The Golden Equation: Product + Market + Team = Deal


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The open secret of VC financing: it's a byproduct of company development, not an event by and of itself.

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The Golden Equation: Product + Market + Team = Deal

  1. 1. The Golden Equation: Product + Market + Team = Deal Tim Dick, General Partner Page 1
  2. 2. The Missing Link… A few weeks ago, I was asked to speak to a venture accelerator cohort on financing. I thought about doing Termsheets: The Good, The Bad & The Ugly that has proven so popular, but that didn’t seem to fit the bill. Then I got stuck, because financing is usually discussed as an a la carte element of startup development similar to getting first product out or making a key hire. But it’s not… Copyright © 2009-2013 Startup Capital Ventures Page 2
  3. 3. The Secret… Financing Is A Byproduct Of Startup Development… …Development Brings Financing, Not The Other Way Around Copyright © 2009-2013 Startup Capital Ventures Page 3
  4. 4. Agenda Product + Market + Team = Deal Page 4
  5. 5. The Golden Equation For some years, I have been using the equation: Product + Market + Team = Deal for the simple reason that those three things together determine the success or failure of every company. Copyright © 2009-2013 Startup Capital Ventures Page 5
  6. 6. The Formula: Prove Your Team & Product Can Fill A Market Vacuum Product: credible evidence that you have a unique painkiller for a real need •  Real entry barriers (e.g. IP, structural, regulatory) Market: show you can effectively access a large & growing market •  Clearly identify market segments & potential customers •  Economical customer acquisition & retention strategy •  Strategy to beat competitors Team: evidence you can build a balanced team that can deliver the product to market Copyright © 2009-2013 Startup Capital Ventures Page 6
  7. 7. Three Axes Of Company Development Product Version 2.0 Production Revenue Beta Prototype Concept Repeat Buys Paid Customers Core Team Successful trials CEO Sales Economics Developers Size/Segments Founder Market Full Team Team Copyright © 2009-2013 Startup Capital Ventures Page 7
  8. 8. Balanced Development Drives Financing Rounds Product Version 2.0 Financing Round Expansion Production First Revenue Beta Seed Prototype Concept Pre-Seed! Founder Repeat Buys Team Paid Customers Full Team Successful trials Core Team Sales Economics CEO Size/Segments Developers Market No “Lame Troikas”: Fill Your Gaps! Copyright © 2009-2013 Startup Capital Ventures Page 8
  9. 9. PRODUCT: How You Plan To Fill The Market “Vacuum” Prerequisites •  A painkiller for a specific customer pain (vs. a vitamin which we “should” take) •  Scalable product with high margins •  Distinctively different from competition Seed round •  Working beta with customer feedback •  Patent applications where possible First Round •  Version 1.0 production product •  Positive customer feedback Expansion •  Product line extension prototypes •  Growing revenue / repeat buys from customers Copyright © 2009-2013 Startup Capital Ventures Page 9
  10. 10. PRODUCT: Notes From The Field Only two eras in company development (Marc Andreessen) 1.  Before Product-Market Fit (change everything until this works, because nothing else matters) 2.  After Product-Market Fit (a key to financing) Entrepreneurs are in love with their product but, set rigid development deadlines and SHIP IT! Protect and patent your products: Value is created by what you keep, not what you create Copyright © 2009-2013 Startup Capital Ventures Page 10
  11. 11. MARKET: Large & Growing, Have A Defensible Entry Strategy Pre-requisite for institutional venture capital: Clear target market and a $10B total available market (TAM) Seed round •  Well defined and segmented market •  Economical customer acquisition & retention strategy First •  Demonstrating customer acquisition cost & value •  Defined sales force strategy Expansion •  Sales growth through established channels •  Building a recognized brand name •  Clear path to profitability Copyright © 2009-2013 Startup Capital Ventures Page 11
  12. 12. MARKET: Notes From The Field The #1 company-killer is lack of market (Andy Rachleff, Benchmark Capital): •  When a great team meets a lousy market, market wins •  When a lousy team meets a great market, market wins •  When a great team meets a great market, something special happens Startups need to show breakeven potential on revenue of $100M in 5-7 years because only 1-2 out of 10 deals hits •  Credibility fail: “$300M revenue in two years with one round!” Selling into a declining market is almost impossible Identify competitors’ positions as you explain how you can win against them •  Credibility fail: “We have no competitors” Copyright © 2009-2013 Startup Capital Ventures Page 12"
  13. 13. TEAM: Balance Is Critical, Fill The Gaps •  Prerequisites –  Committed founders –  Domain experts in the product, service, or technology •  Seed round –  Original product/technology developers –  Some general management & sales talent •  First Round –  Experienced sales and marketing teams –  Fundable CEO with relevant experience •  Expansion Round –  Strong, balanced team –  Solid sales force –  Experienced CFO as the business become metrics-driven Copyright © 2009-2013 Startup Capital Ventures Page 13
  14. 14. TEAM: Leverage Your Team With Great Partners Build a GREAT board for “the voice of experience” and the ability to open doors •  “It’s hard to see the picture if you’re inside the frame” - Eugene Kleiner •  USE YOUR BOARD! – they have been there & have great networks •  Weekly board updates and monthly board meetings correlate highly with startup success Entrepreneur-focused partners can help you more than you think •  The right law firm will help you do more than incorporate •  PR Firm - little companies need big voices & good messages •  Accounting firm: startups need conservative books •  Some banks understand entrepreneurs (e.g. SVB, CPB) Copyright © 2009-2013 Startup Capital Ventures Page 14
