Venture Capital

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					Venture Capital

How to Sell Your Soul
     for a Buck
        VC Characteristics
n   Usually early-stage equity or equity-
    linked financing
n   Involves high risk
n   Lacks liquidity or marketability
n   Returns are primarily from capital gains
n   Provided by patient investors - who
    may give value-added advice
   9 Years of VC Funding
  Year           Deals       Avg/Deal          Total $
   1996            2464           $4.46         $10,993
   1997            3084           $4.75         $14,646
   1998            3557           $5.88         $20,900
   1999            5403           $9.92         $53,580
   2000            7832          $13.38        $104,827
   2001            4451           $9.17         $40,798
   2002            3042           $7.09         $21,579
   2003            2825           $6.69         $18,911
   2004            2873           $7.31         $21,004

Source: National Venture Capital Association
      Venture-Backed IPOs
        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?

n   5X or better capital growth in 5 - 10 yrs.

n   25% annual capital gains at a minimum

n   Eventual liquidity (3 - 5 years)

n   Excitement!
           What do VC’s Get?
Actual performance of venture capital and private equity funds
    What Kind of Company?

n   At least $10M Revenue in 5 years

n   At least 20%/Yr Revenue Growth

n   At least 15% pretax profit margin
Four Essential Questions for the
         Business Plan
 n   Does any large, definable, and identifiable group of people
     really need your product or service?
 n   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?
 n   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?
 n   Do you have the management team that can execute the plan
 Conneighton Pg. 100
        Types of Ventures
n   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
n   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
    – About 10% of startups
        Types of Ventures
n   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
n   Proprietary Technology
    – You own something way cool
    – VC’s are very interested
n   Execution Play
    – You are trying to do something better than
      anyone else.
    – VC’s are not very interested
             Types of VC’s
n   Venture Capital Funds
    – Over 1750 US venture capital and private equiy
    – $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
n   Business Angels
    – The “invisible” capital market
    – Unknown number of individuals (low
    – 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
n   Look close to home
n   Check civic and charitable organizations
n   Check for private pilots
n   Check for expensive hot cars
n   Use gatekeepers (lawyers, accountants)
n   Check other startups
    How to Court an Angel
n   Show them a great business plan
n   Kiss their %!!
n   Ask them for advice (Beware of
n   Act like you have done your homework
n   Don’t act like you know everything
n   Act EXCITED!
         Types of Financing
n   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
n   Early-Stage Financing
    – Seed financing: A small amount of capital
      to prove a concept or qualify for startup
    – 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
n   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
n   Bridge Financing
    – May be needed between stages
    – Usually used before going public
    – Meant to be repaid from the next round of
Cost of Venture Capital

      Stage         Cost
        Seed        80%

       Startup      60%

      First Stage   50%

     Second Stage   40%

      Third Stage   30%

        Bridge      25%
Capital Gain/ROI Conversion
                     Exit Year
        Growth 3    4    5   7     10
          3X   44 32 25 17         12
          4X   59 41 32 22         15
          5X   71 50 38 26         17
          7X   91 63 48 32         21
         10X   115 78 58 39        26

 A 7-fold increase in the value of the investment
 in 5 years is a 48% annualized rate of return on
    Reasons for Rejection
n   Lack of confidence in management
n   Unsatisfactory risk/reward ratio
n   Absence of a well-defined business plan
n   Unfamiliarity with products or markets
n   Too much wishful thinking
Too Much Wishful Thinking…
 n   Investors expect to bear risk.
 n   Investors expect YOU to know how
     much risk they will bear and to TELL
 n   They need to believe that YOU
     understand the risk and will be able to
     MANAGE it.
    Don’t Forget Partnering

n   Companies cooperate for common goals
n   Usually involves cost/revenue sharing
n   May involve equity stake
n   May lead to eventual buyout
    Sources of Information
    – Pairs high-tech entrepreneurs with seed
      financing sources.
    Sources of Information
    – List of 1800 VC firms, database of 23,000
      angel investors
n   National Venture Capital Association
    – Lots of info for and about VCs