate this thesis to my loving family... Declaration This dissertation is the result of my own work, except for commonly understood ideas or where specific references are made, and includes nothing which is the outcome of work done in collaboration. It is not substantially the same as any work that I have submitted, or, is being concurrently submitted for a degree or diploma or other qualification at the University of Cambridge or other University. The dissertation consists of 63273 words, and 36 figures. Therefore, it does not exceed the prescribed word limit of 65,000 words and 150 figures for the relevant Degree Committee of the Department of Engineering. Marc Felske Cambridge April 2020 i Abstract Six degrees of early stage ventures Marc Felske Private markets investment volume and valuations exceed the level of the dot-com bubble (PwC and CBInsights, 2019). The available amount of capital surges as investors announce new multi-billion dollar funds (Kruppa, 2019). Even large, insti- tutional funds in the Silicon Valley, who are used to investing in later stages, move upstream to invest in fledgling firms to achieve higher ownership and returns (Clark, 2019a)1. Despite the high private market liquidity2, standing out from the crowd is critical and has become more difficult to achieve, even for innovative entrepreneurs (Planko et al., 2017). Curiously, venture capitalists who expect the latest technology and innovation from new ventures, did not themselves significantly innovate in their approach, including methods of evaluating ventures (Kupor, 2019). Few investors came up with new, differentiated investment strategies, one such example being data-driven investing (Pitchbook, 2018). Although venture capitalists seek to invest in firms which benefit substantially from the notion that \data is the new oil", few practice to leverage data for their investment process (Parkins, 2017; Dance et al., 2018; Arroyo et al., 2019; Gompers et al., 2020). Instead, the overwhelming majority adheres to the motto \picking investments is an art, not science" and relies primarily on its networks as the most valuable resource (Bell, 2014; Huang and Pearce, 2015; Gompers et al., 2020). Venture capitalists' focus on their social networks could not only negatively affect investment decisions and returns, but also promote group-think and stifle the progression of their investment thesis (Wuebker et al., 2015). Reviewing the previous works on entrepreneurship, venture evaluation, and venture capital revealed a significant gap in the literature. While investors and entrepreneurs depend heavily on their social networks, these networks play an insignificant role 1 In 2000, 848 early-stage ventures with headquarters in the US, UK, Germany, and France raised $5.5b venture capital funding across 866 funding rounds compared to 2018 when 10,885 early- stage ventures raised $31.0b capital across 12,399 deals. This data represents 62% of early-stage ventures and 63% of the globally committed capital in rounds up to Series A and is inflation adjusted (PitchBook Data, 2019). 2 In 2000, 669 early-stage venture capital funds with headquarters in the US, UK, Germany, and France raised $193.2b compared to 2018 when 556 early-stage venture capital funds raised $452.4b. This data represents 93% of global early-stage funds and 92% of capital committed and is inflation adjusted (PitchBook Data, 2019). iii iv in venture evaluation. The existing frameworks are inadequate to accurately assess early-stage ventures and thus a rethink of methodology is needed to better cap- ture the networked nature of today's ventures (Miloud et al., 2012; Dusatkova and Zinecker, 2016). This thesis suggests a new perspective for early-stage venture eval- uation, with particular focus on formalising the ventures' social networks. Contributions made by this thesis are fourfold and relevant to entrepreneurs, in- vestors, and academic theorists. Firstly, existing theories that explain venture fundraising success are expanded by adding a social network perspective. Secondly, this research provides a comprehensive overview of stakeholders' roles and their con- stellation in social networks around the entrepreneurs and their ventures. Thirdly, for entrepreneurs, different modes of leveraging their social networks for critical busi- ness functions are identified. Lastly, an evaluation tool for venture capitalists to the investability of early-stage ventures is developed. In summary, results provide new insights into entrepreneurial strategies for leveraging social networks to enhance operations, differentiate from competitors, send positive signals to investors, and ultimately improve the venture's assessment by the