Getting Money from VCs and Angels Thomas J. Toy PacRim Venture Partners January 27, 2005
Introduction
Introducing PacRim Venture Partners <ul><li>Silicon Valley Venture Capital Firm founded in 1999 </li></ul><ul><li>Invest i...
Introducing Tom Toy <ul><li>PacRim Venture Partners: Co-founder and Managing Director (1999-present) </li></ul><ul><li>Tec...
The Fundraising Dance
The Start-Up’s Financial Food Chain <ul><li>Boot Strap </li></ul><ul><li>Angel Investors </li></ul><ul><li>Venture Capital...
The Fundraising Dance <ul><li>The business plan </li></ul><ul><li>Targeting the “right” investors </li></ul><ul><li>Findin...
The Business Plan <ul><li>Business plan: 25-40 written pages (plus financials); full description about the business </li><...
The “Venture Funnel” Reality First Contact: 100 Companies Initial Diligence: 30 Companies Due Diligence: 5 Companies 1 Com...
Angel Investors <ul><li>Given the “Venture Funnel Reality”, try Angels first…….. </li></ul><ul><li>Angels are a huge segme...
Targeting the “Right” VCs <ul><li>Once you decide that you want venture capital money…….. </li></ul><ul><li>Target the rig...
Establishing First Contact:  The More Personal, The Better <ul><li>Established funding sources receive many, many unsolici...
The “Elevator Pitch” <ul><li>First contact often includes an “elevator pitch” – a brief description of the concept or idea...
The Presentation Gives the Entrepreneur’s View <ul><li>The presentation should be 15 – 30 powerpoint slides describing the...
The Next Step: VC’s Initial (Quick) Diligence  <ul><li>The investor gets up to speed on the market </li></ul><ul><ul><li>T...
Due Diligence: Categories <ul><li>Once the VC gets truly interested, due diligence begins…….. </li></ul><ul><li>Presentati...
Due Diligence: Checking All Facts <ul><li>Check out the facts presented by the entrepreneur </li></ul><ul><ul><li>Checking...
The Role of Venture Syndicates <ul><li>Why desired? </li></ul><ul><li>Build in some extra time for forming the syndicate <...
Termsheets, Negotiations, Documentation <ul><li>Be realistic </li></ul><ul><li>Talk with/work with some experienced people...
Life after the Investment <ul><li>What you get from VCs: </li></ul><ul><ul><li>Money </li></ul></ul><ul><ul><li>Active inv...
Thank You!
Discussion
Appendix: Due Diligence
Management Team Due Diligence <ul><li>Resumes for each key member of the management team </li></ul><ul><li>At least 3 refe...
Market/Competitors Due Diligence <ul><li>Analyst reports & calculations of addressable market size & growth </li></ul><ul>...
Customer References Due Diligence <ul><li>Sales pipeline (if selling to companies or through distributors) </li></ul><ul><...
Technology/Product Due Diligence <ul><li>Review of IP (patents, trade secrets) or product rights </li></ul><ul><li>Technic...
Financials/Return Calculation Due Diligence <ul><li>Financials should be full financials for 5 years </li></ul><ul><ul><li...
Company Structure Due Diligence <ul><li>Complete cap table – all investors, their ownership, and all outstanding options/w...
Legal Due Diligence <ul><li>Review of past legal documents (contracts, financing, etc.) for potential problems </li></ul><...
