Raising Venture Funding: Demystifying the Journey                                      Rahul KhannaTiEcon Delhi           ...
About Canaan Partners»  Global early stage venture fund with $3Bn under  management»  Invest in technology and tech enable...
Agenda»  Lifecycle of a Business and Need for Capital»  Venture Fund Economics»  What Do Venture Funds Look For ?»  When T...
Lifecycle of a BusinessMaturity                                     Market Validation Stage:                    Mature Sta...
Agenda»  Lifecycle of a Business and Need for Capital»  Venture Fund Economics»  What Do Venture Funds Look For ?»  When t...
Know Venture Economics ?Look at things from a VC s perspective.Why ?»  To minimize your fund raising duration   ›    You d...
Early Stage Venture Economics»    Venture fund invests capital over 3-4 years»    Money returned to investors (LPs) 7- 10 ...
Types of Venture Funds / Which VC to Pick»  Types of VCs   ›    Stage of Investment (Early, Growth, Late)   ›    Sector Fo...
What Can You Expect From a Venture Fund»  Other than money   › Assistance/sounding board for strategy   › Large network of...
Agenda»  Lifecycle of a Business and Need for Capital»  Venture Fund Economics»  What do Venture Funds Look For ?»  When t...
The most important question for a VC Can this opportunity generate a large exit for us in 5-6 years ?»  How large depends ...
Early Stage: DNA of VC fundable businesses»  Team      ›  Early stage – risky so lots of emphasis on founders»    Large Ma...
Team                Scalable                                                     Market              DefensibleTeam       ...
Team                Scalable                                                      Market              Defensible Market   ...
Team              Scalable                                                                                Market         D...
Team            Scalable                                                Market          DefensibleValue Proposition       ...
Team            Scalable                                                     Market          Defensible Scalability: Busin...
Team           Scalable                                                      Market         Defensible Scalability : Capit...
Team                Scalable                                               Market              DefensibleDefensibility    ...
Defensibility : Installed Base Play/ Capital»  Out of Home industry – Network of digital screens»  Financing requirements ...
Less likely to be Venture Fundable»  Entrepreneur    ›  Lack of experience / knowledge in related area    ›  Lack of sales...
Agenda»  Lifecycle of a business and need for capital»  Venture Fund Economics»  What do Venture funds look for ?»  When t...
When to approach an early stage Venture Fund ?»  VC unlikely to make a bet on multiple risk factors   ›    Team   ›    Tec...
Lifecycle of a StartupMaturity                                                                                 Mature Stag...
For further details please go to:http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=...
Typical investment process                                                                 Prelim Market Analysis         ...
Thank Yourkhanna@canaan.com
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TiEcon delhi oct 2011 - Canaan workshop

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TiEcon delhi oct 2011 - Canaan workshop

  1. 1. Raising Venture Funding: Demystifying the Journey Rahul KhannaTiEcon Delhi October 2011
  2. 2. About Canaan Partners»  Global early stage venture fund with $3Bn under management»  Invest in technology and tech enabled services ›  iYogi, UnitedLex, Naaptol, Cellcast, Mcarbon»  Typical first cheque : $2Mn - $7Mn»  Selective seed and growth stage investments ›  Motorexchange, Equitas © Copyright 2008 Canaan Partners 2
  3. 3. Agenda»  Lifecycle of a Business and Need for Capital»  Venture Fund Economics»  What Do Venture Funds Look For ?»  When To approach a VC ? © Copyright 2008 Canaan Partners 3
