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  VC	
  motivations	
  	
  
  Driven	
  by	
  their	
  model	
  
  Impacts	
  their	
  terms	
  and	
  expectations	
  ...
  1,000	
  companies	
  
  10	
  investments	
  
  2	
  may	
  be	
  widely	
  successful	
  (usually	
  1)	
  
  6	
 ...
  A	
  company	
  that	
  doubles	
  isn’t	
  enough…	
  
  Every	
  opportunity	
  has	
  to	
  have	
  the	
  potentia...
  You	
  Tube	
  sold	
  to	
  Google	
  for	
  $1.65	
  Billion	
  
  Sequoia	
  invested	
  $11.5M	
  received	
  $495...
  6-­‐9	
  months	
  to	
  raise	
  capital	
  
  Several	
  meetings	
  
  Want	
  to	
  get	
  to	
  know	
  you	
  	...
  Personal	
  Recommendation:	
  	
  	
  
  Get	
  to	
  know	
  the	
  VC	
  	
  
▪  Process	
  (who	
  makes	
  the	
 ...
  Personal	
  Recommendation:	
  	
  	
  
  Rise	
  above	
  the	
  noise	
  
  Remember	
  the	
  frogs	
  
▪  1,000’s...
Have	
  to	
  be	
  able	
  to	
  live	
  with	
  them	
  …	
  
“til	
  exit	
  do	
  you	
  part”	
  
  The	
  term	
  sheet…	
  
	
  
	
  
	
  
  Non-­‐binding	
  offer	
  to	
  invest	
  
  Outlines	
  the	
  general	
  terms	
  and	
  conditions	
  of	
  
investm...
  Non-­‐heart	
  ache	
  	
  
  Company	
  name	
  
  Investors	
  
  How	
  much	
  
  Date	
  	
  
	
  
On	
  average	
  it	
  takes	
  about	
  6	
  years	
  for	
  a	
  software	
  company	
  to	
  get	
  to	
  $10	
  millio...
  Accrue	
  
  Price	
  +	
  dividend	
  convert	
  
	
  
  Protects	
  an	
  investor	
  from	
  down	
  round	
  
  As	
  if	
  their	
  investment	
  had	
  been	
  done	
  at...
  VC	
  can	
  ask	
  to	
  have	
  the	
  company	
  buy	
  back	
  
shares	
  
  Life	
  of	
  the	
  fund	
  
  Inve...
  60-­‐66	
  2/3%	
  
  Change	
  nature	
  of	
  the	
  business	
  (acquire/divest)	
  
  Change	
  capital	
  struct...
  Monthly	
  prepared	
  financial	
  provided	
  	
  
  20-­‐30	
  days	
  from	
  month	
  end	
  
  Quarterly	
  finan...
  Founder	
  restrictions	
  
  Drag	
  Along	
  
  VCs	
  need	
  exit	
  
  Tag	
  Along	
  
  I	
  can	
  sell	
  ...
  Friends	
  and	
  family	
  
  Move	
  to	
  5	
  
  2	
  investor	
  
  2	
  founder	
  
  1	
  independent	
  
 ...
  Founders	
  
  Employees	
  
  Consultants	
  
  Students/universities/research	
  organizations	
  
etc	
  	
  
  ...
  Non-­‐competition	
  
  Non-­‐solicitation	
  
  Customers	
  
  Employees	
  	
  
  IP	
  Assignment	
  
  Ensure	
  one	
  common	
  motivator	
  	
  
  Need	
  to	
  attract	
  talent	
  
  15%-­‐20%	
  (low	
  as	
  10%)	...
  Power	
  of	
  “OPM”	
  
  Get	
  to	
  know	
  your	
  VC	
  	
  
  Won’t	
  matter	
  in	
  good	
  times	
  
  Ca...
  Acceptance	
  &	
  Exclusivity	
  
  Deadline	
  for	
  acceptance	
  
  Use	
  the	
  time	
  to	
  negotiate	
  wit...
 
Be	
  careful	
  what	
  you	
  ask	
  for	
  …don’t	
  send	
  the	
  
wrong	
  message	
  	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
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What do VCs want? - Entrepreneurship 101 (2013/2014)

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Many technology ventures are focused on securing funds from venture capitalists (VCs). This lecture focuses on understanding the motivation of private venture capital firms and how it affects the structure of their term sheets and legal agreements. We explore common pitfalls in dealing with VCs, as well as success stories regarding VC investment.