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Mexico-Silicon Valley Speech.ppt

  1. 1. Getting Money from VCs and Angels Thomas J. Toy PacRim Venture Partners January 27, 2005
  2. 2. Introduction
  3. 3. Introducing PacRim Venture Partners <ul><li>Silicon Valley Venture Capital Firm founded in 1999 </li></ul><ul><li>Invest in early stage Information Technology companies generally in Silicon Valley </li></ul><ul><ul><li>Focus areas: Telecom, Software including internet, semiconductor food chain </li></ul></ul><ul><li>Always invest via syndicates of venture capital firms </li></ul><ul><li>Willing to be lead investor or active participant </li></ul><ul><li>Look to provide value-add to accelerate growth </li></ul>
  4. 4. Introducing Tom Toy <ul><li>PacRim Venture Partners: Co-founder and Managing Director (1999-present) </li></ul><ul><li>Technology Funding: Partner and Managing Director of Corporate Finance (1987-1999) </li></ul><ul><li>Bank of America: Vice President in Corporate Banking (1979-1987) </li></ul><ul><li>Northwestern University: B.A., M.M. (MBA) </li></ul><ul><li>Boards of Directors: UTStarcom (Nasdaq: UTSI), White Electronic Designs (Nasdaq: WEDC), several private companies </li></ul><ul><li>San Francisco State University MBA Lecturer; Myelin Repair Foundation Business Advisory Board; San Francisco Chamber of Commerce The Job Forum Regular Panelist </li></ul>
  5. 5. The Fundraising Dance
  6. 6. The Start-Up’s Financial Food Chain <ul><li>Boot Strap </li></ul><ul><li>Angel Investors </li></ul><ul><li>Venture Capital </li></ul><ul><li>Venture Debt </li></ul><ul><li>Corporate Partners </li></ul><ul><li>Commercial Bank Debt </li></ul><ul><li>Public Markets </li></ul><ul><li>Mergers & Acquisitions </li></ul>
  7. 7. The Fundraising Dance <ul><li>The business plan </li></ul><ul><li>Targeting the “right” investors </li></ul><ul><li>Finding an “In” </li></ul><ul><li>Due diligence </li></ul><ul><li>The role of syndicates </li></ul><ul><li>Termsheets, negotiations, documentation </li></ul><ul><li>Life after the investment </li></ul>
  8. 8. The Business Plan <ul><li>Business plan: 25-40 written pages (plus financials); full description about the business </li></ul><ul><ul><li>Executive Summary: one page summary with complete information about the company </li></ul></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Market/sales strategy/competition </li></ul></ul><ul><ul><li>Technology/Product </li></ul></ul><ul><ul><li>Financials </li></ul></ul><ul><ul><li>Any regulatory issues </li></ul></ul><ul><li>Two purposes </li></ul><ul><ul><li>Strategic road map </li></ul></ul><ul><ul><li>Marketing document </li></ul></ul><ul><li>Be focused </li></ul><ul><li>Lots of resources to assist </li></ul>
  9. 9. The “Venture Funnel” Reality First Contact: 100 Companies Initial Diligence: 30 Companies Due Diligence: 5 Companies 1 Company Funded Commitment: 2 Companies
  10. 10. Angel Investors <ul><li>Given the “Venture Funnel Reality”, try Angels first…….. </li></ul><ul><li>Angels are a huge segment in the U.S. </li></ul><ul><li>So who are Angels? </li></ul><ul><ul><li>Everyone that you know—friends, family, business friends, friends of friends, friends of friends of friends, etc….. </li></ul></ul><ul><li>How do you find the Angels? </li></ul><ul><ul><li>Networking, networking, networking </li></ul></ul><ul><li>Advantages and disadvantages with Angels </li></ul>
  11. 11. Targeting the “Right” VCs <ul><li>Once you decide that you want venture capital money…….. </li></ul><ul><li>Target the right VCs so that you don’t waste time and resources </li></ul><ul><li>VCs have specific focuses; </li></ul><ul><ul><li>Stage </li></ul></ul><ul><ul><li>Industry </li></ul></ul><ul><ul><li>Geography </li></ul></ul><ul><ul><li>Funding needs </li></ul></ul><ul><ul><li>Leader or follower </li></ul></ul><ul><ul><li>Quality of money </li></ul></ul><ul><ul><li>Sufficiency of money </li></ul></ul><ul><ul><li>A “spiritual match” </li></ul></ul>
