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Venture Capital: An Entrepreneur's Manual
 

Venture Capital: An Entrepreneur's Manual

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    Venture Capital: An Entrepreneur's Manual Venture Capital: An Entrepreneur's Manual Presentation Transcript

    • Startup Finance
      An Entrepreneur’s Manual
    • About Index Ventures
      Selected Investments
      Index Ventures
      Over €1.5bn under management
      Active investor in web / internet
      • Pan European Venture Fund
      • Based London & Geneva
    • Agenda
      Important reflections before you start
      What are the financing options?
      How to attract and engage investors?
      Deal structure and what to expect during the investment process
    • A big undertaking
      Starting a business is a big commitment
      Energy & Passion
      Time
      Financial resources (yours and your investors)
      Before thinking of financing, is worth taking a deep breath …
    • Key questions about you
      Why am doing this
      Make money
      Lifestyle
      “Change the world”
      How long do you want to commit?
      What level of financial risk are you prepared to take?
    • Key questions about the business
      Be honest with yourself about the risks / unknowns
      Do customers want the product / service?
      Do you have the competence to build the product and the team
      Can you monetise the product / service?
      How competitive is / will the space be?
      How big can the overall market become?
    • Agenda
      Important reflections before you start
      What are the financing options?
      How to attract and engage investors?
      Deal structure and what to expect during the investment process
    • Overview of financing options
      Equity Financing
      Non-Equity Financing
      Angel Financing
      Venture Capital
      Self Finance /
      Bootstrapping
      Private Equity
      Debt /
      Bank Finance
      Public
      Stock Markets
    • Self financing / bootstrapping
      Financing growth from previous cashflow and personal funds
      Obviously need to have cashflows…
      Most good bootstrapped companies emerge from a service or consulting companies that are productising their offering
      Pros
      Bootstrapped companies almost always spend cash more effectively than equity financed companies
      Already being close to existing customers, give excellent ability to understand problems and define good solutions
      Cons
      Resources for product and market dev constrained by cashflows
      May miss a big opportunity if other players raise finance and invest heavily
    • Debt / bank finance
      Relatively limited funds will be available ; likely to want security anyway
      Banks only lend to predictable businesses they can understand
      If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance
      Not particularly useful web or high growth tech industries
    • Pre-requisites
      Large Potential
      Market Opportunity
      Unique Product
      Or Concept
      Passionate
      Founding Team
      Implications…
      Need to move
      rapidly
      Intense
      competition
      likely
      VC funding supports
      Hiring
      Rapid Product
      Development
      Partnerships
      Infrastructure
      Internationalisation
      Commercialisation
      Good reasons to raise equity finance
    • When NOT to raise VC
      Application
      is a feature
      not a product
      Market size is
      too small
      Motivation is
      not financial
      Risk is not that you waste time unsuccessfully trying to raise finance …
      … real danger is that you do succeed in raising VC funds
      Lose opportunity for small exit which could be personally lucrative
      Lose opportunity to run lifestyle business
      Get bound in to 3+ yrs work you may not enjoy
    • Equity Financing
      Growth Fund
      Seed
      Early Stage
      Series A, (B)
      Later Stage
      (B),C,D…
      Pre-IPO /
      Buy-out
      Private
      Equity
      Investment Size
      0 - €1m
      €2m-€20m
      €5m-€20m
      €30m+
      Potential Sources of Funds
      Grant-funding
      University seed funds
      Friends and family
      Angel Investors
      (Venture Capital)
      Venture Capital
      (Wealthy) Angel investors
      Venture Capital
      Specialist Late stage tech investment funds
      Hedge Funds
    • Agenda
      Important reflections before you start
      What are the financing options?
      How to attract and engage investors?
      Deal structure and what to expect during the investment process
    • Venture Capital – How the VC makes money
      Raise fund every 2-4 years
      Pension funds, financial institutions and specialist “fund of fund” investors
      Invest money over 3-5 years
      ~ 1/2 of investments lose money
      ~ 1/3 of investments break even
      ~ 1/6 of investments make (lots) of money
      Very small management fee on funds managed
      ~ 1-2.5% pa
      Carry
      ~ 20-25%x (Total Return – Total Amount Invested)
    • Angels – How the Angel investor makes money
      Unlike the VC the Angel invests their own money
      Much smaller absolute returns can be very meaningful to an angel
      The Angel approach is to invest small amounts at a very early stage / low valuation
      €50-€250k at valuations of €500k-€4m
      Two “exits” for angel
      Firm might be sold quickly for €5-10m or less where the Angel can make 2-5x money
      Firm raises VC money, after which Angel typically becomes more passive but has built up exposure very cheaply to a venture backed enterprise
      The key thing when selecting an Angel therefore is whether they can help you raise VC finance
      See which Angel investors have invested with which VCs
    • Venture Capital – What a good VC will add
      Advice and Strategy
      Hiring
      Developers
      Country Managers
      Sales
      CEO / CFO / COO
      Advisory Board
      Partnerships
      Profile and PR
      Further access to capital
      • Internationalisation
      • Trusted service provider relationships
      • Search / recruiting
