Under the Hood - Demystifying VC | 0.06

Today's topics: How start-ups are valued, non-fungible tokens, and VC in Africa

Hi, it’s Leonard, Julius, and Aarzoo from the HEC Paris Alternative Investments Society VC teamUnder the Hood is a newsletter about recent developments in the Venture Capital industry, our perspective on key trends, and deep dives into how VC works.

Today, we’re covering how start-ups are valued (a topic with much interest yet much mystique), NFTs, and VC in Africa with four sections:

  • Knowledge deep dive - how start-ups are valued at various stages

  • Deal of the week - Sorare raises a $50M Series A, led by Benchmark, to transform football fandom

  • What we are up to at HEC AIS - key takeaways from our event on ‘Venture Capital in Emerging Markets’ and updates on our VC case study prep workshop series

  • What intrigued us the past weeks - Sequoia’s new seed fund, Partech’s report on VC in Africa, and Coinbase’s S-1 filing

🔎 A stab at lifting the mystique of start-up valuations

(by Leonard Leikert)

Whenever a startup closes a new funding round you practically immediately read and hear a lot about it on various websites such as TechCrunch, Newsletters, or your personal LinkedIn. However, the underlying valuation at which VCs and other investors value the company is rarely disclosed in more detail. It is of great importance when trying to break into VC, to understand how to value a startup when looking outside-in, and to be able to assess current valuations.

But how do you actually do that? Do you actually use the valuation methods that are taught in university? To answer these questions, we will outline the most common methods used in practice to value startups from Seed to Late-Stage in the deep dive hosted on Notion - you can access it HERE. The deep-dive covers key concepts such as pre-money and post-money valuation, the most important startup metrics, and a detailed overview of valuation methods by stage:

  • Early-stage - Berkus Method, Risk Factor Summation Method, Scorecard Valuation Method, VC Method, First Chicago Method

  • Late-stage - Comparable Transactions, DCF/APV, Real Options Method, Book Value Method, Liquidation Value Method

😷Valuations during COVID-19

The general impact of Covid-19 on valuations in the European ecosystem:

  • The primary impact of COVID-19 has been an increase in volatility and uncertainty.

  • There is a moderate disruption to VC capital flows, with investments expected to be only down less than 20% and only every sixth VC reporting any pressure from LPs to conserve capital.

  • Surveyed VCs expect valuations to fall about 20%, reflecting either constraints among VCs themselves or worsening prospects for startups (Gompers et al., 2020)

  • VCs in regions particularly affected by COVID-19 did not report a larger impact on their companies (Gompers et al., 2020)

  • When looking at the data for Europe (PitchBook Venture and Valuation Reports), valuations reached all-time highs for both early- and late-stage ventures

  • VC investment into the UK stayed robust despite Brexit, and capital from the US flowed freely into Europe in 2020

  • European VC funds raised a record high of €19.6 billion in 2020, representing a 35.2% YoY increase as LPs and GPs across the continent shrugged off the long-term apprehension posed by COVID-19. Furthermore, the quantity of closed VC funds increased, reversing the decline observed since 2017

  • An optimism for business conditions - with a focus on software and healthcare companies - improved in Q3. These sectors show pandemic-proof growth and were able to benefit extensively from an accelerated shift to online working and e-commerce in particular


  • As the pandemic hit and recessions commenced, many predicted the angel & seed stage of the ecosystem in Europe would struggle as GPs focused on the capital needs of existing portfolio companies. However, the median angel & seed pre-money valuation is pacing higher than 2019 at €3.7 million as of Q3 2020

  • Early-stage startups that typically possess a proven business model and limited financial information have also demonstrated growth. Investors have not been deterred by early-stage startups that may carry negative cashflow profiles and require significant long-term backing during the pandemic. Early-stage VC valuations and deal sizes across the lower, middle, and upper quartiles are pacing higher through Q3 2020 in comparison to 2019 figures. Robust valuation growth has been driven by soaring upper quartile deal sizes at the early stage in recent years. Top quartile early-stage VC deal sizes have been 10 times larger than the lower quartile through Q3 2020, as the early-stage startups showing the best potential have closed enormous rounds to boost valuations

  • Investors have increased round sizes and have pumped in capital at the early stage to ensure startups have the necessary funding earlier in their lifecycles to compete in hotly contested markets


  • Late-stage startups have attracted copious amounts of capital through Q3 2020 and are expected to push overall deal value figures in Europe to new highs at year-end. Not surprisingly, late-stage VC deal sizes have swelled with the median reaching €5.0 million through Q3 2020, and valuations across quartiles have followed with the median pacing at €14.6 million

