The Startup Ecosystem

Catalyst's Cohort curriculum is divided into 4 weeks and 4 topics. The first is The Startup Ecosystem.

We define the startup ecosystem as the network of individuals who influence a startup's success, and the concepts that govern how these individuals interact with one another.

Here's why it's useful to know about that:

1. Networking - If you want to have insightful conversations with anyone who works with startups, this will help you ask informed questions and offer more informed perspectives.
2. Entrepreneurship - If you want to start your own company, this will give you some insight into the resources you can tap into for funding, connections, and more.
3. Job-seeking - This isn't too different from the "networking" point, but if you want to work with startups in any capacity, this will give you the foundational knowledge you absolutely need in order to do so. (but if you're a student who wants to work directly with startups, I'd jump straight to this)

This essay is an attempt to answer a simple question: where do startup ideas come from, and what happens as they form?

Here's how it's broken down

• Backstory
• Startup Ideas
• Business models
• Startup Networks
  • Accelerators
  • Incubators
  • Membership communities
  • Venture Studios
• Venture Capital
• Geographic Hubs
• How to get connected
• Wrap-up

DISCLAIMER: I'm based in the US, and am most familiar with the dynamics of the US ecosystem. Some of the content here may be less pertinent to the startup ecosystems in other nations.

Backstory

A few weeks into my freshman year of college, I was standing in the library talking to a friend who was much more ambitious, and much more knowledgeable than I was about business.

He asked me what I thought I wanted to do for a career. Trying to sound like I had any sort of goals (which I didn't), I said something like "I'd like to do some kind of work with startups." He said, "Oh, you mean like venture capital?" So I said, "Is that a bank?"

It's not.

But apparently, I did mean like venture capital. At the end of my freshman year I secured an "externship" with HP Tech Ventures. Many students do the program and have a mediocre experience, but by putting everything I had into it, I was able to make it absolutely life-changing.

I was nose-deep in the educational content they provided, and tried WAY too hard on deal sourcing (which is just sending interesting startups to the VC for them to screen for investment). And I constantly bombarded the guy from HP with way too many questions.

The experience taught me a ton. Then the following fall, I did a one-week, hyper-intensive deal sourcing project with a VC. I was cold emailing, calling, and texting startup founders morning to night for days. And I learned more in that week than my entire freshman year of college.

After that, I didn't see any great routes to keep pursuing VC. There was no established VC-focused student organization at my school. And though I thought about building one for a long time, I didn't think I had the right knowledge or skills to do it.

But since nobody else was doing it, I decided I'd give it a shot. For months I scratched my head about how to create a meaningful experience, but then decided to simply follow the model of the externship I did: Partner with real VC firms, and let students do pro-bono work for them. An easy win-win for students and VCs.

The only problem was that I had to get VCs to talk to me. So I messaged the guy from HP that I used to bombard with questions. My message had the subject line "Free Deal Sourcing Opportunity". He had no idea who I was, but he was all over the idea.

Then he connected me with another very well-known VC, and we partnered with him too. Then we got 3 more firms in Florida on board, including Techstars Miami.

All of a sudden, we were players in the ecosystem. We were providing real value, and learning tons of lessons in the process. This experience was my launch into the world of startups, and set the foundation for a supportive network of founders, VCs, and students--the network Catalyst was built on.

Some things that came from that network:

• Catalyst's first clients
• Internships for 65 students
• My internship with Tampa Bay Wave, the biggest accelerator in Florida
• My job with Techstars
• Countless Catalyst guest speaker sessions
• A course taught FOR Catalyst by the author of The Business of Venture Capital

That's when I learned an invaluable lesson: the value of network is opportunity. No matter who you are, knowing more people simply makes more possible. It's how people create their own luck.

And the best way to know more people is to find a way to be valuable to the people you want to know.

Which starts with knowledge of what they actually value. So hopefully by the end of this, you'll understand what people in the startup ecosystem think about all day.

