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					Turning Great Ideas Into Great Companies
Mindbend 2005
Bruce J. Shook Ch.E. „81

Agenda


The process of company creation
 Two


critical phases

Making it to seed funding  Making it to a liquidity event 

Summary: ingredients for success

But first, some caveats…


I am a life science entrepreneur
 It

is a capital intensive business  It is highly regulated  It takes a long time and lots of cash to bring a product to market

Your industry may be very different  Your goals may be very different


Process of Company Creation
Part I: Making it to Seed Funding
Define Your Destination 1 Build Initial Team 2 Develop Initial Intellectual Property 3 Seed Funding 4

Process of Company Creation
Part II: Making it to a Liquidity Event
Hit Your Milestones 1 Reevaluate the Team 2

3 Serious Venture Funding 4 Product Launch

IPO or Sale to Big Co

Define Your Destination
“Begin with the end in mind….”
- Stephen Covey

Define Your Destination
Begin With the End In Mind


Understand what success is for you and your team before you take anyone else‟s money
 Becoming a “for hire” technology developer?  Ringing the bell at NASDAQ after your IPO?  Selling out to Big Co so you can focus on your

next

great idea (serial entrepreneur)?


Make sure your targeted customer cares
 Who are you serving?  What unmet need are you

meeting?



Your planned destination should drive everything you do (and don‟t do)

Build the Team


Identify the knowledge areas critical for success in your venture
 Technology,

finance, IP, regulatory affairs, manufacturing  Will change with company‟s stage of development



Hire people smarter than you are in each area The team is not limited to employees
 Get

name brand experts aligned with your company anyway you can  Directors, advisors, consultants, mentors

Develop Initial IP Estate


Understand the IP landscape in your market space inside and out
 Know

every relevant patent held by every competitor  Know where the “white spaces” are

Develop Initial IP Estate


Get patents filed covering your ideas with claims that are as broad as practical
 Do

this before you talk to outsiders about your ideas and definitely before you publish or present any of it  Don‟t believe that prospective investors will “keep it confidential”  Make the investment in a good patent attorney  Top priority for your limited startup funds

Seed Funding: 4 Basic Sources
Angels •High Net Worth Individuals

FFF
•Friends •Family •Fools

Seed Money <$500K

Early Stage VC Funds •PA Lifescience Greenhouses •Ben Franklin •PA Early Stage

Grants •SBIR (www.sba.gov/sbir)

Finding Seed Funding
Look at who has financed similar companies in your space – see Venturesource at www.ventureone.org  Network, network, network

 Talk

to faculty (engineering & business) with knowledge of your industry  Call CEO‟s who have done it before  Talk to attorneys & accountants specializing in startups

Finding Seed Funding


More networking…
 Attend
  

local industry & venture related gatherings



Greater Philadelphia Venture Group (www.gpvg.com) Eastern Technology Council (www.techcouncil.org) Pittsburgh Technology Council (www.pghtech.org/networks/entrepreneur/seed.asp) Early Stage East 2005 VC Conf (5/11-12) (www.earlystageeast.com)

 Look
 

into state supported programs

Ben Franklin Investment Forum (www.venture-forum.org) Life Science Greenhouses of PA (www.lsgpa.com)

Negotiating Seed Funding


Select the investor carefully
 Go

with established funds with a solid reputation if at all possible  Reference them with others who have taken their money before  Find out how they behaved when things went badly  Find out how they treated management

Negotiating Seed Funding


Consider the future impact of the deal terms
 Avoid


strings that will repel future investors

Debt to be repaid by the next investor in  Downstream royalties on sales
 Make


certain management‟s ownership is competitive
Benchmark against recent deals  It‟s downhill from here

Process of Company Creation
Part II: Making it to a Liquidity Event
Hit Your Milestones 1 Reevaluate the Team 2

3 Serious Venture Funding 4 Product Launch

IPO or Sale to Big Co

Hit Your Milestones
Your mission: increase the value of your company faster than you are spending other people‟s money  How?...Hit your planned milestones on time and on budget  Milestones are value inflection points


Two Quick Definitions
Pre-$ Valuation: the price the investors are putting on all your hard work to date – what‟s your company worth today?  Post-$ Valuation: what your company is worth immediately after the cash comes in


Post-$ Valuation = Pre-$ Valuation + $ Invested

Neuronetics as an Example
Two Private VC Rounds

Series A
Pre-$ Valuation $ Invested Post-$ Valuation Pre-$ Valuation $6.5MM 16.5MM $23MM

Series B

$40MM

$ Invested
Post-$ Valuation

$17MM
$57MM

Adjust the Team
 

The team is the most important determinant of success Needs can change dramatically as the company matures
 New

skills will be necessary; Old skills may not  Ask yourself what the next round of milestones will demand and make sure you have it


The Founder may not be the best CEO
 Don‟t

let your ego get in the way of success

Serious Venture Funding
>$2MM  Three critical considerations:

 How

much do you need to raise to hit the next value inflection point (milestone)?  What is the pre-$ valuation?  Who are you taking money from?


You will give up majority control sooner or later

Serious Venture Funding
How Much Do You Raise?

Decide what you need to hit the next major milestone that investors will regard as value enhancing  Make sure you have at least 6 months of cash beyond the milestone to get the next financing done  When in doubt…double it


Serious Venture Funding
Pre-$ Money Valuation

Investors want it low; you want it high  Valuation at this stage is NOT a science  Valuation is typically based on the recent deals that were done in your space  Competition keeps investors honest  Don‟t try to get every nickel – there are more important considerations


Serious Venture Funding
Who Are You Taking Money From?
 



Your investors are your partners and will likely control your company Investor experience, reputation and past behavior trump pre-$ valuation Reference investors like you would a new employer or employee
 Talk

to CEO‟s who have taken their money



Doing business with the best pays enormous dividends

The Liquidity Event


Is it mandatory?
 If

you accepted VC money, then Yes  Investors need to harvest their gains


They have investors, too



Does it mean that you are done as an independent company?
 That

depends….

The Liquidity Event
“When you get to a fork in the road, take it.” -Yogi Berra
IPO and stand alone? Or,….  Sell to Big Co?


The Liquidity Event


Initial Public Offering (IPO)
 Pros:

you stay independent; gives access to substantial capital; may allow you to sell the company later at a higher price  Cons: stock can be tough to sell if you want to cash in; you are a public company; company value may decrease substantially if things don‟t go according to plan

The Liquidity Event


Sell to Big Co
you know what you are getting – value is locked in; liquidity can be immediate; sales ramp may be much faster in Big Co‟s hands; now it‟s somebody else‟s headache…  Cons: it‟s not your baby anymore; sales ramp may be much slower in Big Co‟s hands
 Pros:

Ingredients for Success
 




Begin with the end in mind – know your destination Assemble the best team available – people are the single most important determinant of success Target an important unmet need – know your customers and what they want Develop bullet proof intellectual property – define what you uniquely own and get it into patents early

Ingredients for Success


Raising cash
 Take

time to understand the venture financing process and market dynamics in your space  Make financial advisors part of your team  Adopt a milestone based focus – create value faster than you spend  All cash is not equal
Reference prospective investors carefully  Do business with the best


Always bear in mind that your own resolution to succeed is more important than any one thing.
- Abraham Lincoln


				
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posted:10/5/2007
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