Venture Capital 101


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An overview of venture capital fundraising methodology

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  • - Focus by sector, stage and geography
  • IT/Consumer had massive investment in late 90s. Volume and distribution has dropped significantly over time. Life Sciences has been more stable over time Industrial/Energy spiked more recently, although lack of capital efficiency scared some off in 2009 - Retailing/Distribution has practically disappeared as a category - Financial Services has dropped as well
  • Anti-Dilution Full Ratchet reprices the existing preferred to match the price of the new investors, which can cause a spiraling price effect that wipes out management and common If Series A invested $5M in the last round, those shares must represent $5M of value in the new deal, so a $5M pre on the next round would give all of the value to the Series A shareholders Weighted average approach results in a more reasonable price adjustment New Conversion Price = Old Conversion Price * ((Common Outstanding + Common Issuable at Old Price)/(Common Outstanding + Common Issuable at New Price)) With Narrow-Based, Common Outstanding can include just preferred class, all preferreds, and common With Broad-Based, Common Outstanding can include all preferreds converted, common, options and warrants, which is better for Company
  • Venture Capital 101

    1. 1. Venture Capital Fundraising Methodology October 28, 2009
    2. 2. What Is Venture Capital?
    3. 3. What Is Venture Capital? <ul><li>Private equity class specialized in funding and building early stage, high growth potential enterprises </li></ul>
    4. 4. Typical VC Fund Structure <ul><li>General Partners invest capital on behalf of Limited Partners </li></ul><ul><ul><li>LPs include endowments, pension funds, charities, corporations, individuals, and fund of funds </li></ul></ul><ul><ul><li>GP contributes personal capital as well </li></ul></ul><ul><ul><li>GP earns 2% annual management fees & 20% carried interest, i.e., share of profits </li></ul></ul><ul><li>Capital called as needed, with primary investing done in first 5 yrs of 10 yr fund cycle </li></ul><ul><li>Quality fund returns 3x capital, or 18-20% IRR </li></ul><ul><ul><li>1/3 of deals will likely fail, 1/3 will return amount invested, and 1/3 will drive majority of returns </li></ul></ul>
    5. 5. Where Do VCs Invest? Life Sciences Clean Technology Information Technology
    6. 6. Fund Example: SoftBank Capital Select Current Investments Experienced Team (5 former CEOs) Focused on early stage high growth technology based businesses benefiting from the rapid deployment and adoption of broadband and mobile technologies Select Historical Investments
    7. 7. Industry Investment Trends Source: MoneyTree Report – NVCA/PWC/Thomson Reuters
    8. 8. Renewable Energy <ul><li>Renewables dominating “Green” VC investing and expected to grow with support of Obama administration </li></ul><ul><li>Billions of dollars in loans and grants available for R&D for everything from new battery technologies to more efficient use of fossil fuels </li></ul><ul><li>VC challenged by capital requirements for large green infrastructure deals </li></ul>Source: FastCompany/Chubby Brain
    9. 9. Fundraising Process You set the valuation. I’ll set the terms.* *Don’t be fooled by the cover price
    10. 10. Why Raise Venture Capital? <ul><li>Guidance & Support </li></ul><ul><ul><li>Board participants; Interim executives </li></ul></ul><ul><ul><li>Product management, business development and financial planning support </li></ul></ul><ul><li>Access </li></ul><ul><ul><li>Industry contacts </li></ul></ul><ul><ul><li>Leverage portfolio </li></ul></ul><ul><li>Credibility </li></ul><ul><ul><li>Stamp of approval with customers, partners and vendors </li></ul></ul><ul><li>Cash </li></ul><ul><ul><li>But at a high cost of capital, so Guidance, Access and Credibility should justify that cost </li></ul></ul>
    11. 11. Typical Company Profile <ul><li>Team </li></ul><ul><ul><li>Ranges from a single, 1 st -time entrepreneur to a full team of seasoned entrepreneurs </li></ul></ul><ul><li>Stage of Development </li></ul><ul><ul><li>Ranges from pre-revenue to approaching profitability </li></ul></ul><ul><ul><li>VCs sit between angel and growth/buyout investors, though some funds cross over into these stages </li></ul></ul><ul><li>Size of Round </li></ul><ul><ul><li>Definitions vary, normalized range from $2M-$15M </li></ul></ul><ul><ul><li>Deals frequently syndicated between multiple funds to strengthen board and diversify risk </li></ul></ul>
