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