A TechEDge Program sponsored by the City of
Chandler and the SBDC
Learn more about private equity investment
process and investor expectations at each
Learn to target your presentation to equity
investors to increase your chances of success
Receive tools that will help you assess your
investor-readiness at each step along the way.
Hear from serial entrepreneurs, angel
investors, venture fund representatives
who’ve all “been there”
For each topic--
• Tool to assess readiness
Snell & Wilmer
Founded in 1938.
Largest law firm in Phoenix and Arizona,
and one of the largest in the West.
True full-service law firm
Ranked best corporate law firm in
Phoenix for 10th consecutive year by
Corporate Board Member magazine.
Ranked the #1 law firm in Arizona by
Ranking Arizona: The Best of Arizona
Silicon Valley Bank
Founded in 1983.
Global client base. 33 offices in the US,
China, India, Israel and the UK
Recognized by Forbes as one of the top
10 banks in 2011.
Recognized as “Lender of the Year” by
the US Export-Import Bank for helping
75 small businesses generate more than
$1.4 billion in US product sales to 30
Brian Burt, Partner and Chair of Emerging
Business Group – Snell & Wilmer
Dax Williamson, Deal Team Leader, Silicon
Dee Harris, President, Arizona Angels
Jim Goulka, Director, Arizona Technology
Marni Patterson, President – Tucson
Transatlantic Trade and Coordinator of
TechEDge, a series of educational
programs for technology-based companies.
Tom Fulcher, President – The Idea
Gardener and Counselor for the Small
Business Development Center (SBDC)
Walking in the Investor’s Shoes….
Practical Research-Based Educational
• Investor-ready Entrepreneur for growth oriented entrepreneur
• AZ Angels: Investing close to home for accredited investors
• Support for angel and other investment funds
• Support for angel and other investment funds
In the Trenches….
Create business plan & executive summary
Define the market
Determine financial needs
Prepare due diligence materials
Assemble management team & advisory board
Review L.P. potential
Find and qualify funding sources
Prepare the pitch
Present to investors
Structure the deal
Execute the plan
The View and What it Means….
What is the funding “food chain?”
What is the funding landscape?
Where do angels and VC’s fit?
What other funding sources are available?
What do investors expect?
Are you “investor-ready?
If not, what are your next steps?
Debt – typically restricted to established
firms with a proven track record or
Equity – typically provided by:
Friends & Family
Private (angel) investors
Source: Gerheng Kong, formerly of Intersouth Partners
• Founders/Family/Friends/sometimes Angels
• Angels/Private Equity
• Venture Capital/Private Equity
• Commercial Banks/Mezzanine Debt
• Mergers & Acquisition/IPO
100 Business Plans Received
10 Get a Close Look
1 Makes it Through Due Diligence and is Funded
Mutual Fund Analogy
• Salaried Managers
• Minimal Investment
• Huge Upside
• Corporations, pension funds, wealthy individuals
• Totally passive involvement
Over 500 venture capital funds
Size: $20M to $5B
Source: NVCA Yearbook– prepared by Venture Economics
Wealthy individuals – “accredited
Experienced and successful entrepreneurs
Range of involvement (passive investor ->
$25 to $250K per investment
Current estimate – More than 400,000
Potentially could be 5 million angels
Approximately 250 angel groups in US
70% network, 22% fund, 8% network/sidecar*
Invest close to home
Source: Center for Venture Research (CVR/SWAG)
Make money and get a return on investment (ROI)
Stay involved (sense of engagement)
Help fellow entrepreneurs
Give back to the state or local economy
Willing to invest a portion of portfolio in high
ROI is still important and is a key metric
Amount of Capital $20.1 B (2010– 14% $21.8B (2010– 19%
increase over 2009) increase over 2009)
Number of Investors ~ 125,000 <900
Number of ~62,000 3,277
Investors per Round $0.3 M $4.7 M
Professionally Sometimes Yes
Motivation Various Primarily ROI
Source: Center for Venture Research (CVR), Dow Jones VentureSource, NVCA
Number of Deals by Industry Sector
Healthcare Software Biotech
30% 16% 15%
Industrial/Energy Retail IT Services
8% 5% 5%
Lush Tropics or Moonscape
Or Somewhere in Between……
90% of outside equity capital
funding for seed/early stage
entrepreneurs comes from angel
investors, not VC’s
Seed Gap Early Stage
Reduction in Overhead
Equity for Services
Research Grants (NIH, SBIR/STTR)
Specialty Loans (NCNB, Self-Help, Local)
Understand risk/return issues
Treat investors as “customers of equity”
Ask them what they’re looking for
It’s a small world… word gets around
A secret idea never sees the light of day
Fundraising takes more time than clients think.
