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Early Stage Venture Funding: Options and Expectations

                                           Harish Gandhi
          ...
About Canaan Partners

» Global Early Stage Venture Fund

» Invest in Technology and Tech Enabled
  Services

» Typical fi...
Agenda

» Lifecycle of a startup and need for capital
     › Options for early stage
»   Venture Economics
»   What do Ven...
LifeCycle of a Startup
Maturity                      • Market Validation
                              stage: BD, fine tun...
Agenda

» Lifecycle of a startup and need for capital
» Venture Economics
» What do Venture funds look for ?
»




       ...
Venture Economics
»   Venture fund invested over 3-4 years
»   Money returned to investors (LPs) 7- 10 years
»   Typical r...
Types of Venture Funds / Which VC to pick
Types of VCs
» Stage of Investment (correlates with Ticket Size)
» Sector Focus
...
What can you expect from a Venture Fund
» Other than money (acceleration of growth) …
   ›   Assistance /Sounding board fo...
Agenda

» Lifecycle of a Startup and need for capital
» Venture Economics
» What do Venture funds look for ?




         ...
Early Stage: Venture Fundable businesses
» Team
     › Early stage - risky
»   Large Market
     › Nascent market but rapi...
Team                Scalable
                                                  Market              Defensible
Team        ...
Team            Scalable
                                                 Market          Defensible
Value Proposition    ...
Team           Scalable
                                                      Market         Defensible
 Scalable : Capita...
Team                Scalable
                                        Market              Defensible
Defensible            ...
Less likely to be Venture Fundable
» Entrepreneur
     › Lack of experience / knowledge in related area
     › Lack of sal...
When to Approach an early stage Venture Fund ?

» VC unlikely to make a bet on multiple risk factors
    ›   Team
    ›   ...
What if it doesn’t work out ?
» Know why
  ›   Not in area of interest ?
  ›   Missing something critical? Adapt if you ag...
For further details please go to:
http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type...
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Early Stage Funding Options And Expectations

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  1. 1. Early Stage Venture Funding: Options and Expectations Harish Gandhi hgandhi@canaan.com Jun 2009 www.canaan.com
  2. 2. About Canaan Partners » Global Early Stage Venture Fund » Invest in Technology and Tech Enabled Services » Typical first cheque : $2M - $5M » Also do some seed and some mid-growth investments © Copyright 2008 Canaan Partners 2
  3. 3. Agenda » Lifecycle of a startup and need for capital › Options for early stage » Venture Economics » What do Venture funds look for ? © Copyright 2008 Canaan Partners 3
  4. 4. LifeCycle of a Startup Maturity • Market Validation stage: BD, fine tune • Feasibility stage: biz model, Product dev. , value partnerships proposition • Product Commercial, • Early Customer Some revenue Feedback • Customer Feedback • Select hires • Early product • Focus Execution diversification • Financial •Team Build out predictability • Risk management •Ideation / • Growth: Scalability, Teams, Concept stage Process, Profitability •Initial market • Market Validated feedback • Biz model validated •Market Sizing • Product diversification Time F&F Seed Early VC Growth VC/ PE IPO Source of Funds Angel Bank Financing © Copyright 2008 Canaan Partners 4
  5. 5. Agenda » Lifecycle of a startup and need for capital » Venture Economics » What do Venture funds look for ? » © Copyright 2008 Canaan Partners 5
  6. 6. Venture Economics » Venture fund invested over 3-4 years » Money returned to investors (LPs) 7- 10 years » Typical return 2.5x – 3.5X (IRR 18% – 25%) » Few super hits, few writeoffs » Expectations of return from each investment › Vary by stage of VC › Early stage VCs Return expectation 7 – 10X or higher Model works with significant stakes and large exits ($ amount) © Copyright 2008 Canaan Partners 6
  7. 7. 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
  8. 8. 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
  9. 9. Agenda » Lifecycle of a Startup and need for capital » Venture Economics » What do Venture funds look for ? © Copyright 2008 Canaan Partners 9
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. Team Scalable Market Defensible Scalable : Capital Output: Revenue, Technology Facilitates Profits Capital Efficiency Input: Effort, Capital © Copyright 2008 Canaan Partners 13
  14. 14. 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) •
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. For further details please go to: http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=powerpoint
  19. 19. Thank You

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