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Seed Funding and Venture Capital


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  • 1. Seed Funding and Venture Capital CourseCertificate Program
    Greg Horowitt, Managing Director, T2 Venture Capital
    Kauffman Fellow, Class XV
  • 2. Overview
    Introduction to Venture Capital
    Instruction provided by:
    Greg Horowitt, Managing Partner, T2 Venture Capital; Co-Founder, Global CONNECT, Kauffman Fellow, Class XV
    Instruction focus:
    Introduction of key terms
    The role venture capital plays in the funding of early stage companies
    The venture capitalist as a human capitalist
    The right funding for you
    Preparation and execution
  • 3. Venture 101
    Seed Funding and Venture Capital Course Certificate Program
  • 4. Venture 101
    • Introduction to Private Equity and Venture Capital
    The ‘Capital Food Chain’
    Overview of Venture Capital
    Evolution of the industry
    Fund stages
    VCs as individuals
    Background (…where do these people come from?)
    Qualities (…are they human?)
    Style (…are they all so arrogant?)
    Leadership (…how can I learn from them?)
    What motivates them?
    Where do they find their deals?
    How do they assess an opportunity?
  • 5. Venture 101
    • The Entrepreneur
    How do you assess the right type of capital for your company?
    Horses for courses
    How much do you really need?
    All venture firms are NOT the same
    How do you know if it’s the right fit?
    What diligence should you do on the investor / firm?
    Besides capital, what else do they bring?
    The ‘rich or king’ dilemma
    What do YOU want??!!!
    Why you….and why now?
    What is your business really worth (valuation)?
    Having a company ≠ having a business
    What will the VCs expect from you? (…besides your first born child)
    Communication (how to read the abstract signals some VCs send)
    How do you get them to notice you?
    When will they make you rich beyond your wildest dreams?
    What is Venture Capital?
  • 6. Risk and Rewards
  • 7. The Capital Food Chain
    Grants, SBIRs, etc.
    Strategic Partners
    Venture Debt
    Liquidity (M&A, IPO)
    ‘Inside’ money
    Not equity
    Seed Equity
    Early Mid, Late
    Early, Mid, Late
    Mid, Late Stage
    Usually later stage
  • 8. Internet
    The Birth of Venture Capital
    Innovation Networks
    Steve Blank, Stanford University 2009
  • 9. The Growth of Venture Capital
    • East Coast Family Offices
    • 10. Whitney, Rockefeller, Bessemer (1946-1969)
    • 11. West Coast IPOs
    • 12. Varian, Hewlett Packard, Ampex (mid to late ‘50’s)
    • 13. SBIC Act of 1958 (SBA)
    • 14. 3:1 government match
    • 15. 700 SBIC funds by 1965
    • 16. Limited Partnerships
    • 17. External investors as LPs (pension funds, endowments, HNW)
    • 18. The General Partners (GP) manage the money in exchange for:
    • 19. 2% management fee
    • 20. 20% of the carried interest (profits)
    • 21. Capital Gains Reduction (‘78)
    • 22. 49.5%  28%
    • 23. ERISA (Employee Retirement Income Security Act (‘79)
    • 24. Pension Funds can invest
  • Venture Capital is Born
    • Draper, Gaither & Anderson (‘58)
    • 25. Rock and Davis (‘61)
    • 26. Sutter Hill (‘64)
    • 27. Patricof & Co. (‘69)
    • 28. Kleiner Perkins (‘72)
    • 29. Sequoia (‘72)
  • Types of Investment Capital
    • Angels
    Usually a wealthy individual who wants to stay ‘active and involved’
    Often has some knowledge or connection to the technology or life sciences world
    Usually makes smaller investments ($25-50K per investment as part of an angel group, or perhaps more as a single investor)
    Wants to stay involved and feels their contribution to the start up goes beyond the ‘cash’ invested.
    • Institutional VC
    Professionally managed (GP)
    Usually have a ‘theme’ or focus (sector, stage, industry, etc)
    Money raised from pension funds, endowments, high net worth individuals, fund of funds, sovereign wealth funds, etc.