So, start early.
1) How do lifestyle and “growth” opportunities
affect funding choices?
2) What deals are right for individuals?
3) What deals are right for angel groups?
4) What deals are right for VC’s?
5) How does an entrepreneur approach this
1) Do I understand the funding gap?
2) Do I see the difference between angel capital
and institutional venture capital?
3) Do I see the difference between giving up
equity and building equity?
4) Do I know the full range of funding
5) Do I think that equity capital is right for me?
“SBDC Capital Opportunities Report” – Chapter 6
(Equity Funding) –
“Early Exits” – Chapter 2 (When to dance with an
angel), May & Simmons
“Business Angels: A Guide to Private Investing,” (in
Angel Capital Association,
Angel Capital Education Foundation,
“Early Exits,” Basil Peters
What’s the Big Idea?
The Essence and Context
It all starts with your idea, but it’s much
more than that!
It’s the basis of everything else
your client does
Are you solving a REAL problem
• “So What?”
• “Who Cares?”
Willthe business model create value?
Does the business plan make sense?
What do investors expect?
Are you “investor-ready?”
What are the next steps?
Investor Expectations –
Are you solving a REAL problem? (Don’t be
a solution in search of a problem)
Is it clear, concise and compelling?
Can you communicate it?
Does it grab attention or capture the
Is your idea truly unique (this is rare)
Is it high growth- scalable?
Is there an exit strategy for investors?
Investor Expectations –
Value proposition: Needs to be clear and
solve a real problem
Will the market pay money for the idea?
Milestones, Assumptions, Action Steps
should be identified and listed
A unique model is tougher to sell
Investor Expectations – The Plan
Provide a range of financial outcomes (low to
Make the plan realistic and believable
Know the dynamics—what affects the plan?
Addressable market– know it from the bottom
Positioning and competition—where and who?
Backup plan – Survival is the key
Exit plan—How does the investor “get off the
Concise format –Use words carefully
Questions for Panelists
1) The idea: What grabs your attention? What
makes you yawn?
2) The biz model: What excites you? What
stops you from giving further consideration?
3) Change the World: Leading edge or bleeding
edge? What role does timing play?
4) What do you say to a social entrepreneur who
has a good idea for society, but may not
make much money?
1) Does my idea capture investor imagination?
2) Does my business model make sense?
3) Does my business plan paint an easy-to-
understand, clear, concise and compelling
4) Can you describe the essence of your idea in
or business model in 15 seconds or less—
5) Do I have backup/survival plans?
“The Art of the Start” – Chapter 1 (The Art of
Starting) – Guy Kawasaki
“Fire in the Belly” – Chapter 2 (Jerry Neal with Jerry
“What I Learned Before I Sold to Warren Buffet,”
Chapter 24, Barnett C. Helzberg. Jr.
www.teccoach.com, ABC’s of Business Plan,
Opportunity, Exit Panning
www.entreworld.com--Starting your business,
growing your business
Getting a Share
Who are the customers?
Why do/will they buy from you?
Why would they leave their current suppliers?
How much will it cost to convince them to buy,
and how long will it take?
If there are no current providers, why will they
have to have your product since they’ve been
Who are your competitors? What are their
strengths and weaknesses compared to you?
What is your sustainable advantage?
Adequate detail to convey understanding
Total Market vs. Addressable Market
Is the market large enough for adequate
Is it growing?
Is it scalable? (How much will it cost to
double the size of the company?)
Avoid the “1% of Universe” Syndrome
(Count bottom up, not top down)
What are their characteristics?
How do they buy?
• Why do they buy?
• Describe the decision-making process from
your customer’s point of view
Hint: “Everybody” is NOT the right answer
How do you help them?
• What “pain” does your product/service alleviate?
• How does your product/business model work
compared to your competitors?
• Explain how/why your product/service is customer
Provide proof that customers agree– don’t
What is required to make a sale?
What are the steps? (i.e. qualify, present,
propose, negotiate, close, deliver)
How long does it take to get a new customer?
How much does it cost?
