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2010 Innotech VC Pitch
      By Roydean Osman, May 2010
Highlights

Highlights

1. Funding ECO System

2. Arts & Craft of Valuation

3. Venture Capital Evaluation Process

4. Pre...
Highlights - Key Take Aways
 Highlights methodologies used by venture capitalists and professional investors to
estimate ...
Funding ECO System
Growth
& Profit




                                                                                   ...
Funding ECO System

Innovation
             Ideas   Invention   Incubation     Start-Up       Growth   Liquidity
Process
 ...
Arts & Craft of Valuation
 Differences between the entrepreneur‘s/ private investor‘s finance and
corporate finance
   En...
Arts & Craft of Valuation

 In the VC eyes, determination of a company‘s value is elusive and it‘s more
arts than science...
Arts & Craft of Valuation

 Some Valuation Methodologies Used by Investors

      Net Present Value           Adjusted ...
Venture Capital Evaluation Process
                                                                                       ...
Venture Capital Evaluation Process
                                              First Hand Assessment


            Marke...
Venture Capital Evaluation Process
                                                     To Do List



List the most import...
Venture Capital Evaluation Process
                                                                                       ...
Venture Capital Evaluation Process
                                      What are you worth????




            Leadership...
Venture Capital Evaluation Process
                                                                   Negotiate with VCs !...
Venture Capital Evaluation Process
                                                      VC Roles




 Strategy Developme...
Venture Capital Evaluation Process
                                                                       Venture Capital ...
Venture Capital Evaluation Process
                                      Venture Capital Method


  Post-money valuation:...
Venture Capital Evaluation Process
                                                       Financial Engineering


 To ove...
Venture Capital Evaluation Process
                                                                     Exit Strategy


  ...
Venture Capital Evaluation Process
                                             VC End Game



Managed Risk
 Fewer losses...
Prepare for the VC elavator pitch!
                                                  Business Model needs to be clear !


...
Prepare for the VC elavator pitch!
                                                          Key points for building up yo...
Prepare for the VC elavator pitch!
                                                          Slide 1




            Compa...
Prepare for the VC elavator pitch!
                                                                   Slide 2



         ...
Prepare for the VC elavator pitch!
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Prepare for the VC elavator pitch!
                                                                              Slide 4

...
Prepare for the VC elavator pitch!
                                                              Slide 5


               ...
Prepare for the VC elavator pitch!
  One of the most important section in your pitch is
       this slide. Please understa...
Prepare for the VC elavator pitch!
                                                                        Slide 7


     ...
Prepare for the VC elavator pitch!
                                                                                       ...
Prepare for the VC elavator pitch!
                                                                          Slide 9


   ...
Prepare for the VC elavator pitch!
                                                                                    Sli...
Prepare for the VC elavator pitch!
    You don‘t need a whole lot of                                              Slide 11...
Prepare for the VC elavator pitch!
                                                                                    Sli...
Thank You !
roydean.osman@gmail.com
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Transcript of "2010 Venture Capital Pitch Prep"