      • Branding / PR
      • Finance, etc
      • Exit optimisation
      • Knowledge / contacts with relevant buyers
      • Experience with process
    • What does an investor look for?
      Technology
      Traction
      Team
      $$$
      • Can evaluate each as
      • Exceptional
      • Good / credible
      • Mediocre / incomplete
      • Misconception that being good / credible across the board is what VCs look for
      • Can always add credible attributes to the mix later
      • We focus on finding opportunities which rate as exceptional in one attribute
    • Identifying relevant VC partners
      Has funds
      to invest
      Do create a shortlist
      Rifle is a better weapon than a shotgun
      Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors
      Match of
      Size/Stage/
      Geography
      Excellent
      track record
      Shortlist
      Relevant
      Portfolio
      No directly
      competitive
      investments
    • Getting on radar screens
      Out of the blue email is a longshot
      Try to build context
      Analyse portfolio companies – are there any links there?
      Analyse contact network and advisors
      Analyse press coverage
      Participate in blog conversations
      Attend events and conferences
      Relevant PR around product also helps
      VCs spend their time looking for businesses with momentum
    • Agenda
      Important reflections before you start
      What are the financing options?
      How to attract and engage investors?
      Deal structure and what to expect during the investment process
    • Sharing relevant information
      Pre - first meeting
      Pre - termsheet
      Post - termsheet
      100 page business plan not required
      20 page ppt which clearly answers main questions is best bet
      Product
      Market
      Business Model
      Team
      Competition
      Product Roadmap
      Technology Overview
      Business Development
      Financial Status
      • Dialogue rather than documentation – expect lots of meetings
      • Calls with current / prospective customers or partners
      • Meeting broader team
      • Brainstorming around strategy
      • Identifying key hires post closing
      • Formal presentation to VC partnership
      • Some additional reference calls with partners / customers
      • Personal reference calls
      • Legal / accounting audit (if relevant)
      • Drafting legal documentation
      2-4 weeks
      1-2 Months
    • Types of investment
      Ordinary Share investment
      Simplest form, often used by angels
      All shareholders have similar rights
      Company Board composed according to
      Convertible Loan
      Sometimes used by both Angels and VCs
      Typically when another financing is anticipated soon
      Loan will convert (with a discount ~25%) into the next financing round
      Preferred Share Investment
      Typical Structure used by VCs and occasionally larger Angels investing as a group
    • Understanding a termsheet – case study
      Anything between 2 and 15 pages (if points are spelt out in fuller legalise)
      Sample phrasing is
      “[XXX fund] proposes to lead a Series A preferred share financing of €5m at a €8m pre-money valuation. As part of the investment process an employee option pool of 15% on a post money basis will be put in place. Typical venture capital terms including participating liquidation preference, etc. etc …”
      What does it all mean?
    • Case Study – Cap Table
    • but that’s so unfair…
      Board Representation
      Liquidation Preference
      Participation rights
      Anti-dilution rights
      Element of reverse vesting
      Certain control and veto rights
      Period of exclusivity to close legals
      Photo Source: Philip Greenspun, MIT
      Venture Capital – “Typical Deal Terms”
    • Case Study - liquidation preference
    • Case Study - liquidation preference
    • Case Study - liquidation preference
    • Case Study - liquidation preference
    • Case Study - liquidation preference
    • Case Study - Antidilution
      If a subsequent investment round is done a price lower than the previous investment round then the previous investment round is repriced (more stock issued to Series A)
      Two flavours
      Broad-based – Series A price ratchets down based on size of Series B relative to Previous post-money valuation
      Narrow-based – Series A price ratchets down based on size of Series B relative to Size of Series A
      Say €5m Series B done at €0.75 per share
      Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25) = €0.93
      Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) = €0.875
    • Case Study – Reverse Vesting
      The value of startup is typically in the promise of future labour from the founders
      Investors seek to secure this by reverse vesting founder stock, typically over 3 or 4 years
      For startups typically all founder stock is subject to reverse vesting.
      For later stage companies perhaps half the stock might be subject to vesting
      NB – this also protects founders from each other
      • Revenues / Profitability
      • Growth rate
      • Team quality
      • Strategic fit with buyer community
      • Well managed exit process
      Entrepreneur’s Equation
      Value at exit
      • Fewest strategic errors made
      • Hiring (quality & speed)
      • Partnerships
      • Product development
      Probability of getting there
      • Valuation at initial round
      • Valuation and dilution at subsequent rounds
      • Option grants
      % share of business at exit
      Choosing the right VC - Valuation should not be the decisive factor
    • Key things to consider when choosing an investor
      Right partner at a fair price
      vs.
      Any partner at best price
      Relationship
      With key individual(s); and
      broader team
      References
      Speak to other founders
      Portfolio
      Relevant experience
      Non competitive
      Community you want to be part of
      Valuation and associated deal terms
    • Thank you
      Ben Holmes
      Email: benh@indexventures.com
      Skype: ben_holmes
    • Artwork – (Transparent Layers)