    12. 12. Typical Deal Timeline <ul><li>Average firm reviews 1000+ deals per year </li></ul><ul><li>99% of deals turned down </li></ul><ul><li>Promising deals present to partnership 2-6 weeks post initial meeting </li></ul><ul><li>Partnership approved deals receive term sheet </li></ul><ul><li>Accepted term sheets followed by 2-6 weeks of final diligence and legal documentation </li></ul><ul><li>Average firm, in normal market, closes 8-12 new investments/yr </li></ul>Note: Graphic via NVCA; Industry statistics are approximations
    13. 13. Deal Evaluation <ul><li>Focus varies by firm, but key elements include: </li></ul><ul><li>Concept </li></ul><ul><ul><li>What is the product or service? </li></ul></ul><ul><ul><li>Why will customers buy it? </li></ul></ul><ul><li>Opportunity </li></ul><ul><ul><li>What is the market size and penetration strategy? </li></ul></ul><ul><ul><li>What is the competitive landscape? </li></ul></ul><ul><li>Team </li></ul><ul><ul><li>Can they execute on development, sales and support? </li></ul></ul>
    14. 14. Financial Projections <ul><li>Focus on key revenue and expense drivers </li></ul><ul><ul><li>Sensitivities important given model immaturity </li></ul></ul><ul><ul><li>Viability of margins long term </li></ul></ul><ul><li>How much additional capital required? </li></ul><ul><ul><li>What is the potential dilution from later rounds? </li></ul></ul><ul><li>Focus on model details varies based on stage </li></ul><ul><ul><li>Seed stage may not yield revenue for 18-24 mos. </li></ul></ul><ul><ul><li>Later stage deals may consider debt financing, requiring covenant maintenance </li></ul></ul>
    15. 15. Term Sheet <ul><li>Price </li></ul><ul><ul><li>Pre vs. Post $ Valuation </li></ul></ul><ul><ul><li>Option Pool implications </li></ul></ul><ul><li>Liquidation Preference </li></ul><ul><ul><li>Liquidation: Sale of company as opposed to IPO </li></ul></ul><ul><ul><li>Multiples and Dividends </li></ul></ul><ul><ul><li>Participation: Full, Capped and Non-Participating </li></ul></ul><ul><ul><li>Stacked vs. pari passu </li></ul></ul><ul><ul><li>Impact on management ownership and resulting motivation </li></ul></ul><ul><li>Board Configuration </li></ul><ul><li>Option Pool: Pre vs. Post $ Dilution </li></ul><ul><li>Anti-Dilution Rights: Weighted Avg. thru Full Ratchet </li></ul><ul><li>Pro Rata Rights for future rounds </li></ul><ul><li>Protective Provisions </li></ul><ul><li>Term Sheet summary at </li></ul>
    16. 16. Term Sheet (cont’d) <ul><li>Board of Directors </li></ul><ul><ul><li>Investor Seats and Observers </li></ul></ul><ul><ul><li>Founder and Independent Seats </li></ul></ul><ul><li>Protective Provisions </li></ul><ul><ul><li>Veto rights for overall preferreds or by class </li></ul></ul><ul><ul><li>On changing rights of preferred class, selling existing or raising additional shares, change of control, board composition, raising debt </li></ul></ul><ul><li>Anti-Dilution </li></ul><ul><ul><li>Full Ratchet, Broad or Narrow-Based Wghtd Avg </li></ul></ul><ul><li>See term sheet series at </li></ul>
    17. 17. Legal Documentation <ul><li>Stock Purchase Agreement </li></ul><ul><ul><li>Price and # of shares sold, reps & warranties </li></ul></ul><ul><li>Certificate of Incorporation (a/k/a Charter) </li></ul><ul><ul><li>Establishes rights, preferences, privileges and restrictions of each class and series of stock </li></ul></ul><ul><li>Investor Rights Agreement </li></ul><ul><ul><li>Information, registration, and pre-emptive rights </li></ul></ul><ul><li>Voting Agreement </li></ul><ul><ul><li>Board composition, drag-along rights </li></ul></ul><ul><li>See for these and other template docs </li></ul>
    18. 18. Subsequent Financing <ul><li>Bridge funding </li></ul><ul><ul><li>Discount into next round or warrants </li></ul></ul><ul><li>External rounds </li></ul><ul><ul><li>Up rounds vs. Recaps </li></ul></ul><ul><li>Internal rounds </li></ul><ul><ul><li>Potential pay to play when syndicate broken </li></ul></ul><ul><li>Venture Debt </li></ul>
    19. 19. Exit Strategy <ul><li>Acquisition </li></ul><ul><ul><li>Strategic buyers </li></ul></ul><ul><ul><li>Financial buyers for high cash flow business </li></ul></ul><ul><li>IPO </li></ul><ul><ul><li>Market appetite for venture-backed deals </li></ul></ul><ul><ul><li>Sarbanes Oxley </li></ul></ul>
    20. 20. <ul><li> </li></ul><ul><li>@joevc - </li></ul><ul><li> </li></ul>