Startup Ideas

Let's start with the first part of the question I posed at the beginning of this: where do startup ideas come from?

We've all heard the speech about this. "Think of the problems you encounter in your day-to-day life, and see if any of those are in need of a solution. That's how you get startup ideas."

Sure, but there's only one problem: for the average joe in 2024, almost any "day-to-day problem" they encounter has already been solved really well.

How do I know this? Because I know you've heard that speech before, and I know you most likely still don't have a startup idea. Or if you do, your inspiration for it was more complicated than that.

Most successful startup ideas are things you never hear about, most likely because you wouldn't understand them or care about them. They address complex problems for complex customers (most often businesses).

And why is that? Because the problems that still have yet to be solved that are solvable with today's technology don't reside in the day-to-day lives of most people: they reside in very niche areas, where only hyper-focused and motivated people can identify them.

Here's what I mean by "motivated": it's not enough to just identify the problem. If a startup is going to be born from it, it's going to have to be encountered by someone who cares a lot about solving it. So much that they'd devote their lives to solving it for as many people as possible.

So let's reel that all in: where do startup ideas really come from?

Startup ideas come from ambitious people who experience a difficult problem while doing something they care about.

And here's why that matters: you won't find startup ideas by sitting in your bedroom racking your brain about a product you could make to fix climate change. You'll find them pursuing goals that you care about enough to remove any barriers that get in your way. That's definitely my story, and I guarantee it will be the story of any founder you meet.

Note: Not all business ideas are startup ideas

Let me offer an alternative perspective that I don't think we think about enough.

If you think you may be entrepreneurial, you don't have to start a "startup". Startups are often characterized as extremely high-growth, ideally scalable companies that sell a product--most often software.

They're also extremely high risk (90% failure rate), take all of your time, and don't typically pay you in the short term.

It's important to keep in mind that there are things in between not starting a company at all and that. There are an unbelievable amount of ways to start your own business and make money. Most of which are much more feasible and sustainable than trying to create the next Apple. Catalyst started as a services business. And really, it still is that.

It didn't start because we had some big "light bulb" moment--we just started helping people by offering our time and expertise, and it snowballed into something more and more serious.

So if you want to start something, don't wait for your Steve Jobs-level idea. Think about your interests. Think about anything you know more than most people about. Or just want to know more than most people about. Odds are there are tons of people who would rather pay you for that knowledge than get in themselves.

And guess what: often times, that concept does lead to what we'd typically call "startups". When someone is offering something to customers that they genuinely believe in, the impact that their work will lead to can be immeasurable. Do the thing you care about, and the rest will work itself out.

Business Models

So let's say you've got the startup or business idea: you know the problem you want to solve, and have a general idea of how you're going to solve it.

But how is the business actually going to work? Who are you going to charge, and what for?

You'll have to answer those questions by picking a business model. So let me lay out some options for you:

B2B - "Business to business", meaning you charge businesses for your thing

B2C or D2C - "Business to consumer" or "direct to consumer". You charge individuals, not businesses.

B2B2C - You'll hear this sometimes, and you can infer that it means "business to business to consumer". You can think of this like a paid partnership with another company where you work together to provide something to the same customer.

Those sum up who you charge. The below are answers to the "what for?" question. These mostly pertain to technology companies, which encapsulates almost all "startups" as we defined them.

Marketplace - connect buyers and sellers of something, and charge fees to one or both of those parties (Airbnb, eBay, Facebook Marketplace)

Transactional - facilitate financial transactions between two parties and take a cut (Venmo, PayPal, Stripe)

SaaS - "Software as a service". Charge subscription fees to use a software, like Netflix or other streaming services. Often you'll see "freemium" services with a free version and the option to upgrade to a paid version (Linkedin, Spotify)

Advertising - Charge advertisers to advertise on your platform (Facebook, Twitter, Reddit)

E-Commerce - Sell goods online (Amazon, Walmart)

Enterprise - Facilitate big, expensive contracts with big companies

Hard-Tech - Make a physical product combining hardware and software and sell it (Tesla, Apple, HP)

If you're interested, I'll also list some less tech-related ones that are just as useful to know, but won't often characterize startups.