Investors are more interested in How than
claims of What
• Communicate the plan to successfully attack a
• Establish a position
• Predict and respond to competitor reactions
• Maintain or strengthen your position
…All while making a profit
Don’t count your eggs before the contract is
• Investors pay for what is and ignore or discount
heavily what may be
• Show traction
Recognize that missed milestones are
• Best to under-promise and over-deliver
Who are your competitors in this market?
What are their strengths and weaknesses compared
to you from the customer’s perspective?
• What do you do better than each one?
• What do they do better than you?
• How do you know?
• Must demonstrate ability to evaluate competition realistically
How will each respond to your success?
How easy/difficult is it to enter the market?
Don’t underestimate the other guys
Competitors might turn out to be potential acquirers
• Talk to customers/competitors
• Research reports
• Evaluate comparables (similar companies/markets)
Remember. Investors have experience in
markets they invest in
1) What do you listen for when entrepreneurs
describe their current and prospective
2) How do you distinguish scalable
opportunities from exaggerated claims?
3) What are the most important
representations regarding the market?
4) What are the most common errors you
1) Can I describe my market so an uninvolved
party can understand it (and describe it back to
2) Have I tested my competitor descriptions with
3) Do I know how our customers describe us?
4) Can I substantiate my market claims (i.e. share
of market, timelines, competitor response patterns)
5) Do I have validated evidence of my claims of
“Conducting an Industry Analysis,”
Marketing Plan Worksheet, SBTDC
Market Assessment Checklist
The Frugal Guerilla, Levinson
Who will get it done?
The buck stops here.
Recognize the skills and traits you
DON’T possess and hire (find)
people who DO possess them.
-- Howard Schultz, Chairman, Starbucks
What talent/skills/experience is needed?
Who is on board?
What is missing?
What do investors expect?
Is your company “investor-ready?”
What are the next steps?
Capacity to change with a changing world
Engaged, passionate, positive, realistic
Builders of trust
Knowledge of industry/science
You can’t do it alone
Your role will likely change
Build an adaptable team
Founders and CEO’s are different over
Anticipate a “Fredo” moment
(Remember The Godfather)
Great at communicating product, service or
High degree of passion/perseverance
Can manage the execution, or can hire those
• Avoid “Founders Disease Syndrome”
Confidence vs. Arrogance
No one expects you to be all things to all
Ask for help
Be curious -> Radar always on
Detective, intelligence officer and analyst
1) What excites you about a management
2) What are the biggest mistakes
entrepreneurs make when selecting a
3) What are your management team “deal
4) What activates the “BS” detector?
1) Can I manage my optimism?
2) Have I made an objective assessment of my
team’s strengths and weaknesses– starting
3) Do I know what is missing today, and what will
be needed tomorrow?
4) Do I truly recognize the value of outside help?
5) Do I actively seek it?
Art of the Start – Chapter 6 (Art of Recruiting),
Good to Great, Jim Collins
How to Build a Power Team, PROFIT.com
TEC Online, Best Practices: Management
HutchLaw.com – 2010 CEO Compensation
Study (for venture-backed tech and life science companies)
Experienced entrepreneurs/investors – select
ones you can trust as coaches/advisors
Passing the “Sniff” Test
State the financial need
Represent the vital signs
Demonstrate the depth and quantity
of your planning
Indicate expected ROI
How much money is needed?
• For what? How soon? For how long?
What are the stages of need??
What do investors expect?
What are key financial reports?
How do you demonstrate credibility?
• What supports your assumptions?
What are your key milestones?
Like the 3 Bears’ porridge:
• Not Too Little
• Not too Much
• But just Right
What Drives the Need?
Be specific about how you plan to spend
Include projected acquisition schedules for
equipment, employee hiring timetables,
marketing expenditures, etc.
