Venture Capital_7_

Venture Capital How to Sell Your Soul for a Buck VC Characteristics  Usually early-stage equity or equitylinked financing Involves high risk     Lacks liquidity or marketability Returns are primarily from capital gains Provided by patient investors - who may give value-added advice 10 Years of Global VC Funding Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Deals 3084 3557 5403 7832 4451 3042 2825 2873 2939 3416 Avg/Deal $4.75 $5.88 $9.92 $13.38 $9.17 $7.09 $6.69 $7.31 $7.38 $7.46 Total $ $14,646 $20,900 $53,580 $104,827 $40,798 $21,579 $18,911 $21,004 $21,700 $25.500 Source: National Venture Capital Association What do VC’s Want? “VCs simply want to believe that the valuation of a company – either public stock price or private valuation – will grow high and stay high long enough for them to sell their interest.” Source: Cliff Conneighton; Venture Management Handbook: An Entrepreneur’s Guide to Stock, Finance, and Contracts - pg 99 What do VC’s Want?    5X or better capital growth in 5 - 10 yrs. 25% annual capital gains at a minimum Eventual liquidity (3 - 5 years)  Excitement! What Do VC’s Get? What Kind of Company?   At least $10M Revenue in 5 years At least 20%/Yr Revenue Growth  At least 15% pretax profit margin Four Essential Questions for the Business Plan     Does any large, definable, and identifiable group of people really need your product or service? Are they willing to pay someone (you or a competitor) considerably more than, perhaps twice, what it costs you to produce and deliver it? If the answer depends on volume, do you know what the volume/cost curve looks like? Is there some sustainable advantage you will have, in proprietary technology, cost, capability or marketing, over others who do or would compete in this market? Do you have the management team that can execute the plan successfully? Conneighton Pg. 100 Types of Ventures  Life-Style Ventures – 5 Yr Revenue projections < $10 M – Started by people with life-style motives – 90% of all startups – Zero interest to venture capitalists Types of Ventures  Middle Market Ventures – 5 Yr Revenue projections $10 - $50M – Offer cash-out and capital gains opportunities – The backbone of the entrepreneurial economy – Rely heavily on bootstrap and individual financing – About 10% of startups Types of Ventures  High Potential Ventures – 5 Yr Revenue projections > $50 M – Potential BIG winners – May require many rounds of financing of several million dollars – Expect to go public within 5 years – Less than 1% of startups Types of Ventures  Proprietary Technology – You own something way cool – VC’s are very interested  Execution Play – You are trying to do something better than anyone else. – VC’s are not very interested Types of VC’s  Venture Capital Funds – Over 1750 US venture capital and private equiy partnerships – $585 Billion capitalization – Fund about 500 companies/year – 100 to 1 odds (at best) – Typically later-stage deal in excess of $3M Types of VC’s  Business Angels – The “invisible” capital market – Unknown number of individuals (low profile) – 3 to 1 odds of finding one – Typically early-stage deal of $100-500K involving multiple investors – Find one and you’ve found 5 or 10 How to Find an Angel      Look close to home Check civic and charitable organizations Check for private pilots Check for expensive hot cars Use gatekeepers (lawyers, accountants)  Check other startups How to Court an Angel    Show them a great business plan Kiss their %!! Ask them for advice (Beware of Micromanagers) Act like you have done your homework Don’t act like you know everything    Act EXCITED! Types of Financing  Bootstrap Financing – – – – – – Personal savings Family and friends Credit cards Second mortgages Customer advances Extended terms from vendors/suppliers 80% of the Inc. 500 fastest growing private companies were financed solely by these methods. Types of Financing  Early-Stage Financing – Seed financing: A small amount of capital to prove a concept or qualify for startup capital – Startup financing: for completing product development and initial marketing to get ready to do business – First-stage financing: funds required to begin full-scale operation Types of Financing  Expansion Financing – Second-stage financing: provides working capital for initial expansion – Third-stage or mezzanine financing: provides funds for a major expansion after the company has become profitable Types of Financing  Bridge Financing – May be needed between stages – Usually used before going public – Meant to be repaid from the next round of financing Cost of Venture Capital Stage Seed Startup First Stage Second Stage Third Stage Bridge Cost 80% 60% 50% 40% 30% 25% Capital Gain/ROI Conversion Exit Year Growth 3 4 5 7 3X 44 32 25 17 4X 59 41 32 22 5X 71 50 38 26 7X 91 63 48 32 10X 115 78 58 39 10 12 15 17 21 26 A 7-fold increase in the value of the investment in 5 years is a 48% annualized rate of return on equity. Reasons for Rejection    Lack of confidence in management Unsatisfactory risk/reward ratio Absence of a well-defined business plan   Unfamiliarity with products or markets Too much wishful thinking Too Much Wishful Thinking…   Investors expect to bear risk. Investors expect YOU to know how much risk they will bear and to TELL them. They need to believe that YOU understand the risk and will be able to MANAGE it.  A Note on SBICs…  Small Business Investment Program (1958) The government licenses privately organized and managed venture capital firms to make equity capital or long-term loans (5+ years) available to small companies. Get government-backed (cheap) long term loans to provide this funding. Funding is generally in the $250,000 to $5Mill range    Specialized SBICs (SSBICs) make investments in socially and economically disadvantaged entrepreneurs only. Information on SBICs…  National Association of Small Business Investment Companies: www.nasbic.org   SBA’s site: Good luck… Answers.com -http://www.answers.com/topic/smallbusiness-investment-company-sbic Other Information  Garage.com – www.garage.com – Pairs high-tech entrepreneurs with seed financing sources. Sources of Information  vFinance.com – www.vfinance.com – List of 1800 VC firms, database of 23,000 angel investors  National Venture Capital Association – www.nvca.org – Lots of info for and about VCs