  12. 12. Establishing First Contact: The More Personal, The Better <ul><li>Established funding sources receive many, many unsolicited contacts </li></ul><ul><li>As a quick way to prioritize, personal introductions are sorted to the top </li></ul><ul><ul><li>Other VCs </li></ul></ul><ul><ul><li>Other portfolio companies </li></ul></ul><ul><ul><li>Industry friends </li></ul></ul><ul><ul><li>Bankers, lawyers, accountants </li></ul></ul><ul><li>In Silicon Valley, unsolicited contacts are often ignored </li></ul><ul><li>In other environments, they may be more welcome </li></ul><ul><ul><li>Smaller business communities </li></ul></ul><ul><ul><li>Very specific niches </li></ul></ul><ul><li>You get one “shot”; make it count! </li></ul>
  13. 13. The “Elevator Pitch” <ul><li>First contact often includes an “elevator pitch” – a brief description of the concept or idea </li></ul><ul><li>The elevator pitch should contain no more than 3 sentences and some supporting information </li></ul><ul><li>It helps orient the investor and quickly sort out ideas that may be of interest </li></ul><ul><li>Elevator pitch example: “Epinions.com is a web site that helps people make buying decisions. The content is provided by consumers themselves and experts as they contribute reviews. When consumers actually purchase, Epinions receives a fee from the merchant for referring the sale. The team includes several Netscape founders and an early Yahoo employee. The site is launched, and we’ve got about 1 million visitors a month.” </li></ul>
  14. 14. The Presentation Gives the Entrepreneur’s View <ul><li>The presentation should be 15 – 30 powerpoint slides describing the idea and the company </li></ul><ul><li>It should contain at a high level all of the information the VC needs to know to make an investment </li></ul><ul><ul><li>Concept </li></ul></ul><ul><ul><li>Team </li></ul></ul><ul><ul><li>Market problem & market size </li></ul></ul><ul><ul><li>Product/solution </li></ul></ul><ul><ul><li>Competitors/positioning </li></ul></ul><ul><ul><li>Financials </li></ul></ul><ul><ul><li>Financial needs </li></ul></ul>
  15. 15. The Next Step: VC’s Initial (Quick) Diligence <ul><li>The investor gets up to speed on the market </li></ul><ul><ul><li>The VC’s personal knowledge about the sector </li></ul></ul><ul><ul><li>Friends who may know the market </li></ul></ul><ul><ul><li>Google </li></ul></ul><ul><li>Perhaps a few quick checks on the management team </li></ul><ul><ul><li>Any overlaps are helpful </li></ul></ul><ul><li>Perhaps a short discussion with the VC’s partners </li></ul><ul><li>Goal: come to a quick decision on whether it is a real opportunity ASSUMING everything the entrepreneur says checks out </li></ul>
  16. 16. Due Diligence: Categories <ul><li>Once the VC gets truly interested, due diligence begins…….. </li></ul><ul><li>Presentation/business plan </li></ul><ul><li>Management team </li></ul><ul><li>Market/competitors/customer references </li></ul><ul><li>Technology/Product </li></ul><ul><li>Investors </li></ul><ul><li>Financials/return calculations </li></ul><ul><li>Any regulatory or legal issues </li></ul><ul><li>Three other elements: credibility factors, points of excellence, common sense </li></ul>
  17. 17. Due Diligence: Checking All Facts <ul><li>Check out the facts presented by the entrepreneur </li></ul><ul><ul><li>Checking trustworthiness of entrepreneur </li></ul></ul><ul><ul><li>Any mis-statement, no matter how small, may kill a deal at this stage </li></ul></ul><ul><li>Check out opinions held by the entrepreneur </li></ul><ul><li>Find information the entrepreneur may/may not know </li></ul><ul><ul><li>Other companies being funded in the space? </li></ul></ul><ul><ul><li>Shifts in strategy on the part of big players? </li></ul></ul><ul><li>Goal: find any knowable reasons why this may not be a good investment </li></ul>
  18. 18. The Role of Venture Syndicates <ul><li>Why desired? </li></ul><ul><li>Build in some extra time for forming the syndicate </li></ul>
  19. 19. Termsheets, Negotiations, Documentation <ul><li>Be realistic </li></ul><ul><li>Talk with/work with some experienced people (such as Pillsbury Winthrop) </li></ul>
  20. 20. Life after the Investment <ul><li>What you get from VCs: </li></ul><ul><ul><li>Money </li></ul></ul><ul><ul><li>Active involvement </li></ul></ul><ul><ul><li>Value-add </li></ul></ul><ul><li>The entrepreneur needs to have done his/her due diligence to know what he/she is getting </li></ul>
  21. 21. Thank You!