Save detail for projections
Major use of funds should be projected over a
Instead of simply stating a need for $1 million,
itemize as follows:
• $200,000 – fixtures and equipment
• $250,000 – prototype development
• $300,000 – year 1 production and operations, and,
• $250,000 for marketing campaign (provide
beginning and end dates)
May want to include a visual timetable of
capital infusion needs
Should use multi-scenario projections
• Most likely, survival, upside
Time to reach positive cash flow
Overly optimistic sales projections lead to:
• Worst Case -> perceived as unsophisticated
• Best Case -> Missed milestones and
Understand realistic exit issues
Financials indicate the need and the
Entrepreneur thoroughly understands the
business model and financial metrics
Assumptions have been tested and
Multiple scenarios are represented
Clarity of reports
Assumptions clearly articulated, credible
Market-based and customer-focused
Error free, no obvious omissions
Cash Flow Statements
Other Reports of Key Indicators
• Sales, Margins, Inventory, Other key ratios
Represent a clear business model
Convey understanding of industry segment
Projections are connected to realistic
Investors’ questions/concerns are
Most likely, Survival, Upside
Worst case doesn’t exceed likely best
Must accommodate the “what if”
Risk not represented if deemed unknown:
Must demonstrate understanding of cash
Must be connected to market realities
Must exhibit understanding of impact of
growth on capital requirements
Must accommodate the “what if”
• Relationships—Sales: Inventory; Sales: AR;
Sales: other assets
Milestones, Credibility and Cash
• Performance must be measured as prototype
completed, sales targets met, key team
positions filled, etc.
• Staged infusions of cash that are part of a single
round of investments
Planning for Subsequent Rounds
• Understand and anticipate downstream
Hitting milestones will likely be key to
Revenue targets will be primary
Others may include:
• Prototype development
• Beta testing
• Product shipments
• Management team hires
• Breakeven or positive cash flow
Should represent major inflection points –
significant, value enhancing developments
Should clearly represent increase in value
• To the customer, marketplace, etc.
1) What do you consider in evaluating true
2) How much financial detail is enough?
3) What do you look for when examining the
assumptions? Any differences for pre-
4) Describe the importance of milestones
and inflection points.
5) Discuss “top-down” vs. “bottom-up”
approach to sales projections
1) Do I know my true funding needs?
2) Do my assumptions sound credible to financial
experts? Bottom-up sales, realistic
3) Have I compared my projections to industry
standards? (margins, inventory/AR level &
4) Have I adequately addressed questions posed
by my financial advisors?
5) Do I know my cash flow breakeven point under
various scenarios? In units? In $$?
Sample Income Statement, Balance Sheet &
Cash Flow Budget Worksheet
• Sources & Uses of Funds Statement
• Capital Needs Timeline
• Key Milestones Timeline
www.sec.gov (annual reports)
www.salary.com (compensation ranges)
When & how does it matter?
What is a patent and what does it do?
What will it not do?
Copyright or Trademark?
Is it all worth it?
How does an investor value patents,
copyrights and trademarks (if at all)
Entrepreneursshould NOT be discouraged
rom proceeding with a patent application.
They SHOULD have a comprehensive
overview and review the pros and cons so
they can make an informed decision.
DO THIS FIRST!!
Evaluating the market potential will
determine IF the time and cost of obtaining
a patent will be worthwhile.
Which would you rather have?
Inreality, there are a lot of new ideas out
Only about 2 patents in 100 are
commercially successful (according to the US
Patent & Trademark Office [USPTO])
What it Isn’t – A guarantee of success,
wealth or value– if not defended, inventor
UtilityPatents – These may be granted to
anyone who invents a process, machine,
article of manufacture or composition of
matter that is
NEW, NON-OBVIOUS and USEFUL
Design Patents may be granted to anyone
who invents a NEW, ORIGINAL and
ORNAMENTAL design for an article of
It ONLY protects the appearance of an
article, not its structure or utilitarian
While assessing the market, clients will
want to be careful about protecting their
Use non-disclosure and/or confidentiality
agreements when appropriate
Patents are key to life sciences, medical
Less important for software as a service,
social media (fast-moving environments)
Funding a Patent: There are no grants or
free money to fund a patent
Enforcing a Patent: It is up to the patent
holder to monitor and enforce a patent. The
USPTO does not do this.
The patent is only the beginning
• Distinctive sign or indicator (name, phrase, logo,
• Relates to the market
• Set of exclusive rights granted to author or creator of
an original work
• A formula, practice, process, design or compilation
• Classic example – Coca Cola
Determine market potential before spending
time and money filing a patent
Develop a patent strategy that is tied to
business and investment strategy
Consider perceived vs. real value
Research patents already issued
Engage a qualified patent attorney
Use a trademark to connect with customers
Register a copyright
1) What is the average cost to file a patent?
2) How long does it take?
3) Will the government help protect my
4) When does IP REALLY matter? Can it be
a deal maker or breaker?
1) Do you have an idea worth protecting?
2) Have you obtained legal advice?