  4. 4. Lifecycle of a BusinessMaturity Market Validation Stage: Mature Stage BD, Fine Tune Biz -  Focus Execution Feasibility Stage: Model, Partnerships -  Financial predictability Product -  Product/Service live -  Risk management Development, Value -  Early revenue model Proposition -  Customer feedback -  Early Customer -  Team build out Feedback -  Select hires Concept Stage: Ideation -  Initial market Growth Stage: Scalability, feedback Teams, Process, Profitability -  Market Sizing -  Market Validated -  Biz model validated -  Product diversification Time Self/Angel Seed VC PE IPO Source of Funds Bank Financing © Copyright 2008 Canaan Partners 4
  5. 5. Agenda»  Lifecycle of a Business and Need for Capital»  Venture Fund Economics»  What Do Venture Funds Look For ?»  When to Approach a VC ? © Copyright 2008 Canaan Partners 5
  6. 6. Know Venture Economics ?Look at things from a VC s perspective.Why ?»  To minimize your fund raising duration ›  You don’t want to run out of money during fund raise ›  Minimize the diversion and get back to running the business ›  Know what kind of investors to approach © Copyright 2008 Canaan Partners 6
  7. 7. Early Stage Venture Economics»  Venture fund invests capital 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 write-offs»  Early stage investments require more time/involvement»  Each investment professional may manage $50M - $60M & can only deal with 6-8 companies §  Return expectation of 5X – 7X + (High risk, longer duration) §  Model works with Large Exits ($$$) §  Model works with Significant Ownership (25% - 35%+) © Copyright 2008 Canaan Partners 7
  8. 8. Types of Venture Funds / Which VC to Pick»  Types of VCs ›  Stage of Investment (Early, Growth, Late) ›  Sector Focus (Tech, Healthcare, Infrastructure, Real Estate) ›  Corporate VCs»  Picking a VC ›  Sector, Stage ›  Compatibility of thought/chemistry ›  Non-monetary contribution – domain knowledge, relationships ›  Ability to provide reserves for future investment ›  Investment cycle of fund © Copyright 2008 Canaan Partners 8
  9. 9. What Can You Expect From a Venture Fund»  Other than money › Assistance/sounding board for strategy › Large network of customer contacts, advisors › Active assistance in hiring senior members of team › Appointment of Board, Advisors › Corporate governance › Enhanced credibility Most of above – varies by stage of investor.»  What are the trade-offs ›  Higher Accountability / Governance (spending, reporting) ›  Decisions being made by a balanced board rather than founder ›  Lower equity holding (but potentially much higher value) © Copyright 2008 Canaan Partners 9
  10. 10. Agenda»  Lifecycle of a Business and Need for Capital»  Venture Fund Economics»  What do Venture Funds Look For ?»  When to Approach a VC ? © Copyright 2008 Canaan Partners 10
  11. 11. The most important question for a VC Can this opportunity generate a large exit for us in 5-6 years ?»  How large depends on size, stage, VC model. •  If investing $10M per company, want to get at least $50M+ back •  What does this mean for the valuation of the company ? •  What does that mean for VC stake in the company ? Large OwnershipImplications Large Multiple•  Revenues/Profits have to be of scale Large $$$•  Exit multiples should be attractive•  Business should have potential strategic exit options © Copyright 2008 Canaan Partners 11
  12. 12. Early Stage: DNA of VC fundable businesses»  Team ›  Early stage – risky so lots of emphasis on founders»  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 rapidly, with capital efficiency/operating leverage»  Defensible ›  Intellectual Property ›  First mover advantage ›  Network effects»  Exit Prospects ›  IPO, Trade Sale © Copyright 2008 Canaan Partners 12
  13. 13. Team Scalable Market DefensibleTeam Value Proposition»  Passion ›  strong belief ›  risk taking appetite ›  Ambition»  Relevant experience ›  Domain / Market understanding ›  Functional Skills»  Ability to sell, hire, evangelize, motivate»  Execution capability ›  Business and operational experience © Copyright 2008 Canaan Partners 13
  14. 14. Team Scalable Market Defensible Market Value Proposition»  Very critical component of VC decision making ›  Big is important, but markets dynamics are also key ›  India vs. International markets»  Small, fast growing markets are fine (ecommerce in India!)»  Large mature markets can be very competitive. Need a disruptive play ›  Breakthrough Technology ›  Business model»  How do you calculate market size ? © Copyright 2008 Canaan Partners 14