Hopefully that puts some guide rails around how you might go about turning an idea into a business, or gives you a better idea of how to analyze companies.

You might think figuring out the business model of a company is always obvious, but I can tell you it's not. It took me almost a year to realize I was trying to make the wrong business model work.

And I realized it by carefully analyzing my time and resources, and what I would be able to sustainably do with the resources I had, value I was creating, and who I was creating it for. Ultimately, that should be the key factor in the decision.

But once you figure out how your business makes money, take time to dive into wisdom and resources surrounding that model. What are common challenges or pitfalls? What are some ways to accelerate growth and success? The internet and ChatGPT will have more answers for your questions than you can imagine.

So I mentioned that this is essay is going to be about the individuals who can influence a startup's success, and how they interact with each other. Before I dive deeper, I want to make it clear that the individuals that most impact a startup's success are the team and the customers. Everything else is secondary.

But still, these things are useful to know.

Startup Networks

So you have your business ready to go with a model that makes sense (at least to you). Now the next question is who do you talk to about it?

The answer is customers. But we'll talk more about that in Week 3.

So after customers, who do you want to connect with? Hopefully some people that can help you not waste time and keep making progress. Which is most likely mentors (experienced founders), and peers (other founders in a similar position).

Why? For the two reasons above, and also, to not go insane.

Founders have two primary problems: they don't know what to do, and everything they do is really hard.

By connecting with peers and mentors who have been through similar experiences, founders can gain a much stronger sense of direction in all areas of their business, and can learn time-efficient ways to execute the things that may have otherwise been much more daunting or time-consuming for them to tackle.

Additionally, it's crucial to be able to talk to people who have experienced the same challenges, failures, and successes as you have. They're the only ones who really know how to root for you, and how to support you at every step. And they're often people you can support too.

But most people aren't entrepreneurs. If you decide to become one, odds are most of your friends won't. So to account for that, there are definitive communities that act as places for founders to connect and receive support.

These communities can be structured a few different ways. Some popular ones are accelerators, incubators, membership communities, and venture studios.

Accelerators

Accelerators are short-term, typically three-month programs jam-packed with mentorship, resources, network, and sometimes funding for startups. Techstars and Y Combinator are the two most popular examples.

These programs often fill a two-fold purpose. The first is to help the startups reach product-market fit (PMF). Product-market fit is a term used to describe the state of a startup when it has successfully filled a target-market's needs.

There's often confusion about whether or not a startup has reached this state, but many thought leaders hold that if there's confusion about it, the startup definitely has not reached it. PMF comes with very obvious, rapid growth and an excess of demand so significant that the startup has trouble managing it.

The other purpose of accelerator programs is to help startups secure funding. Typically from venture capital investors, which we'll dive into soon.

So how do accelerators accomplish this? By providing the things I mentioned before: mentorship from experienced founders, resources, network, and sometimes funding. And of course, a peer community of impressive and ambitious founders.

Having worked at Techstars for a bit, I'll use their program as an example.

Accelerator programs are often extremely exclusive and thought of as prestigious (primarily the two I mentioned). And that's for a reason. If a startup can tie a prominent accelerator's name to their company, it gives them a disproportionate advantage over other companies simply because of the brand name.

You'll see this on Linkedin when companies have something like (YC W22) or (Techstars '24) after their names.

This same idea of branding applies to other prestigious venture capital investors.

Incubators

Incubators often support startups in their earliest stages, even as early as just an idea. Y Combinator often functions as an incubator in this way, as many of the companies they fund are simply talented founders with good ideas and no real business yet.