  1. 1. 2010 Innotech VC Pitch By Roydean Osman, May 2010
  2. 2. Highlights Highlights 1. Funding ECO System 2. Arts & Craft of Valuation 3. Venture Capital Evaluation Process 4. Preparing for VC Elavator Pitch! Interactive Session / Q&As
  3. 3. Highlights - Key Take Aways  Highlights methodologies used by venture capitalists and professional investors to estimate the value of a company  Understanding of how equity proportions are allocated to investors  Analyzing a startup financing and utilization requirement  Benefits of partnering with VCs: O are active investors and bring more to the deal than just money, o spend a large amount of time, o reputation capital, o access to skilled managers, o industry contacts, network, o and other resources.  Basic understanding of how to position your business to a VC.  Preparation for a VC elevator pitch!
  4. 4. Funding ECO System Growth & Profit Maturity Expansion Growth Seed Pre Seed Funding Needs Other Grants, Project Financiers, Institutional & SME Loans & Commercial Banks, Foreign Investors, MDEC Incubators, Venture Capitals, Public Funds, Government Private Equity, Credit Merger & Incentives, Angels Guarantee Corporation, Acquisitions, Cradle & Corp Investors Leasing & Factoring Merchant Banks Providers, Govt. Agencies Point Zero Time
  5. 5. Funding ECO System Innovation Ideas Invention Incubation Start-Up Growth Liquidity Process Risks Venture Capital Funds Capital
  6. 6. Arts & Craft of Valuation  Differences between the entrepreneur‘s/ private investor‘s finance and corporate finance Entrepreneur‘s / Private Investor‘s Finance  More volatile  Imperfect  Less accessible than corporate capital markets  Obtain source of capital differently  Companies are younger, more dynamic  Environment are more rapidly changing and uncertain  Liquidity & timing are everything Corporate Finance  Arena of public companies compete in well-established capital markets  Have access almost to everything
  7. 7. Arts & Craft of Valuation  In the VC eyes, determination of a company‘s value is elusive and it‘s more arts than science  So, what‘s a start-up company worth ?  It all depends!  Very imperfect market capitalization unlike public companies where market capitalization is readily determined.  Entrepreneurial valuation are cash, time and risk.
  8. 8. Arts & Craft of Valuation  Some Valuation Methodologies Used by Investors Net Present Value  Adjusted Present Value Comparables  First Chicago Method Real Options  DCF Turkish Bazaar  Golden Handcuff Venture Capital Method
  9. 9. Venture Capital Evaluation Process Industry Structure & Analysis Buy Side : Private Equity, Venture Capital, Angels, High Net Worth, Investment Bank, Institution Industry & Market Economy Of Mg mt C lear C J Scales T eam E xit o V S trateg y m C Sector Players p o e s Knowledge S trong T arg et O rg . t Transfer S trong Market S truc t. i Value P ropos it t ion i B S ound v Shareholders u B iz . e Value Company Insight O ps . P lan Model s S ound i A Mktg . n Business Plan P lan d e v Financial S tg c . s a Returns R oap S uff. s Due Diligence Map F unding n t a P ric ing g Model e Scalability
  10. 10. Venture Capital Evaluation Process First Hand Assessment Market Attractiveness : • Size of Market EXPECTED RETURN • Market Need • Market Growth Potential • Access To Market Product Differentiation : • Uniqueness of Product • Technical Skills • Profit Margins • Patentability of Product VC Check Points Managerial Capabilities : • Management Skills • Marketing Skills • Financial Skills • References of Entrepreneurs PERCIEVED RISK Resistance to Environmental Threat: •Protection from Competition • Protection of Obsolescence • Protection against Downside Risk • Resistance to Economic Cycles
  11. 11. Venture Capital Evaluation Process To Do List List the most important points about your company. Strong management team. Patents and unique technology or model. Use of Proceeds Attractiveness of the venture for investment. Market trends, market growth rates. Size of the target market.