  22. 22. Discussion
  23. 23. Appendix: Due Diligence
  24. 24. Management Team Due Diligence <ul><li>Resumes for each key member of the management team </li></ul><ul><li>At least 3 references; investors are always good references for other investors </li></ul><ul><li>Expect the investor to do further checking beyond the provided references </li></ul><ul><li>The investor will likely want to spend enough time with the team so as to “know” them </li></ul><ul><li>Goals </li></ul><ul><ul><li>Find proven ability to execute </li></ul></ul><ul><ul><li>Find proven credibility (full disclosure on all facts, good and bad) </li></ul></ul><ul><ul><li>Find good contacts & network </li></ul></ul><ul><ul><li>Find no credibility showstoppers; most entrepreneurs are GREAT at presenting as if they have more ability than they actually do </li></ul></ul>
  25. 25. Market/Competitors Due Diligence <ul><li>Analyst reports & calculations of addressable market size & growth </li></ul><ul><li>Customer, analyst, and market expert interviews to understand market drivers & success criteria </li></ul><ul><li>Key questions </li></ul><ul><ul><li>What’s changing to allow a new entrant/technology? </li></ul></ul><ul><ul><li>Who else is competing in the market? </li></ul></ul><ul><ul><li>What makes this company better/different than the others? </li></ul></ul><ul><li>Goals </li></ul><ul><ul><li>Believe the company has a differentiated technology/product/service with a good chance of achieving the scale necessary for a good exit </li></ul></ul><ul><ul><li>Believe that it is possible to exit the investment profitably (e.g., multiple potential buyers, attractive public comparables </li></ul></ul>
  26. 26. Customer References Due Diligence <ul><li>Sales pipeline (if selling to companies or through distributors) </li></ul><ul><li>Key customer statistics & trends (if selling direct or via own web site) </li></ul><ul><li>Customer references – be sensitive to how it may impact your business </li></ul><ul><ul><li>Actual buyers </li></ul></ul><ul><ul><li>Potential buyers </li></ul></ul><ul><ul><li>Potential customer contacts you’ve used for market research </li></ul></ul><ul><li>Goal: Verify that customers… </li></ul><ul><ul><li>… are where the company claims they are in the pipeline </li></ul></ul><ul><ul><li>… are willing to pay enough for the service/product </li></ul></ul><ul><ul><li>… put that product/service at the top of their list </li></ul></ul><ul><ul><li>… are representative of the target market </li></ul></ul><ul><ul><li>… are satisfied with the company’s performance </li></ul></ul>
  27. 27. Technology/Product Due Diligence <ul><li>Review of IP (patents, trade secrets) or product rights </li></ul><ul><li>Technical review by an expert in the area (e.g., senior software person to review an enterprise software, chip designer to review new chip designs, etc.) </li></ul><ul><li>Goals </li></ul><ul><ul><li>Ensure the technology or product can do what is claimed; verify “secret sauce” </li></ul></ul><ul><ul><li>Ensure that good development standards & practices are in place so that technology or product development can scale with company </li></ul></ul><ul><ul><li>Test expertise of key technical/product team members </li></ul></ul>
  28. 28. Financials/Return Calculation Due Diligence <ul><li>Financials should be full financials for 5 years </li></ul><ul><ul><li>Costs & Revenues </li></ul></ul><ul><ul><li>Income statement & balance sheet </li></ul></ul><ul><li>All assumptions should be carefully documented </li></ul><ul><ul><li>No, we don’t really expect year 5 to be accurate… </li></ul></ul><ul><ul><li>…but the assumptions you use help us understand the business </li></ul></ul><ul><li>The investor will create its own return calculation based on valuation comparables </li></ul><ul><li>Goals </li></ul><ul><ul><li>IRR should be over 70% a year for early, 50% for mid, and 30% for late stage companies </li></ul></ul><ul><ul><li>Financials should be fully thought out and match financials from other companies in the industry </li></ul></ul><ul><ul><li>There should be no hidden liabilities or claims on the company (e.g., don’t want to finance debt repayment!) </li></ul></ul>
  29. 29. Company Structure Due Diligence <ul><li>Complete cap table – all investors, their ownership, and all outstanding options/warrants </li></ul><ul><li>Phone calls with key past/present/future investors to ensure: </li></ul><ul><ul><li>Compatible investment goals </li></ul></ul><ul><ul><li>Willingness for future support </li></ul></ul><ul><ul><li>Understanding of relationships and skills of the management team </li></ul></ul><ul><ul><li>Understanding of ownership structure (e.g., differing interests for different investors or series of stock that could potentially damage your investment) </li></ul></ul><ul><li>Organization chart review </li></ul>
  30. 30. Legal Due Diligence <ul><li>Review of past legal documents (contracts, financing, etc.) for potential problems </li></ul><ul><li>Involve lawyers in generating (or review of) financing documents & reviewing patent claims </li></ul><ul><li>Goals </li></ul><ul><ul><li>Ensure both sides understand & agree on mutually acceptable terms </li></ul></ul><ul><ul><li>Avoid any hidden “gotchas” in existing legal documents </li></ul></ul>
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