Universities often run some sort of incubator program on their campus. If you find yourself thinking through an interesting startup idea, I'd recommend being smarter than I was and getting plugged into resources like that. Just try not to sign your soul away to the university.

Membership Communities

These are essentially pay-to-play communities, like startup country clubs.

In-person community memberships typically come with access to a co-working space, and offer tiered memberships all the way up to a full-fledged office.

Much of the support that online and in-person communities provide is similar to accelerators, but on an ongoing basis (since that's how they make money). Like accelerators, the majority of the value comes from the network. But I will say, these communities are generally less impactful than strong accelerator programs.

Venture Studios

Venture studios are sort of like incubators, except they actually build the startups themselves.

They have various sources (internal team members, founders in their network) that bring startup ideas to the top of their funnel. Then they have processes to test and validate an idea.

If the idea is promising, they assemble a team to execute it, and pour their funding and resources into it.

They have significant equity ownership in the companies that start within them, and make money when those companies successfully exit. Which is basically how venture capitalists make money, which we'll talk about next.

Here are some ways you can apply the above information to your journey in entrepreneurship:

If you want to work at a startup, companies backed by prominent accelerators are much more likely to provide the exciting experience you're looking for, AND are statistically more likely to succeed. So I'd recommend starting there.

If you want to start a startup, consider if any of the above programs could be beneficial to you and your company. Catalyst has benefitted massively from our connections in the Tampa Bay Wave and Techstars communities, and we weren't even part of their cohorts--we were employees at the programs.

If you want to get involved in entrepreneurship some other way, you could consider pursuing roles with organizations like the ones above.

And if you want to work in VC, knowing about startup networks will help you have much more informed discussions and conduct more informed research.

But I've mentioned VC enough--let's get into what it is, how it works, and why it matters to the ecosystem.

Venture Capital

So we talked about where startup ideas come from, how they can become businesses, and the communities that startup founders organize themselves into.

Now we have to answer a key question in entrepreneurship: where do you get the money to build your thing?

Though venture capital is only one of many answers to that question, the concepts and terms used in VC are at play all throughout the ecosystem. They govern the decisions founders make, the way they talk about their businesses, where they base their business, and more.

And to quickly define it, venture capital is a form of financing for startups where a fund purchases shares of their company for cash with the hopes that the startup will use the cash to grow and exit rapidly.

Things to keep in mind

The business of VC is amazingly chaotic, because it's built on about as unstable of a foundation as possible: the success of startups.

This leads to a lot of satire around the practice, and the people who practice it. While there are many extremely wise and successful venture capitalists, there are also plenty of bad actors who might be unqualified, yet have an over-inflated sense of importance or power over startup founders.

That's why it's important to know who you're dealing with. Whether you're going to get funded by a VC or work for one, developing a critical eye for this is essential.

And it's another part of the value of startup communities: they can tell you who to trust and who not to.

But with that out of the way, back to what I was saying: venture capital is built on the success of startups.

Why does it exist?

For startups that want or need to grow fast, venture capital exists to accelerate their growth and ultimately help them successfully exit ASAP (less than 10 years after the investment).

As a business, it exists to capitalize on the uniquely rapid and dramatic growth in value of successful startups. Though most fail, it only takes one hyper-successful company to make the opportunity worth it for a venture capitalist.

But that's speaking strictly from a transactional perspective. Many VC's (especially the most successful ones) are extraordinarily mission-focused in their approach to investing. They see the business of venture capital as an opportunity to enable visionary leaders to impact the world in massive ways.

And that's exactly what happens. Without venture capital, companies like Apple, Google, Airbnb, Uber, Amazon, Tesla, and SpaceX would have likely failed, or at least not grown to the giants they are now.

How it works

It works like this: A VC firm invests a certain amount of money into a startup, and that startup in return gives them a percentage of ownership in their company.

