Early Stage Funding Options And Expectations

Early Stage Venture Funding: Options and Expectations Harish Gandhi hgandhi@canaan.com Jun 2009 www.canaan.com

About Canaan Partners » Global Early Stage Venture Fund » Invest in Technology and Tech Enabled Services » Typical first cheque : $2M - $5M » Also do some seed and some mid-growth investments © Copyright 2008 Canaan Partners 2

LifeCycle of a Startup Maturity • Market Validation stage: BD, fine tune • Feasibility stage: biz model, Product dev. , value partnerships proposition • Product Commercial, • Early Customer Some revenue Feedback • Customer Feedback • Select hires • Early product • Focus Execution diversification • Financial •Team Build out predictability • Risk management •Ideation / • Growth: Scalability, Teams, Concept stage Process, Profitability •Initial market • Market Validated feedback • Biz model validated •Market Sizing • Product diversification Time F&F Seed Early VC Growth VC/ PE IPO Source of Funds Angel Bank Financing © Copyright 2008 Canaan Partners 4

Venture Economics » Venture fund invested over 3-4 years » Money returned to investors (LPs) 7- 10 years » Typical return 2.5x – 3.5X (IRR 18% – 25%) » Few super hits, few writeoffs » Expectations of return from each investment › Vary by stage of VC › Early stage VCs Return expectation 7 – 10X or higher Model works with significant stakes and large exits ($ amount) © Copyright 2008 Canaan Partners 6

Types of Venture Funds / Which VC to pick Types of VCs » Stage of Investment (correlates with Ticket Size) » Sector Focus » Corporate VCs Picking a VC » Sector, Stage » Investment Cycle of fund » Ability to provide reserves for future investment » Philosophy » Non-monetary Contribution – “Value Addition” © Copyright 2008 Canaan Partners 7

What can you expect from a Venture Fund » Other than money (acceleration of growth) … › Assistance /Sounding board for actions, strategies › Large Network for customer contacts, advisors › Active assistance in hiring senior members of team › Appointment of Board members, Advisors › Corporate Governance › Credibility › - again – varies by stage of VC » On the Flip side - › Lower level of freedom (spending, reporting) › Decisions being made by a balanced board rather than founder › Lower equity holding (but potentially much higher value) © Copyright 2008 Canaan Partners 8

Early Stage: Venture Fundable businesses » Team › Early stage - risky » Large Market › Nascent market but rapidly growing and potential to be large › Large existing market with a disruptive play or discontinuity » Strong Value Proposition › Why you will win » Scalable › Build the business efficiently and quickly » Defensible › Differentiability (IP) › Defensible first mover advantage » Exits (IPO, Trade Sale) © Copyright 2008 Canaan Partners 10

Team Scalable Market Defensible Team Value Proposition » Relevant Experience › Domain › Functional » Passion (strong belief, risk taking, ambition) » Ability to Sell, Hire » Execution capability › Business and Operational Experience © Copyright 2008 Canaan Partners 11

Team Scalable Market Defensible Value Proposition Value Proposition » Is there a genuine need for the product / service? » How is it being addressed today ? » Who is best positioned to fulfill this need ? » Why will the customer select you, continue to use your service/product ? » Cheaper, Better, Faster © Copyright 2008 Canaan Partners 12

Team Scalable Market Defensible Defensible Value Proposition • Intellectual Property • Installed Base – Platform Play • Installed Base – deep entrenchment, hard to remove • First to Market - if Network effect (sometimes scale) • Specialized knowledge / Resources • NOT PRICE (unless sustainable cost advantage) •

Less likely to be Venture Fundable » Entrepreneur › Lack of experience / knowledge in related area › Lack of sales and operational experience in founding team › Mindset: Always prioritizes profits over growth › Mindset: Reluctant to divest equity (or only limited amounts) › Mindset: Not open to feedback, change » Market › Small Market / aiming to build a 10 Cr company in 4 yrs › Uncertain Business model, Scalability challenges » Differentiability and Competition › Me too product / service » Capital Requirement › Risk of consuming too much capital © Copyright 2008 Canaan Partners 15

When to Approach an early stage Venture Fund ? » VC unlikely to make a bet on multiple risk factors › Team › Technology and Product risk › Competitive Risk › Market and Business Model risk › Exit Risk » Product ready / close to being ready & customer traction » Some validation of assumptions, business model, market size » Presence of Business and Operations guy on team © Copyright 2008 Canaan Partners 16

What if it doesn’t work out ? » Know why › Not in area of interest ? › Missing something critical? Adapt if you agree » Try other VCs » Stay in touch and provide updates on progress © Copyright 2008 Canaan Partners 17

For further details please go to: http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=powerpoint

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Early Stage Funding Options And Expectations

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