  • The bifurcation across quartiles at the late stage in terms of valuations and deal sizes has persisted during 2020 as flagship startups have completed huge rounds—a result of investors safeguarding against failure and providing necessary cash injections to manage challenges from COVID-19

  • Despite the pandemic, the aggregate post-money valuation of companies valued at €1.0 billion or more in Europe surpassed the €100 billion in Q3 2020 for the first time in history. This can be largely attributed to the fact that ever more capital is flowing into VC, increasingly from non-traditional investors such as sovereign wealth funds, insurers, and family offices. European fintech, software, and healthcare startups have achieved international traction and achieved unicorn status via outsized rounds funding their rapid scaling efforts


The trends of increasing valuations and ever greater funding rounds are unlikely to end in 2021, rather, we expect the development to continue for at least some time

  • A low-interest environment likely to persist, motivating non-traditional investors to invest in VC. Therefore, there is more capital in VC than ever before. Non-traditional investors favor a balance of maturity and growth potential as they cannot support the startup in ways a traditional VC could, hence they focus on early- to late-stage startups with business processes in place

  • Private Equity players are increasingly blurring the lines between VC and growth investments with their own initiatives (e.g. EQT Growth) bringing in more capital and expertise. Additionally, US VC funds are looking more and more into the European market (e.g. Sequoia London) amid shifts away from silicon valley and looking for cheaper investment opportunities, further funneling more capital into the market and competing for a limited number of successful startups

  • Tech and software more relevant than ever with startups continuing to disrupt incumbent industries

  • Late-stage valuation could cool down as startups may need to restructure personnel and deploy resources to core areas that can sustain future growth and profitability, rather than venturing into new business lines

  • Highly liquid IPO market likely to stay in 2021 (AffirmBumble), providing an excellent exit outlook for investors and supporting the ambitious growth plans for certain startups. Furthermore, though SPACs are likely to decline in number, at least for the first half of 2021 we can expect more SPAC IPOs, utilizing the favorable current capital market environment

Complement this with our resources on Acing your VC Analyst Interview.

Check out the deep-dive!

🔦 Deal in the spotlight 

(by Julius Müller)

Sorare raises a $50M Series A round, led by Benchmark, to transform football fandom.

Key facts about Sorare and the deal:

  • Value Proposition: Sorare uses non-fungible tokens to create digital football card collectibles that can be traded and used in a fantasy football game - the first in a suite of potential applications using those cards

  • Founded: 2018 / HQ: Île-de-France, France (pay us a visit guys, we are practically neighbors)

  • Series A funding round: $50M equity round led by Benchmark with participation by Accel and notable sporting personalities, among them Antoine Griezmann and Rio Ferdinand

  • Prior funding: 07/2020: $10M Seed round led by e-ventures | 05/2019: $500k Pre-Seed round led by Seedcamp and Kima Ventures

  • Notable figures: ~$16.8M in token value traded all-time at the time of writing, with $3.5M in Jan 2021 alone | 120 licensed clubs on the platform

🚀 Why you should really care about this deal

  • Non-fungible tokens (NFT) are here to stay, take three. If decentralized finance was the most hyped topic of 2020 (we published our take on the market earlier in the year) then NFT is an early strong contender for the top spot this year. NFTs seem to make a resurgence whenever we see a wider crypto craze - industry observers saw the same thing happen in 2017 (where some of the more popular applications, Cryptopunks for example, were initially released). We predicted this fourth-ever crypto hype-wave to be the coming-of-age moment of DeFi - the same could be the case for NFTs. The incredible hype surrounding that industry now will lead to higher activity of innovators in the space in the future. The same has been said during past hype cycles though - Sorare could now, however, be the catalyst that enables more applications that actually provide value beyond the crypto space. Their value proposition feels distinctly different from other crypto-centric applications by putting the underlying technology into the background. That is the correct approach - let’s be honest here, Cryptokitties never was the killer-application that the world has been waiting for.

  • The perfect fusion of huge and highly irrational markets. Fantasy sports meets sports collectibles powered by blockchain tokens. It really is the perfect triangle to attract enthusiastic users with high spending power. The average card is currently traded for just over $100 on the platform due to the demand of fantasy sports players, collectors, and speculators alike. Sorare is the first in a string of NFT platforms that truly understood how to fuse multiple domains together and they are in the perfect position to capture more of this market. The sky is the limit really as long as they execute well on their vision and keep players interested. The combined size of the merged industries here is staggering:

    Fantasy sports was valued at $18.6B in 2019 and is forecast to grow to $48.6B by 2027 driven by strong demand in developing markets.