Ideally the value of the company, and thus the shares owned by the VC, increases over time. And with any luck (a LOT actually), the company will have a successful exit (meaning all of its shares will be purchased, most likely through IPO or acquisition).

To better understand this, I'll take you through each phase of a VC fund.

Step 1: Fundraising

So no: venture capitalists are not just rich people investing their personal funds into startups (those are called angel investors). Venture capitalists are running a business. Or, more specifically, managing a fund.

Similar to how startups have to pitch VCs in order to raise funds for their startup, VCs have to pitch potential Limited Partners(LPs) to trust them with their money enough to let them invest it into startups.

But it's worth noting that the fund manager or General Partner does often invest some of their own personal cash. This ensures that they have "skin in the game", which is massively important to build trust with their LPs.

But who are the LPs that VCs are pitching? The most significant source of funding comes from pension funds. Then it's insurance companies, endowments and foundations, family offices and high-net-worth individuals(HNWIs), corporate operating funds, and finally funds of funds(FOFs).

These are the groups willing to submit to a VCs timeline of about 10 years. 10 years is the lifetime of a VC fund, during which the fund repeats a certain cycle.

The cycle goes something like this: Raise funds, invest in a bunch of companies in the first few years, support those companies in any way possible for a while, and hope that they grow a lot and exit before the fund closes after 10 years.

And by "closes" I mean pays all gains or losses to investors.

There's a lot of nitty gritty terms about how that's executed which you don't really need to know for the sake of this essay. But if you're curious, I would invest in the book The Business of Venture Capital by Mahendra Ramsinghani.

And to put this into perspective: Mahendra once described the process of raising a VC fund to me as "an uphill crawl on shards of broken glass". Needless to say, it's not easy.

And that makes sense. It turns out there's a lot of risk in VC investing, and in order to get LPs to trust a fund manager, the manager practically needs a proven track record of picking successful companies to invest in. And even if they have that it's still not a walk in the park.

Step 2: Deal Sourcing

But let's say a VC manages to perform the miracle of successfully raising a fund. How do they go about beginning to deploy the cash?

"Deal sourcing" is the fancy term for VCs finding promising startups to invest in. Some common sources of these startups include:

• Warm introductions from founders the VC knows and trusts
• Inbound from the company website, or direct outreach from founders
• Active searching on databases like Pitchbook, Crunchbase, or just Linkedin
• Referrals from other investors

The most common task given to interns and new employees at VCs is deal sourcing. VCs know that massively successful companies can pop up in the most mysterious places, and they have a chronic fear of missing out.

So when low-experience employees do deal sourcing, it's most often in the form of active search: scraping every possible source of new companies known to man, and pursuing them like a maniac if they look promising.

I mention this because that' exactly how I got my start in the world of entrepreneurship, and I can tell you that in order to do this successfully, you need the perfect storm.

Here's what I mean: every VC has strict criteria for who they invest in. This criteria is called their investment thesis. It often includes things like stage of the company, industry, price of the round, and more.

Not only do the individuals deal sourcing have to find a company within that criteria: they have to find that company at exactly the point that company needs them, or slightly before.

To better explain this, I'll break down the criteria I mentioned.

Stages

The primary distinguishing factor of a VC's thesis is stage. In case you're not familiar, "stage" is how everyone in the startup world describes where a company is at in their development. The stages in order of least developed to most developed are as follows:

Pre-seed - Typically just ideas or concepts, not likely to have a working product or revenue

Seed - Likely beginning to generate revenue and prove out some sort of concept

Series A - Startup has reached product-market fit, and is all-in on executing a bulletproof go-to-market(GTM) strategy

Series B+ - High-growth, beginning to conquer their target market

Earlier-stage startups are less expensive and more risky to invest in, with higher potential returns for the VC. Later stage startups are more expensive and less risky, with lower potential returns.

VC's decision-making criteria varies drastically based on what stage they invest in.

