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
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?
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?
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
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.
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)
Non-dilutive investment Government programs Foundations
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
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
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
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
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
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?
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)
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
How to use 360° feedback (from customers, team, market trends, valued advisors)
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 email@example.com