Published in: Business, Economy & Finance
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Transcript of "What do VCs want? - Entrepreneurship 101 (2013/2014)"

  1. 1.   VC  motivations       Driven  by  their  model     Impacts  their  terms  and  expectations         Most  companies  aren’t  VC’able       Just  don’t  fit  the  “Big  Money”  model     May  be  good  companies  and  businesses     But  if  you  are  then  you’ll  be  better  equipped   than  most  because  of  tonight  
  2. 2.   1,000  companies     10  investments     2  may  be  widely  successful  (usually  1)     6  “land  of  the  living  dead”     2  fail  horribly     Winners  to  offset  my  losers       Start  ups  10-­‐12x  return  in  5-­‐7  years     Existing  companies  5-­‐7x  in  4-­‐5  years  
  3. 3.   A  company  that  doubles  isn’t  enough…     Every  opportunity  has  to  have  the  potential   to  be  a  home  run    
  4. 4.   You  Tube  sold  to  Google  for  $1.65  Billion     Sequoia  invested  $11.5M  received  $495M     30%  of  the  company     43x  return     Great  deal!  
  5. 5.   6-­‐9  months  to  raise  capital     Several  meetings     Want  to  get  to  know  you       Assess  your  “Say/Do”  factor     Close  to  truth   ▪  Builds  confidence    
  6. 6.   Personal  Recommendation:         Get  to  know  the  VC     ▪  Process  (who  makes  the  decision,  when  &  how  often)   ▪  Where  are  they  in  their  fund  life  cycle   ▪  What  was  their  last  deal   ▪  Talk  to  their  existing  CEO   ▪  Cash  available  to  invest/reserves  
  7. 7.   Personal  Recommendation:         Rise  above  the  noise     Remember  the  frogs   ▪  1,000’s  of  deals        
  8. 8. Have  to  be  able  to  live  with  them  …   “til  exit  do  you  part”  
  9. 9.   The  term  sheet…        
  10. 10.   Non-­‐binding  offer  to  invest     Outlines  the  general  terms  and  conditions  of   investment     Which  may  change     Not  the  definitive  agreement  simply  a  place   to  start     Everyone  uses  it     When  they  issue  one  in  their  process  
  11. 11.   Non-­‐heart  ache       Company  name     Investors     How  much     Date      
  12. 12. On  average  it  takes  about  6  years  for  a  software  company  to  get  to  $10  million  revenue.     Far  more  realistic  to  get  to  $50M  in  10  years  (50%  growth  rate  from  years  6  to  10).  
  13. 13.   Accrue     Price  +  dividend  convert    
  14. 14.   Protects  an  investor  from  down  round     As  if  their  investment  had  been  done  at  the   current  lower  price     Keeps  the  investor  whole  in  bad  times     Full-­‐ratchet     Weighted  average  
  15. 15.   VC  can  ask  to  have  the  company  buy  back   shares     Life  of  the  fund     Investors  in  funds  want  their  money  back     Outcome:     Forces  a  sale     Get  minimum  investment  back  (P+dividends)    
  16. 16.   60-­‐66  2/3%     Change  nature  of  the  business  (acquire/divest)     Change  capital  structure/articles     ▪  Default  approval  over  future  financing     Approve  business  plan/operating  plan     Change  in  key  employees  (defined  term)     Creation  of  ESOP     Unbudgeted  expenditure  in  excess  of  $5,000     Non-­‐arms  length  transactions     ….  
  17. 17.   Monthly  prepared  financial  provided       20-­‐30  days  from  month  end     Quarterly  financials       Analysis  vs.  budgets     Board  material       Yearly  operating  plan       (30  days  prior  to  beginning  of  fiscal  year)  
  18. 18.   Founder  restrictions     Drag  Along     VCs  need  exit     Tag  Along     I  can  sell  a  portion  if  you  can  
  19. 19.   Friends  and  family     Move  to  5     2  investor     2  founder     1  independent     Expect  material  in  advance  of  meeting     Only  a  meeting  if  the  VC  is  there   ▪  Defer  once    
  20. 20.   Founders     Employees     Consultants     Students/universities/research  organizations   etc       Avoid  convoluted  IP  structures     Only  going  to  be  unwound  
  21. 21.   Non-­‐competition     Non-­‐solicitation     Customers     Employees       IP  Assignment  
  22. 22.   Ensure  one  common  motivator       Need  to  attract  talent     15%-­‐20%  (low  as  10%)     New  CEO     New  executives     Board  members     Non-­‐VC     Pre-­‐$     Dilutive  to  you  
  23. 23.   Power  of  “OPM”     Get  to  know  your  VC       Won’t  matter  in  good  times     Can’t  tell  you  what  to  do  but  prevent  you  from   doing  things  
  24. 24.   Acceptance  &  Exclusivity     Deadline  for  acceptance     Use  the  time  to  negotiate  with  other  parties     No  “shop”        
  25. 25.   Be  careful  what  you  ask  for  …don’t  send  the   wrong  message    
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