For pre-seed and seed companies, they're going to look at more qualitative factors like the team, and their belief in the idea.

For later stages, VCs are going to be heavily numbers-focused: how much revenue do they have and how fast did they get it?

What's interesting is that companies don't really have an official "stage" unless they're raising outside funding, since the main purpose of "stage" lingo is to label their investment round.

And here's what I mean by investment round: When startups raise money in exchange for equity, it has to be done in formal "rounds". If I were to raise money for Catalyst, I would "open" a round by saying "I want to sell x% of my company for $x price." Once all the equity (x%) is bought up by investors, my round is closed.

One nuance I had to learn about this the hard way: there are very few ways to know whether or not a startup is raising a round besides literally asking them. Which adds to the difficulty of finding that "perfect storm" I mentioned.

That's why it's nice to be investors like these guys. The startups come to you.

Now I mentioned that when you raise a round, you generally have a price in mind for how much you want to sell your equity for. That price is the beginning of determining your valuation.

Valuations

Valuation is determined by the price of a company's shares that is agreed upon between the company and their lead investor.

For example, let's say a company opens a round: they need as much money as possible, and they're willing to give up 10% ownership in their company to get it.

So they start talking to some lead investors. And by the way, most investors don't lead rounds. But let's say they find one who does, and that firm offers them $1M for 2% of their company.

That puts the value of the round at $5M, (10% / 2% = 5, so do 5 x $1M to get $5M). And since the round is worth 10% of the company, that means the whole company is now worth $50M.

Once that price is agreed upon, that valuation is set. Any additional investors that want to "participate" in the round need to abide by that price. They can't change it: they can only decide if it's a good deal or not.

But how do they make that decision? And how did the lead investor decide on a fair price to pay for shares of the company? By performing due diligence.

Step 3: Due Diligence

Every firm has their own special process for this. It usually is characterized by different phases that each have a unique names, but generally it can pretty much be broken down into an initial screening, some interviews, a market analysis, a financial review, and some legal due diligence as well.

The aim is to find out how well-positioned the startup is for rapid success, and/or how likely it is to run into some serious trouble.

To describe much of the criteria VCs use to evaluate opportunities, a mentor of mine used the Six T's:

Team - do the founders have a track record of successfully building?

Traction - is there proof that people care about this? Or that people will pay money for it? (this includes financial information)

Timing - why is now the right time for this to enter the market?

Total addressable market(TAM) - if this were to reach maximum success, how much money would they make in the market they're in? (roughly speaking)

Tech - how impressive is the tech? Is it built and ready to scale? Or if not, do they have the resources to build it?

Transformative - how new is their thing? Is there a reason it couldn't exist until now? Or does it already exist on a large scale, and they're going to have to compete to win?

10x return potential - if all other companies in the portfolio failed, does this company alone have the potential to make up for that?

Based on those criteria, among others, VCs can develop strong conviction in whether or not they believe a startup is worth investment. Or of they're a lead investor, how much they believe the startup is worth.

Step 4: Structuring the deal

There are a number of terms that determine the nature of a VC's investment in a startup. Generally, the VC's goal with these terms is to maximize their upside potential, and minimize their downside potential.

The first way they do that, which we already mentioned, is trying trying to negotiate a lower valuation. This allows them to own more of the company for less, which lowers their financial risk. And of course, owning more of the company increases the benefit they receive if the company massively succeeds.

But again, that only applies to lead investors.

Note: Much of the major terms, including valuation, are actually agreed upon before due diligence is conducted. But I thought introducing concepts in this order would flow a bit better.

Another term you might hear about is dilution. If you've ever watched the Social Network, overlooking this is exactly how Eduardo Saverin's shares got swept from under him.

VCs of course want to make sure their ownership doesn't decrease in value, or get diluted as other investors get on the cap table, which is just a spreadsheet of who has ownership in a company and what they own.

