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

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

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