3) Have you completed a benefit/cost analysis on
filing a patent or trademark?
4) Are you basing your company’s future on a
5) Have you assessed ways to leverage your
US Patent & Trademark Office –
Google Patents – www.google.com/patents
SBTDC User’s Guide to Intellectual Property –
TEC Coach –
“The Mechanics of Patent Claim Drafting,”
“….but liability could eat you up”
Who’s Got the Money?
What is a “qualified funding source?”
Where do angel investors live?
How to avoid the “angel from hell.”
What do angel networks look like?
What due diligence can an
What is the most common mistake
committed when seeking funding?
In the angel investor world, it starts with
being an “accredited” investor– a person
with a net worth of at least $1M or an
annual income of at least $200K (excluding
• Revised definition in 2010 Dodd-Frank bill
This should be the first screening criteria.
Angel investors don’t advertise
They don’t hang out a shingle
You could be surrounded by angel
investors and not even know it.
Careful networking is required.
Angel investors tend to form networks either
by design or chance
Some key entry points to these networks can
be found through wealth management
specialists, attorneys, bankers, accounting
firms and universities
You should have your executive summary
ready before you begin to talk to angel
Research the angel group’s focus area(s)
or area(s) of interest. (i.e. web site, word of
Make certain the angel group is interested
in your industry/business type
Expertise is as important as the money
• Interesting tidbit: ROI for companies with
involved angel investors is 3x that of firms with
uninvolved angel investors.
Failureto research the interests of the angel
Not being prepared when invited to make a
Accepting investment funds from non-
Paying angel group “brokers” (waste of
1) What questions should entrepreneurs ask
2) What can an entrepreneur do to get in
front of you? What is the best way to grab
3) What makes you dismiss an entrepreneur
4) What factors are important beyond
money relationships, trust,
1) Does your company have strong contacts with
attorneys, bankers, CPA’s through whom
networking can be conducted?
2) Have you identified potential investors?
3) Have you done due diligence on investors?
4) Do you know what you want from investors in
addition to money?
SBTDC Capital Opportunities Report – Chapter
6, Equity –
Finding Angel Investors –
“Every Business Needs an Angel: Getting the
Money You Need to Make Your Company
Grow,” Simmons & May
The night before the big meeting, Frank receives a visit from
the PowerPoint Fairy
What does it take to present
What do investors expect?
What is an appropriate level of
Are you ready to present to
State the problem, “pain point,” or
opportunity. (This sets the context for the rest of
Test your opening statement.
• Do friends, family and others understand the
Follow quickly with the solution (This is critical
for building momentum and interest)
• Problem + Solution is the “1-2 Punch.” No
room for color commentary here
Definethe addressable market. Be certain
you understand what your relevant and
addressable market is….the investor will
You’ve stated the problem, solution & market
Talk about your market position and your
Turn a critical eye on the management team
Review your projected P&L and basic
Explore feasible exit options
Then… the all important “ASK”
Observe the 10-20-30 Rule (From Guy
Kawasaki’s “Art of the Start)
• 10 Slides
• 20 Minutes
• 30-point Font
A picturecan be worth 1000 words
Use stories, analogies and testimonials
Prepare pitches of 1, 10 and 30 minutes
Anticipate questions (have a few additional slides
prepared in advance)
Limitanswers to 45 seconds
Stay on point—resist the temptation to take
Don’t answer questions that weren’t asked
Use as opportunity to re-state conclusions
or key points
1) What do you normally see missing from
2) What are the most common mistakes?
3) How would you advise entrepreneurs to
prepare for their presentation?
4) What impresses you most in
5) What are some credibility killers?
1) Can you describe your business in 2 minutes
and be CLEAR, CONCISE and COMPELLING?
2) Can your management team do the same?
3) Do non-involved professionals agree?