There are also discussions around preferred stock vs common stock. Preferred stock holders have more rights than common stock holders, and--most importantly--get paid first in the event of liquidation.

And the last thing I'll mention that you'll definitely hear about and should understand is investment vehicles.

Besides a straight cash-for-equity agreement, two popular structures are convertible notes and SAFEs.

In a convertible note agreement, the VC pays cash for future equity. The terms of when they actually get that equity are heavily negotiated upon, but usually tie the "conversion" of that equity to the raising of the next financing round (so startups can facilitate these agreements without formally opening a round).

A SAFE (Simple Agreement for Future Equity) is a vehicle invented by Y Combinator. It's just like a convertible note, except the parties don't need to determine a price per share when the investment is made. This is VERY attractive to founders, since we generally try to push important decisions off for as long as possible.

Lastly, investors might take a board seat, meaning a seat on the board of directors. The board of directors has significant voting power over strategic decisions. But from what I've been told, their main job is really to fire the CEO if he/she is doing a terrible job.

But once the parties have agreed on terms, completed due diligence, and signed off on an investment, what is the nature of their relationship post-investment?

Step 5: Support and Monitoring

VCs almost always offer value beyond just their money. When startup founders talk about finding the right VC, they often talk about looking for "smart money". Meaning an investor who's been where they are, and and be an ally who truly takes their business to the next level.

This is one specific area of VC where you'll hear a lot of satire: the idea of "let me know how I can be helpful". Because generally, that phrase doesn't mean much.

That's not always because the VCs don't have strong character--it's mostly because they're doing their best to support 20-30 other companies while managing relationships with a handful of LPs who are constantly breathing down their necks.

But with that being said, some do manage to provide significant value to their portfolio. Most commonly through their network and strategic guidance.

A VC with a strong network can help their companies secure additional funding, hire top talent, form partnerships with other companies, or maybe even introduce them to a company who could acquire them.

In many cases, VCs often have significant operating experience in building startups or taking executive positions at huge companies. When that's the case, their expertise alone can add significant value to a company.

Accelerators, which we already covered, are the most extreme example of adding value outside of money.

But no matter who the VC is, the goal is of course to drive their portfolio companies towards successful exits.

Step 6: Exits

VCs play a significant role in the exiting of their portfolio companies. As a refresher, an "exit" is when the VC finally realizes the value of their shares in the company (meaning they earn that value in cash).

Generally, the most ideal and fruitful exits that all VC-backed startup founders shoot for are acquisition (they get bought buy another company) or IPO (they issue their stock to the public).

Other possible (less ideal) exits include:

Secondary Sale - when the VC sells their shares to another investor

Buyback - the startup actually purchases their ownership back from the VC for cash

Write-offs - this is technically a form of "exit", but it just means the startup fails and the VC gets nothing

In terms of the role VCs play, they're heavily involved in the strategic decision making and negotiations, and likely also have strong connections to people like investment bankers who can help execute the exit.

Step 7: Repeat

Once all companies in a VCs portfolio have exited and the 10 or so years are over, the VC distributes returns, records the fund's performance, and (ideally) boasts that performance in order to raise their next fund.

Should all startups seek VC funding?

Absolutely not. Like we described above, a VC wants your company to grow and exit as fast as humanly possible. By injecting cash, they enable exactly that to happen.

But not all startups need that to happen. They can succeed with a slower growth curve, and while they're at it, keep all ownership in their own company. This is what we call bootstrapping: funding your startup only from your revenue.

So why doesn't everyone bootstrap? Which founders need their company to grow fast? Primarily the founders of companies in huge, competitive markets. Such environments demand speed in order to not be squashed or pushed out by companies with similar products. Uber and Airbnb are great examples.

In other cases, some founders just want to build expensive stuff. This is especially the case with hard-tech companies like Apple. Unless the founders have boatloads of cash, they're going to need some extra sources to gain momentum.