    The sports memorabilia market was valued at approximately $10B by Forbes with surging demand in recent years driven by increased digital distribution.

    And that really is only the tip of the iceberg - the same customers that might spend money on digital sports collectibles might spend money on rare skins in video games - an industry that easily tops $40B in market size and is growing rapidly.

    When those industries meet the scorching hot crypto market then the potential for staggering trading volumes and potential revenues is clear. Sorare is reportedly profitable and increased trading activity should lead to a solid revenue increase as well.

🤔 What you need to believe in 

  • Sorare can execute on their vision and provide a better experience than established fantasy sports providers. As I’ve said in our DeFi piece: blockchain applications will only break into the mainstream only if the user experience is better than existing solutions. Sorare caters to sports collectible enthusiasts first, crypto speculators a distant second which is the correct order for mainstream appeal. The platform still feels like a beta, but with a team of 12 that might be expected. We hope they double down on the user experience and keep the blockchain in the background - it is an infrastructure technology after all and the inner-workings really shouldn’t be customer-facing.

📰 On our own behalf

(by Aarzoo Sharma)

VC in Emerging Markets

Last week, we hosted Charlie Graham Brown, Partner and Chief Investment Officer at Seedstars, and Ido Sum, Partner at TLCom Capital for a panel discussion on ‘VC in Emerging Markets’.  In addition to exploring Charlie and Ido’s paths to VC, we spoke about their funds and about innovation in Emerging Markets (Africa in particular). Detailed below are the key takeaways from the discussion.

  • On innovation in Africa: “Most innovations in the coming decade from Africa are likely to come from the use of technology to solve existing problems as opposed to pure technological innovation.” According to the team at TLCom Capital, opportunities lie in accessing large underserved markets, discovering and engaging the African consumer, and fixing broken verticals/ infrastructures. Some key tech-enabled themes investors should watch out for are: 

    1. Infrastructure & transport - developing logistics platforms for market access and enabling intra-continent expansion - addressing international markets is a crucial piece for startups seeking VC funding in Africa as individual markets tend to be small from a VC returns perspective.

    2. Manufacturing - boosting manufacturing efficiency for increased affordability and engaging the African consumer - the African Consumer is much less understood than consumers in other emerging markets, in part due to the limited availability of data points (such as done by google or Facebook on a global scale). 

    3. Financial services - there are massive opportunities in challenger banks, retail fintech, and SME financing/ payment infrastructure. A large chunk of the innovation coming out of Africa today is undeniably in financial services, and the investment team at Seedstars sees it as the strongest sector for seed-stage investments today. Check out our coverage of Stripe’s acquisition of Paystack published late last year.

    4. Retail - 90% of retail in Africa today is still informal, and there is tremendous value creation potential within the aggregation of retail demand - there is a caveat here, however, since consumer spending is small in Africa (and was further impacted by the pandemic) and this hampers the growth of B2C startups. Consequently, the majority of investments are in B2B startups, which are easier to monetize and to service (business spend is said to double every 15-20 years, and is expected to reach $8.2 trillion in 2050).

    5. Agriculture - there is tremendous potential in the automation of fresh supply chains and in boosting small farmer yield and market access. 

  • On exit routes for investors: There are more investors in Africa now who invest larger tickets (such as Partech), and there are also more direct investments from DFIs and trade buyers. In terms of exits, the local stock markets are still not developed enough, and as a result, trade buys from strategic buyers are probably a more viable local exit option in the short term for investors. The team at TLCom Capital expects to see a great deal of consolidation into Chinese and Indian players in sectors such as logistics and EdTech.

Check out Partech’s annual African Tech VC report (linked below) to go further on the topic!

VC Case-Study Interview Workshop

As a part of our mission to demystify VC for students at HEC Paris, we are planning to conduct a series of workshops around VC case interviews. So far, we have on board mentors from La Famiglia, Frontline, and Hummingbird who have very generously offered to conduct 2-3 sessions of ~1 hour each to prepare students for VC case interviews and upcoming analyst positions. If you are a student at HEC Paris seeking to break into early-stage VC, you can sign up for the workshop series to be held in March HERE!

To the investors reading this, reach out to us at AIS VC if you’d like to participate and provide your perspective as a mentor!

📚 What intrigued us this week

Thank you for reading! Don’t hesitate to write to us at leonard.leikert@hec.edu, julius.muller@hec.edu, or aarzoo.sharma@hec.edu to share feedback, resources, or to submit requests for future deep-dives!