4) Have you developed the first 30 seconds of
your presentation into a “killer” problem-
5) Have you thoroughly anticipated investors’
“Presentation Guidelines,” Seraph Capital
“Seven Tips for Successful Investor
Presentations,” Edward Segal
“How Venture Capital Works,” Harvard
Business Review, Article #98611, Bob Zider
“Take the Money….. or Run” Harvard Business
Review, Article #0411A, John W. Mullins
“Creating the Perfect Pitch,” Evan Carmichael
The Ultimate Test
Verifies the business plan
Attempts to uncover the missing
Tries to assess the unknown
Attempts to contain the risk of a new
The type of deal
The risk profile of the investors
The industry knowledge of the investors
Ifinvestors have done their homework
properly, the due diligence process will not
be undertaken unless the deal is:
• Within the investor’s “sweet spot”
• The investor can bring industry knowledge to
Now is the time for the entrepreneur to
present an NDA for the investor to sign
Be aware that many investors do not sign
NDA’s because they see too many deals
This is usually not an issue because
investors aren’t in the business of stealing
business ideas and trying to develop them
Most angel investment groups have a due
The checklist usually includes basic
business and market information
Much of the checklist will focus on the legal
organization of the business, capitalization,
structure, contracts, debt, etc.
See sample in workbook
Quality of Management
Size of Opportunity
Rate of Market Growth
Barriers to Entry
Stage of Development
The Business Model
Proven Track Record
• Relevant business experience
• A failure is significant (learning on someone else’s
Integrity, dedication and commitment
Vision and the ability to articulate it
Knowledge, skill level, intelligence
Ability to assemble a team
Barriers to Entry
Business Plan Review
Management Track Record/Reputation
• Former Employers
• Direct Reports
• Industry Leaders or Peers
Actual vs. Plan
Sales (Are they real?)
Leverage (operating, financial)
Valuation (Is it reasonable?)
Returns (ROI, IRR, etc.)
Term Sheet is Presented
Entrepreneur Should Get Legal
Startpreparing due diligence notebook,
web site or data room early
Time line– 60 to 90 days - maybe longer
Know the business, market and financials
Have a strong team
The deal may be just around the corner!
1) How long does due diligence take?
2) What are the odds of making it through
3) Name two things an entrepreneur can do
to make the DD process successful?
4) What is the worst thing an entrepreneur
can do during the DD process?
1) Do you have detailed documentation to back
up your claims?
2) Is your legal house in order?
3) Are you willing to admit that you simply don’t
know the answer to something?
4) Have you been thorough in your due diligence
5) Do you tend to oversell your idea?
Due Diligence Checklist
“The Art of M & A Due Diligence,” Lajoux &
“Venture Capital Due Diligence: A Guide to
Making Smart Investments,” Justin Camp
Astute Diligence –
What’s it all worth?
What are the factors used in valuing a company?
What is vs. what might be
Overview of methodologies
Revenue vs. Pre-revenue
What about multiples?
What resources are available for use in valuation?
Shouldn’t I be compensated for my “sweat equity.?
Opinion of value vs. negotiating skills vs. the market
For Acquisition of Ongoing Firms
Book Value – Assets less Liabilities (limited
Market Value – Comps of similar
Income Value – Free cash flows, discounted
Average of Relevant Methods – Weighted as
Characteristics of Early-Stage Ventures
Limited track record
Highly variable or negative profits
Negative cash flows
Partial management team
Additional risks associated with startups
Valuation Without a Track Record…
May apply public multiples with discounts
• Limitations of multiples
Factors beyond projections
• Management team experience
• Industry appeal
• Trends & current market reality
Investors are participants in a marketplace
• Expectations will vary
• Choices are many
• Angel investments are part of a portfolio
… the High Risk portion
Risk-adjusted for Stage of Development
Stage of Business ROI 5-Year X-Factor
Seed 60% 10x
Startup 50% 8x
Early-stage 40% 5x
2nd stage 30% 4x
Near exit 25% 3x
ROI Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Factor
10% 110% 121% 133% 146% 161% 1.6X
25% 125% 156% 195% 244% 305% 3.1X
50% 150% 225% 338% 506% 759% 7.6X
100% 200% 400% 800% 1600% 3200% 32.0X
[1 + Rate of Return] years to exit
Multiplier (X-Factor) = ______________________________
e.g. 50% ROI = ___________________________________ = 7.6N
Another Look at the
From an Individual investor’s perspective…
Invest X Factor 5-Year Invest X Factor 5-Year
1 Zip 0% 6 1.6 10%
2 Zip 0% 7 1.6 10%
3 Zip 0% 8 7.6 50%
4 1.3 5% 9 20.0 82%
5 1.3 5% 10 Life Support
Portfolio Return on Investment 1-9 ---- 3.7x = 26%
Mergers & Acquisitions 65%
Source: Center for Venture Research - 2007
Investors aren’t necessarily greedy. They
simply require a high rate of return to make
up for their portfolio investments that don’t
hit it big.
