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Seed Funding and Venture Capital
 

Seed Funding and Venture Capital

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    Seed Funding and Venture Capital Seed Funding and Venture Capital Presentation Transcript

    • Seed Funding and Venture Capital CourseCertificate Program
      Greg Horowitt, Managing Director, T2 Venture Capital
      Kauffman Fellow, Class XV
    • 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
    • Venture 101
      Seed Funding and Venture Capital Course Certificate Program
    • Venture 101
      • Introduction to Private Equity and Venture Capital
      The ‘Capital Food Chain’
      Overview of Venture Capital
      History
      Definitions
      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?
    • 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?
    • Risk and Rewards
    • The Capital Food Chain
      Friends,family,fools
      Grants, SBIRs, etc.
      Angels
      VCs
      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
    • Internet
      PersonalComputers
      IntegratedCircuits
      Microwaves/Defense
      TestEquipment
      VacuumTubes
      The Birth of Venture Capital
      Venture
      Capital
      Innovation Networks
      1910
      1960
      1970
      1980
      2000
      1990
      1930
      1940
      1950
      1920
      Steve Blank, Stanford University 2009
    • The Growth of Venture Capital
      • East Coast Family Offices
      • Whitney, Rockefeller, Bessemer (1946-1969)
      • West Coast IPOs
      • Varian, Hewlett Packard, Ampex (mid to late ‘50’s)
      • SBIC Act of 1958 (SBA)
      • 3:1 government match
      • 700 SBIC funds by 1965
      • Limited Partnerships
      • External investors as LPs (pension funds, endowments, HNW)
      • The General Partners (GP) manage the money in exchange for:
      • 2% management fee
      • 20% of the carried interest (profits)
      • Capital Gains Reduction (‘78)
      • 49.5%  28%
      • ERISA (Employee Retirement Income Security Act (‘79)
      • Pension Funds can invest
    • Venture Capital is Born
      • Draper, Gaither & Anderson (‘58)
      • Rock and Davis (‘61)
      • Sutter Hill (‘64)
      • Patricof & Co. (‘69)
      • Kleiner Perkins (‘72)
      • 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
      Foundations
    • 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)
    • Entrepreneurs:Go Where the Investors Are
      Angels
      Number of Investors
      Valley of Death
      VCs
      $5 million
      $10 million
      Investment (one round)
    • <100 IPOs (VC funded)
      < 500 VC Seed/Start-up Investments
      40-50,000 Angel Investments
      500-700,000 New Companies
      0
      200,000
      400,000
      600,000
      800,000
      New Company FormationSource of Funds
      Typical Year
    • Outside Equity Capital for Entrepreneurs
      • <1 in 10 Start-ups obtain angel financing
      • <1 in 1000 Start-ups are VC financed
      • <1 in 10,000 new companies go public
      • <1 in 10 angel deals see VC money
    • Investor Motivation
      ROI 5 year increase
      Stage
      Seed
      Start-up
      Early
      Mid
      Later
      60% 10x+
      50% 8x
      40% 5x
      30% 4x
      25% 3x
    • Venture Capital Method
      Investment
      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
      12X
      $48 million
      50% = 8X
      $16 million
      33%
      $4 million
      * In reality, we would need more than 33%, since dilution will probably occur
    • 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
    • The Venture Lifecycle
      • Deal Sourcing
      • Deal Structuring
      • Value Creation
      • Preparation for exit
      • Liquidity event
    • Venture Mechanics
      • Deal Sourcing:
      • 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
    • Venture Mechanics
      • Deal development:
      • 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
    • 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?
    • You, the Entrepreneur
      • Deal Structuring
      Alignment of goals and expectations
      What motivates you, the entrepreneur?
      Fame?
      Wealth?
      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)
    • Value Creation
      • What the VC will bring to the table
      • The pre-investment relationship
      • Helping entrepreneurs validate, calibrate, and refine value proposition
      • Assistance in building global advisory boards
      • Introductions to other investors
      • Mentorship and education
      • Helping them understand what’s ahead
      • 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
    • Value Creation
      • What will you bring to the table?
      • Execution and adaptation off business model to market demands and customer needs
      • Being able to attract, motivate, and empower team members
      • Being capable of synthesizing new ideas, and demonstrating relevance
      • Being able to mobilize and allocate resources efficiency and effectively
      • Giving customers what they need, AND what they want
      • Leadership and talent development
      • Staying ‘authentic’
      • How to use 360° feedback (from customers, team, market trends, valued advisors)
    • The Exit!
      • Exits
      Preparing for the exit
      Timing
      Factors which influence the timing
      Market conditions
      Investor desires
      Entrepreneur desires
      Capital constraints
      Offers for mergers or acquisition
      Availability of necessary future resources
      Competition
      Mechanics
      Communication
      Execution
    • Thank you
      Greg Horowitt
      Managing Director
      greg@t2vc.com