  15. 15. Team Scalable Market Defensible Market: Case Study Value PropositionOnline Photo Printing $ 400MN $ 80 MN $ 60 MN + ?# of urban HH = 100MN # of digi cams in India Internet Penetration = Subscription Services = 20MN 75% Annual Spent= 200/- Photo Storage Platform Market Size = 20*200 Market Size = 0.75*80 Market Size = 200*100 = 4 bn INR = $80MN = $60MN 100/- per HH per annum= 20 bn INR = $ 400MN Mobiles with Cameras Easy Storage. How»  Competition many of us print Photos today?»  Degree of fragmentation, network effects»  Compare growth rates, adoption rates from international markets»  Additional revenue opportunities © Copyright 2008 Canaan Partners 15
  16. 16. Team Scalable Market DefensibleValue Proposition Value Proposition»  Is there a genuine need for the product / service?»  How is it being addressed today ? Why NOW ?»  Who is best positioned to fulfill this need ? Why YOU ?»  Why will the customer select you, continue to use your service/product ? »  Cheaper, Better, Faster © Copyright 2008 Canaan Partners 16
  17. 17. Team Scalable Market Defensible Scalability: Business Model Value PropositionEnterprise Software: Scalability Barriers ›  Small Ticket Price ›  Fragmented market, Competition ›  Technical sale , Long Sales Cycle ›  Demanding Customer, Customization»  What would be interesting: ›  Large ticket Price Discontinuity: SaaS ›  Channel / distribution Cloud Offerings ›  Upsell / Cross Sell; Recurring revenues ›  Strong demand (regulation, compliance) © Copyright 2008 Canaan Partners 17
  18. 18. Team Scalable Market Defensible Scalability : CapitalOutput: Revenue, Technology FacilitatesProfits Capital Efficiency Product Companies (Software) Online marketing/ distribution/ sales (Digital Media) Input: Effort, Capital © Copyright 2008 Canaan Partners 18
  19. 19. Team Scalable Market DefensibleDefensibility Value Proposition»  Intellectual Property»  Installed Base – Platform Play»  Installed Base – deep entrenchment, hard to remove»  First to Market - if Network effect»  Specialized knowledge / Resources»  Capital»  NOT PRICE (unless sustainable cost advantage) © Copyright 2008 Canaan Partners 19
  20. 20. Defensibility : Installed Base Play/ Capital»  Out of Home industry – Network of digital screens»  Financing requirements ›  Critical mass on screens required, often financed by the startup §  Leading players will have 10,000+ screens in 4-5 years §  ~ $1000-2000 per screen ›  Operating losses to cover rental costs till revenues catch up §  ~ $2500 per screen per year in initial years»  Minimum $30MN - $40MN to build the businessè Need a syndicate of investors to finance this © Copyright 2008 Canaan Partners 20
  21. 21. 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: Not open to feedback, change»  Market ›  Small Market / aiming to build a 20 Cr company in 5 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 21
  22. 22. Agenda»  Lifecycle of a business and need for capital»  Venture Fund Economics»  What do Venture funds look for ?»  When to approach a VC ? © Copyright 2008 Canaan Partners 22
  23. 23. 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 23
  24. 24. Lifecycle of a StartupMaturity Mature Stage Market Validation Stage: -  Focus Execution BD, Fine Tune Biz -  Financial predictability Feasibility Stage: Model, Partnerships -  Risk management Product -  Product/Service live Development, Value -  Early revenue model Proposition -  Customer feedback -  Early Customer -  Team build out Feedback -  Select hires Concept Stage: Ideation -  Initial market Growth Stage: Scalability, feedback Teams, Process, Profitability -  Market Sizing -  Market Validated -  Biz model validated -  Product diversification Time Self/Angel Seed VC PE IPO Source of Funds Bank Financing © Copyright 2008 Canaan Partners 24
  25. 25. For further details please go to:http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=powerpoint
  26. 26. Typical investment process Prelim Market Analysis Deal Identification / Discussion : Internal + External15 days Preliminary Analysis Experts Deal Validation Deep Dive: Team, Market,30 – 45 Differentiation, Traction, days Financials Investment Committee & Issue of Due Diligence Term Sheet & Closure Fact Validation. Accounting & 60 days Legal Diligence Background checks Typically 1% of deals get through the funnel
  27. 27. Thank Yourkhanna@canaan.com

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