Investment $1 Million
Exit Year 5th Year
Revenues (5th Year) $20 million
Net Profit (5th Year) 10% = $2 million
P/E (industry) 12.5X
Company Value $25 million
Required ROI 40% = 5X
Required Valuation $5 million
% of Company Required 20%
Pre-Money Valuation $4 million
Post-Money Valuation $5 million
Note: Annotated version in workbook
It helps to understand the numbers
Potential investors will run various models to
validate (but not set) a valuation
At the end of the day, investors are …
• Looking for reasonable value
• Good return
Don’t expect a lot of room for negotiation
Some valuables shift with the investment
• Total value of the company
• Relative balance of ownership
Unit Holders Units Valuation Pre- Post-
Issued investment % investment
Ownership % Ownership
John Doe 500,000 $500,000 25% 19%
Bill Smith 400,000 $400,000 20% 15%
Jane Brown 800,000 $800,000 40% 31%
ESO Pool 300,000 $300,000 15% 15%
Total Issued 2,000,000 $2,000,000 100% 80%
Investors 500,000 $500,000 0% 20%
Total Issued 2,500,000 $2,500,000 100%
Eachround can be unique
Unit Holders Units Valuation Pre- Post-
Issued investment % investment
Ownership % Ownership
John Doe 481,250 $240,625 19% 7.9%
Bill Smith 381,250 $190,625 15% 6.6%
Jane Brown 781,250 $390,625 31% 13%
ESO Pool 375,000 $187,000 15% 15%
Total Issued 2,500,000 $1,250,000 100% 62%
Investors – Rd2 1,500,000 $2,000,000 0% 37.5%
Total Issued 4,000,000 100%
$750,000 raised at $0.50 per share or a decrease in valuation of 50%
Current investors = “Cramees”
• Upset because overpaid -> lose support
Prospective investors = “Cramors”
• Will walk away -> the invisible “no”
• Self-inflicted wound
Aim for a “fair market” valuation
Don’t overprice early rounds – will likely get
hurt in the end
Focus on the dollars (#) vs. the equity stake (%)
• 10% of $20 million is a lot better than 100% of $200K
For first time entrepreneurs, average ownership
at liquidity event is 7-8% (upper 20’s for second
Management Team 0-30%
Size of Opportunity 0-25%
Sales Channels 0-10%
Stage of Business 0-10%
Size of Round 0-5%
Need for More Funding 0-5%
Quality of Plan 0-5%
Source: The Power of Angel Investing – Kauffman Foundation
Learnwhat investors look for and expect
Know why they are important to investors
Understand the factors that influence value
Consider all areas of importance– not just those
within your comfort zone
Anticipate investor questions
Look at comparative deals (comps)
Learn from the process (listen well)
1) Who really drives the valuation process?
2) How can entrepreneurs best prepare for
the valuation process?
3) How do you handle pre-revenue firms?
4) What do you consider to be the most
important factors in the valuation?
5) What are the downstream implications of
1) Do I understand typical valuation methods?
2) Have I tested my opinion of value with
3) Do I understand how investors are affected by
4) Am I familiar with my industry standards and
financial performance indicators?
5) Am I willing to accept the going market
ROI and X Factors
Capitalization table and explanation
“Business Valuation Methods”
“Business Valuation: The Art”
Assembling the Puzzle
Who determines the structure of the deal?
How are stock types significant?
What is the Term Sheet?
What are tranches?
Does the type of legal entity matter?
Funds likely have templates—individuals may
or may not.
Negotiations will determine ultimate structure
The stronger the critical factors (mgt team,
proven market, etc.), the stronger the
Remember. Investors think early about exit
strategy, and it’s not likely to be an IPO
Become familiar with deal structure concepts
before approaching investors– Preparation is
key to negotiating successfully
Spells out expectations, obligations and
Addresses essential elements of
agreement between investors and
Annotated sample in workbook
Participating Preferred Stock
Note: Annotated term term sheet/glossary in workbook
Instead of receiving entire sum all at once,
some is held back and disbursed upon hitting
specific milestones (i.e. revenue, product
Still part of current round
Pro – May instill added discipline and
Con – May reduce some management
Debt instrument that converts into equity at
first institutional round of funding
Interest payments – often deferred
May include warrants to purchase future shares
May be used for family/friend and angel rounds,
or as a “bridge”
Pros – No need to set valuation, fewer legal
Cons – Debt holders can call loans, investor
concerns (limited upside)
VC’s will likely only invest in a C Corporation
Angel investors are more flexible, depending on
Company can begin as an S corporation or LLC
and convert to a C corporation later
• Discuss tax considerations with lawyer and tax
Significant angel investors/VC’s prefer Delaware
corporations due to management-friendly
statutes and existing case law
1) At what point should the entrepreneur
involve a lawyer?