private market. Acknowledgements First of all, I am overly grateful to my PhD Supervisor, Tim Minshall. Without his close guidance, I would have been lost many times. His encouraging words reassured me that I could complete a nonconformist research project. Most importantly, every conversation with him left me pondering and the feeling that I learned even more about life than research. My VC fund colleagues gave me a unique chance to work while studying and getting insights into the practitioner side. Such a double role and their willingness to sharing insights allowed me to learn fast and reshape my studies. The time I spent in Cambridge was unforgettable. I feel fortunate that I was able to maintain existing friendships and forge many new ones. I want them to last forever, wherever our paths may lead. Being able to call the most humble, intelligent, loyal, and amiable quirky people my closest friends is the greatest gift. Listing any names would imply an order - so I will leave it here - you know exactly who you are. The biggest thanks goes to my family. v Publication Conference Paper Felske, M., Foege, J. N., and Minshall, T. (2018). Spiders spinning their webs: Implications of social network constellations for early-stage venture valuation. In World Open Innovation Conference 2018, Open Innovation and Performance: New Venture, WOIC 2018. vii Keywords Venture capital, entrepreneurship, early-stage ventures, new business ventures, start- ups, evaluation, valuation, data-driven investing, social capital, social networks, so- cial network analysis, models viii Horizon expanding activities Industry experience 8/2018 to today - Associate with an early-stage VC fund Starting the fund's European office 4/2018 to 8/2018 - Campus Associate with an early-stage VC fund Deal screening and due diligence 19x - Founder coffee sessions Advising founders on fundraising 9/2018 - Internship with boutique consulting firm Applying social network analysis in consulting context 11/2018 to today - Member at Google for Startups Campus in London 3/2019 to today - Mentor in two early-stage accelerator programs Mentored >50 founders on various topics Conference attendances 1x - Cambridge Artificial Intelligence Summit 8/2019 - Cambridge Networks Day 2019 2x - CUTEC Technology Ventures Conference 4/2019 - Hannover Messe Attending the worlds largest industrial trade show 5/2017 - IfM Briefing Day Research presentation to industrial representatives 2x - Tech Day London Attending the UK's largest start-up roadshow 11/2018 - World Open Innovation Conference 2018 Paper presentation Venture ecosystem visits 2x - Aachen 1x - Berlin 1x - Frankfurt 33x - London 1x - Los Angeles 2x - Munich 1x - Paris 2x - Silicon Valley 2x - Zurich ix x Demo day attendances 2x - Entrepreneur First Demo Day 3x - Founder's Factory Demo Day 1x - Hackbridge Demo Day 1x - Pitch@Palace 1x - Santander University Growth Accelerator Demo Day 2x - St. John's Innovation Centre Pitchfest 2x - RebelBio Demo Day Accelerator/Incubator visits 3x - Accelerate Cambridge 1x - Accelerate@Babraham 1x - AMRC Sheffield Innovation Centre 1x - BCG Digital Ventures 2x - Entrepreneur First London 1x - King's College London Innovation Group 5x - Google for Startups Campus 4x - IdeaSpace Cambridge 1x - Impact Hub Zurich 10x - RebelBio London 1x - Seedcamp London 1x - UCL Hatchery London 1x - Welcome Genome Campus Entrepreneurship and Innovation Centre Event attendances 1x - Camb.ai 1x - Cambridge Startup Billion Pound Scale-up 3x - Cambridge Tech and Beers 1x - Cambridge Startups Failure Party 1x - CAMentrepreneurs Launch Event 2x - CUE Business Plan Competition 6x - DeepTech Monday and DeepTech Friday 11x - Judge Business School Enterprise Tuesday 3x - Entrepreneurial Postdocs of Cambridge 2x - Innovation Forum Cambridge 1x - Image&Data: Analysis, Research, Translation day 2x - Investing in Deep Tech 1x - Venture Creation Weekend 2x - SV2Cambridge Acronyms AI Artificial intelligence API Application programming interface B2B Business to business B2C Business to consumer BM Business model BMI Business model innovation CEO Chief Executive Officer CFO Chief Financial Officer CIO Chief Information Officer CMO Chief Marketing Officer COO Chief Operating Officer CRO Contract research organisation CTO Chief Technology Officer CVC Corporate venture capital DT Decision tree ESG Environmental, social, and governance factors ESV Early-stage venture FinTech Financial technology GBT Gradient boosted tree IP Intellectual property IPO Initial public offering LP Limited partner M&A Merger and acquisition ML Machine learning xi xii Acronyms OLS Ordinary least squares PoC Proof of concept PR Public relations R&D Research and development RF Random