    Most often set up as a Limited Partnership
    2/20 (management fee + carried interest)
    • Grants
    Non-dilutive investment
    Government programs
  • 30. Types of Investment Capital
    • Strategic Ventures
    Usually corporate (think Intel, Qualcomm, Novartis, Google)
    Often a focus on companies that are complimentary and synergistic to their internal efforts
    Balanced ROI with strategic goals
    Most often not the ‘lead’, and will invest with institutional VCs
    • Private Equity
    Invest in the tangible assets of a company
    Buy low, sell high
    Usually an investment bank that is compensated as a percentage of the deal
    Usually syndicated capital
    Motivated by ROI
    • Banks
    Issue debt (loans) secured by assets (receivables, property, equipment, etc.) or other assets (including intellectual property)
  • 31. Entrepreneurs:Go Where the Investors Are
    Number of Investors
    Valley of Death
    $5 million
    $10 million
    Investment (one round)
  • 32. <100 IPOs (VC funded)
    < 500 VC Seed/Start-up Investments
    40-50,000 Angel Investments
    500-700,000 New Companies
    New Company FormationSource of Funds
    Typical Year
  • 33. Outside Equity Capital for Entrepreneurs
    • <1 in 10 Start-ups obtain angel financing
    • 34. <1 in 1000 Start-ups are VC financed
    • 35. <1 in 10,000 new companies go public
    • 36. <1 in 10 angel deals see VC money
  • Investor Motivation
    ROI 5 year increase
    60% 10x+
    50% 8x
    40% 5x
    30% 4x
    25% 3x
  • 37. Venture Capital Method
    Exit Year
    Revenues (5th year)
    Net Profit (5th year)
    P/E (industry)
    Company Value
    Required ROI
    Required Capital Growth
    % Equity Required at Exit
    Pre-money Valuation
    $2 million
    5th Year
    $40 million
    10% = $4 million
    $48 million
    50% = 8X
    $16 million
    $4 million
    * In reality, we would need more than 33%, since dilution will probably occur
  • 38. Venture Mechanics: Valuation
    Pre-money V: agreed value of company prior to this round’s investment (I)
    Post-money valuation V= V + I
    VC equity in company: I/V= I/(V+I), not I/V
    Example: $5M invested on $10M pre-money gives VC 1/3 of the shares, not ½
    This should be viewed as a partnership, not an acquisition
    I and V are items of negotiation
    Generally company wants large V, VC small V, but there are many subtleties…
    This round’s V will have an impact on future rounds
    Possible elements of valuation:
    Multiple of revenue or earnings
    Projected percentage of market share
  • 39. The Venture Lifecycle
  • Venture Mechanics
    • Deal Sourcing:
    • 44. Where do VCs find deals?
    Other VCs
    Service providers (lawyers, accountants, etc)
    Angel investor groups
    Individual angels
    ….from a trusted colleague / friend in their network
    • Analysis (research)
    Scouting universities and other Research Labs
    Looking at opportunities in a related space to existing portfolio companies
    • Rarely, but on occasion:
    Funding programs such as SBIR, STTR
    Trade Organizations
    Business Plan Competitions
    Corporate events
    Networking events
  • 45. Venture Mechanics
    • Deal development:
    • 46. What do they look for?
    Great management that is emotionally competent
    Market opportunity that is trending in the right direction
    Sustainable competitive advantage
    Managed and mitigated risk
    Convinced that people will buy the product…and hopefully buy it again and again and….
    Solid team with high integrity
    Strong IP position and / or significant trade secret
    Entrepreneurial passion, relentlessness imagination, flexibility, coachability, and ‘pushing hard at the edges’
    VCs want to be assured that they will get their money out before they die
  • 47. Venture Mechanics
    • Deal Evaluation
    What must we confirm?
    How do we calibrate the opportunity against the market?
    What don’t we know, and what is the risk of not finding out?
    How do we find this information and what is the cost?
    Are there any deal killers?
  • 48. You, the Entrepreneur
    • Deal Structuring
    Alignment of goals and expectations
    What motivates you, the entrepreneur?
    Peer positioning?
    Social good?
    Do you play nicely with others?
    What do you want for yourself, and where do you see yourself 5 years from now?
    How do you assess if you should take outside, dilutive capital?
    How do you do due diligence on a potential investor?
    Look at their portfolio companies, and identify synergies
    Talk to their entrepreneurs
    Ask around. Find out about the individual as well as the firm.
    What diligence will they do on you? (Answer: Everything)
  • 49. Value Creation
    • What the VC will bring to the table
    • 50. The pre-investment relationship
    • 51. Helping entrepreneurs validate, calibrate, and refine value proposition
    • 52. Assistance in building global advisory boards
    • 53. Introductions to other investors
    • 54. Mentorship and education
    • 55. Helping them understand what’s ahead
    • 56. The post-investment relationship
    Being an effective board member
    Mentorship, coaching and insights
    Using networks to accelerate value creation
    Access to high quality talent
    Access to domain and market experts
    Access to customers and partners
    Access to licensees / licensors
    Engineering a liquidity event
  • 57. Value Creation
    • What will you bring to the table?
    • 58. Execution and adaptation off business model to market demands and customer needs
    • 59. Being able to attract, motivate, and empower team members
    • 60. Being capable of synthesizing new ideas, and demonstrating relevance
    • 61. Being able to mobilize and allocate resources efficiency and effectively
    • 62. Giving customers what they need, AND what they want
    • 63. Leadership and talent development
    • 64. Staying ‘authentic’
    • 65. How to use 360° feedback (from customers, team, market trends, valued advisors)
  • The Exit!
    • Exits
    Preparing for the exit
    Factors which influence the timing
    Market conditions
    Investor desires
    Entrepreneur desires
    Capital constraints
    Offers for mergers or acquisition
    Availability of necessary future resources
  • 66. Thank you
    Greg Horowitt
    Managing Director