2) What are the most common sticking points
for entrepreneurs in negotiating term
3) What are the pros and cons of using
4) Should the entrepreneur avoid certain
legal entity choices? How about LLC’s?
1) Have I learned the tenets of deal structure?
2) Will I appear reasonably informed to
3) Do I understand stock classifications?
4) Am I familiar with the basic components of a
Sample Term Sheets
National Venture Capital Association (NCVA) –
Model Financing Documents –
“Venture Capital Negotiations”WCSR (brochure)
Making it Work
How do you effectively use board members?
What is expected of board members?
How much engagement is needed with
What is expected of entrepreneurs?
Board of Directors
• Elected by shareholders/governed by by-laws
• Fiduciary responsibility to company (Can be held liable)
• Serve terms – Most often compensated
• Informal group of experts (tech, industry) and
• Selected by CEO/management team
• Flexible – easy to expand/reduce size
• No fiduciary responsibility
Can have both
Funding (future rounds)
Objective Sounding Board
Avoid Land Mines
• 5-7 members
• 2 management team, 2 investors, 1
• Typically stock (<1%)
• Directors & Officers (D&O) insurance
Boardof Directors will change with each
round of financing
Board members are there to help the
enterprise succeed (i.e. look for “gaps,”
offer expertise, contacts, etc.)
Interests should be aligned
Board members with a “rubber stamp” do
not help companies succeed
Good communication between board
meetings is essential
Encourage respectful confrontation,
disagreement and tension
Give investors bad news along with good
Establish an efficient, clear and concise
Ask for help when necessary
1) Who should be on a board of directors?
Should they be compensated? Insured?
2) What characteristic show you that you’re
working with a savvy entrepreneur?
3) What should a CEO expect from a board
4) What should a board member expect fro a
1) Do I really want help?
2) Have I thought about the talent I need?
3) Can I thrive on productive disagreement and
tension among board members?
4) Do I understand the importance of effective
5) Do I understand the differences between
fiduciary and advisory boards?
“Board Basics for Entrepreneurial Companies,”
Boards that are not Bored,” Bradley Feld
Board Strategies - www.BoardStrategies.com
TEC Online –
“The Art of the Start” – Chapter 11 (Art of
Being a Mensch), Guy Kawasaki
…I know it when I see it
What constitutes the “perfect” investor-ready
What do investors expect in a perfect world?
Are you investor ready?
A well written business plan that describes
a potentially large market with high growth
and strong margins.
An executive summary and pitch that is
clear, concise, compelling, correct and
A solid, experienced management team
and advisory board (or willingness to build
IPfiling or strong potential
Entrepreneurial track record
Early stage market testing/validation
Clear understanding of funding landscape
“Skin in the game”
They Expect a “Prepared” Entrepreneur…
Who has done his/her homework on
making sure investor/angel group/VC has
interest in field, product or service that s/he
Can clearly convey the opportunity and
The entrepreneur has a assembled a
management team and advisory board that
adds value and experience to the business
The entrepreneur knows the business and
numbers inside and out
Have you conducted your networking and
homework well enough to know who the best
investor audience is?
Are you viewing investors as “customers of
Do you have the right management team with
the right experience?
Can all of them clearly and consistently explain
the value proposition of the business?
Do they know the business inside and out?
1) In a business plan and presentation, how
do you distinguish “flash and polish” from
2) What are the critical components?
3) What are the “must-do’s” for
4) What are the “must-not's?”
1) Have I anticipated and prepared for investor
2) Have I tested the the clarity of my plan and
3) Can I defend and substantiate my answers?
4) Have I learned from the questions,
successes and mistakes of others?
5) Have I practiced the presentation enough?
“Angel Investing: Matching Startup Funds with
Startup Companies – A Guide for Entrepreneurs,
Individual Investors and Venture Capitalists,”
Osnabrugge and Robinson
“Winning Angels: The 7 Fundamentals of Early
State Investing,” Amis and Stevenson