  15. 15. Agenda Product + Market + Team = Deal Page 15
  16. 16. Inside the Head of a VC… Copyright © 2009-2013 Startup Capital Ventures Page 16
  17. 17. …What Are They Really Thinking? He or she has a $100 million early-stage fund dedicated to enterprise software and medical devices The firm must invest the fund within 5 years – about per year for a total of around 20 deals (4 per year) •  The investment typically buys 20% of the company He plans to put around $5 million to work in each company in three rounds (say $1.5M, $1.5M, and $2M including reserves) •  Many companies won’t make it past round two... •  He’s hoping that 2 in 20 deals will be a home run - and “return the fund” of $100M •  8 will probably die or be sold at low value •  10 will probably do “OK” So every deal must have the potential of achieving a $100M exit from the VC’s 20% share = $500M valuation Copyright © 2009-2013 Startup Capital Ventures Page 17
  18. 18. Financing Steps 1: Plan 2: Contact 3: Pitch Research Leverage contacts Communications Sequence 4: Term Sheet 5: Due Diligence Crisp Listen!! Benchmark Be Norms Responsive Prepare! Right Legal Pitch Team Counsel Copyright © 2009-2013 Startup Capital Ventures Dig deep Page 18
  19. 19. Step 1: Plan Because It Will Take 6+ Months To Deliver Research the firms who fund your sector •  Are they making investments? •  Have they funded a competitor? •  Who is their expert in your space? Sequence your fundraising •  Talk to a few VCs to get feedback & edit •  Save your best shots for after you have feedback Get intros to sources of funding whenever possible •  Avoid cold calls: “send me the executive summary” Copyright © 2009-2013 Startup Capital Ventures Page 19
  20. 20. Step 2 Contact: Find Financiers That Match Your Industry & Stage Industry Segment Deal Size Pre-Seed (<$500K) Series A ($1-3M) Series B ($3-8M) BIO-MED SOFTWARE / CLOUD CONSUMER Angels Acclerators Angels 500 Startups Accelerators Angels 500 Startups MPM NEA Sprout Epic MPM Andreessen Horowitz Emergence Epic Kleiner Andreessen Horowitz Crosspoint NEA Sprout Greylock InterWest ITV Accel Accel Sequoia Maveron KPCB Copyright © 2009-2013 Startup Capital Ventures Page 20
  21. 21. Step 3: Develop Clear Communications Elevator Pitch: you may have 10 seconds to interest a source Executive summary: one or two pager that tells the story (no 6 point font!) Business Plan: Power Point 10-20 slide pitch •  Many investors will decide go / no-go ten minutes into a pitch •  Fact-based: no exaggerations or “we have no competition” •  Cover Market Opportunity, USP, Sales Strategy, Competition, Team, Revenue & financials, financing plan, milestones & use of proceeds, exit strategy & comparables Back-up materials for deeper questions Copyright © 2009-2013 Startup Capital Ventures Page 21
  22. 22. Step 4: The Term Sheet Investor may want to introduce you to other potential investors to syndicate the deal & test their own judgement You may have a valuation in mind, but the golden rule applies: he (or she) who has the gold makes the rules Investors will propose terms include valuation, board seats, liquidity preferences, registration rights, anti-dilution provisons, etc. •  Get familiar with the terms and the norms •  Find example term sheets from law firms online •  Check “Term Sheets: The Good, The Bad & The Ugly” Copyright © 2009-2013 Startup Capital Ventures If you don’t have an attorney, get one! Page 22
  23. 23. Valuation “Push-Me / Pull You” Ask For More $, Not Less In early stages, you can “push” your company’s value The 60/40 rule: Your “ask” can be $2M or $5M but the “money” will take 40%+ either way Have a full capital plan (multiple rounds) that funds to cash-flow positive When your company has real revenues, the market will start to “pull” your value Market becomes more efficient due to comparable deals Analytical measures are measurable (EPS, ROI) A few quarters of profitable growth can get close to a liquidity event Copyright © 2009-2013 Startup Capital Ventures Page 23
  24. 24. Step 5: Due Diligence Lead investor does this for syndicate Will want to get comfortable with you and your team VC will study and learn your space, want to talk with your customers, see all paperwork, etc. Follow up promptly and thoroughly with all data requests •  Have your books in order and be prepared to provide all contracts, investor lists, references, and as much time as the investor wants Copyright © 2009-2013 Startup Capital Ventures Page 24
  25. 25. The Fear-Greed-O-Meter Of Deal Psychology… My deal might not get done You! ! ! ! ! ! VC! I can get a higher value for my deal My milestones don’t support the valuation I want I’m going to ding that low-ball offer I might miss out on this good deal Fear Greed Will there be another deal like this? Copyright © 2009-2013 Startup Capital Ventures I can get this deal cheap if I wait a little longer I’ll fund a copycat deal cheaper Page 25
  26. 26. “Meat’s Not Meat ‘Til It’s In The Pan” Painting: Charles Russell
  27. 27. The Author Tim is a partner at Startup Capital Ventures where he sits / sat on the Boards of SilverTail Systems, (acquired EMC), TagArray (acquired MXIM), Adama Materials, and TuneIn. He has raised over $300M in capital with $1.2B in exit value. Tim previously founded Hawaii Superferry, (acquired by Edelman),, (NYSE: WPZ then acquired by BT). He has advised and invested in companies including (first angel investor, acquired by IAC), (acquired AMZN). Previously, Tim was a principal at the Boston Consulting Group (BCG) where he advised clients including Microsoft and Disney. Earlier he was an engineer at Beckman Instruments, where he developed the first electronic speech synthesizer for use ICUs, and the world's first instrument-on-a-chip. A believer in social responsibility, Tim co-founded the internet’s privacy standard. He is currently chair of Entrepreneurs Foundation of Hawaii and a board member of HiBEAM. He sponsors the student program at Hawaii Venture Capital Association Tim holds an MBA from Stanford and a BSEE from the University of California Page 27