But here's an important nuance: it is extremely difficult to raise VC funding. CEOs typically have to commit nearly all of their attention towards this for stretches of time until they close their rounds.

To put it into perspective, the least picky VCs invest in about 1 of every 100 startups they engage with. And for most VCs, it's one in thousands.

Hopefully after reading the above and understanding those concepts you can see how significant of a role VC plays in the startup ecosystem, and can better understand the dynamic between startups and investors.

The last thing I want to touch on is hubs. Not all geographic areas are created equal in terms of their support for startups and their founders, and it's important to know what communities have the strongest presence of innovation.

Geographic Hubs

So let's quickly touch on what makes a startup hub, and where the most significant ones are.

A startup hub is typically a city with unusually favorable conditions for building a venture. These conditions could be legal or commercial. And a side affect of these conditions is the powerful community of startups and their supporters that arise in these areas.

Silicon valley is the most prevalent example. The area is home to nearly all of the world's most prominent and successful VC funds and accelerators, and is the birthplace of many of today's largest and most successful tech companies.

Some other examples to note are New York, Tel Aviv, London, Berlin, Bangalore, Beijing, and Singapore.

How to Get Connected

So I mentioned that one of the most applicable ways you can put all of this knowledge to use is in your networking efforts.

Whether you're a founder looking to connect with communities or raise funds, or someone looking to build relationships in the startup world for other reasons, the principles of how to actually go about it are generally the same.

I understand that for many college students, networking can seem VERY daunting. It's intimidating to reach out to strangers--you're afraid you might sound dumb, might not be able to make the meeting worth their time, might seem like you're only reaching out to get a job, etc.

So with that in mind the first way to make networking go well is to actually have good intentions. Try to connect with someone out of a genuine curiosity about their story or expertise, or out of a desire to help them in some way.

And communicate that intention clearly. If you reach out to someone with a vague message like "let's see if there might be opportunities to work together", they're going to assume you're trying to sell them something.

So let's talk about how to reach out to people you want to connect with, and what to actually say.

Something amazing about the world of startups is that generally, people are strangely open to finding ways to give back to the ecosystem. They want to use their learnings and connections to support the next generation of innovators.

So essentially, you need to reach out with a very clear message about how they can help you or how you can help them.

And I always suggest doing this through LinkedIn personalized invites. On the computer this is the "add a note" button you'll see after you hit "connect" on someone's profile.

Personalized invites force you to be concise, as you only get 300 characters to state your purpose for reaching out. So don't introduce yourself--your LinkedIn profile will already be attached.

To give an example, here's a message I would absolutely reply to:

Hey Nathan! Love your work with Catalyst. I started a club at my school to help students get connected in the world of entrepreneurship, and I'd love your input on how I could take it to the next level! Open to a call?

That's 218 characters and achieves all of the following:

• Shows this person understands what my company does
• Shows that they care about the problem I'm solving
• Demonstrates an interest in my help and mentorship

If you can achieve those three things, you'll be able to get on a call with almost any founder, investor, or anyone doing work you find interesting.

And if you really wanted to increase your chances of getting a response, you'd offer a way to help them for free.

Just keep in mind: authenticity is valued over almost anything else. Don't worry about sounding as "professional" as possible. Worry about sounding like someone who has unique interests and ambitions.

If you get the person on a call, do your research beforehand. Ask insightful questions that get them to think. Offer your authentic perspectives. And after the call, follow up and let them know how much you appreciated their time.

And by the way, if you do want to network with startups specifically to get a job, you can get ahead on next week's curriculum here.

Wrap-up

To stop this from becoming an entire novel, I'll stop there and say thank you for taking the time to read all the way to the end. You're in the 1% of university students who are ambitious enough to actually pursue paths in entrepreneurship. And I can tell you from experience, if you say on this path, it will be worth your time.

Hope you're enjoying Week 1 and if you have any questions, please feel free to reach out at nathan@recruitcatalyst.com.