  12. 12. Venture Capital Evaluation Process The Investment Process Deal Due Diligence Investment Deal Terms Decision & Sources Go/No-Go Screening Evaluation Continues Conclusion Market Entry Commercialization & Biz Plans Products /Services Entrepreneur Business/ Conditional Approval Kicks-In Concepts/Ideas Analysis Venture Termsheet Analysis Analysis • Who are they? • Deal Structure Biz Plans •This is a go/no go • Vision, Mission of •Proposed to negotiations Source stage • What background? Company? invest and to • Deal Internally •Fit into VC •Credentials? • Core business? obtain instruments – /Externally investment criteria? •Do they have • Biz Model? Investment grant / equity / •Initial • previous operating & What is the go to Committee debt Market/Value profit responsibility?market strategy ? Approval • Tailoring high Chain Analysis • Depth of business • Financial Forecast impact business •Competitive venture industry •Fund Utilization milestones with Technology knowledge fund Analysis •Characteristic? disbursement •Value Proposition?
  13. 13. Venture Capital Evaluation Process What are you worth???? Leadership (CEO) Ability to implement project VC Cash is most important Implementation (CMO, CTO, CFO) Idea Idea has limited value
  14. 14. Venture Capital Evaluation Process Negotiate with VCs !!!! VC Maximum Value $ Company Value Negotiating Space Entrepreneur Minimum Value PE Multiples Seed Early Expansion Mezzanine 1 to 2x 2 to 3x 4 to 5x 20 – 50x
  15. 15. Venture Capital Evaluation Process VC Roles  Strategy Development  Active board membership  Attract outside expertise and know- how  Attract later round investors  Attract other stakeholders, management  Provide contacts, access to info, people, institutions
  16. 16. Venture Capital Evaluation Process Venture Capital Method 1. Identify the company’s forecasted net income within n years up to exit year. Estimate normally based on sales and margin projections. 2. Assign appropriate P/E ratios to the company based on current multiples for companies within similar economic characteristics. 3. Derived at a Terminal Value . E.g. Terminal Value (t) = Net Income x P/E ratio. 4. Terminal Value can be discounted. Normally VCs discount rates range from 30% - 80% due to the risks involved in the type of investments. Required Investment Ownership (%) = Required Total Terminal Value Ownership Required (%) New Shares = 1 – Ownership Required x old shares
  17. 17. Venture Capital Evaluation Process Venture Capital Method Post-money valuation: The valuation of the company immediately after a round of investment is closed. Pre-money valuation: The valuation of the company just before closing a new round of investment, including the value of the idea, the intellectual property, the assembled management team, and the opportunity. Terminal value: The valuation of the company at exit; that is, the proceeds of the sale of the company via a merger or acquisition or an initial public offering and at which time the investors' ownership can be liquidated. ROIn: The cash-on-cash return on investment expected for such an investment in the year of the harvest, or exit. This ROI is commonly expressed as a multiple of invested cash—that is, 10x, for example—regardless of the time since investment (n years). If the terminal value of a company seeking seed/start-up capital is estimated to be $60 million and we assume the stage of the company is appropriate for investors to expect 30x ROI in year of harvest, then the post-money valuation of this company can be estimated at $2 million. If the required investment is $0.5 million, then the pre-money valuation would be $1.5 million.
  18. 18. Venture Capital Evaluation Process Financial Engineering  To overcome valuation or incentive issues, VC’s will engage in ‘financial engineering’ Debt Preferred Shares Preferred Convertible Securities Mixed Debt and Equity Ratchets or Clawbacks (Downside for Investor, Upside for Entrepreneur) Liquidation preferences Fundamentally challenges notion of pre-money value, as values and returns become contingent on future events
  19. 19. Venture Capital Evaluation Process Exit Strategy Exit Universities US Incubation Collaborations Private Sale ICT US US VCs Partners Non-ICT IPO Liquidity UK access • AIMS Liquidity access M&A Dubai Liquidity • Investors access Singapore Liquidity • SESDAQ Liquidation access • CATALYST Malaysia
  20. 20. Venture Capital Evaluation Process VC End Game Managed Risk  Fewer losses than perceived  Return for success is substantial  Close partnership and supervision  Staged financing Window on Technologies and New Businesses High Potential Return  Lower initial valuations  Opportunities for leverage  Higher upside potential Creates Jobs and Provides Economic Development
  21. 21. Prepare for the VC elavator pitch! Business Model needs to be clear ! INFRASTRUCTURE OFFER CUSTOMER PARTNER CUSTOMER NETWORK RELATIONSHIP CORE VALUE TARGET CAPABILITIES PROPOSITION CUSTOMER VALUE DISTRIBUTION CONFIGURATION CHANNEL COST FINANCE REVENUE STRUCTURE STREAMS
  22. 22. Prepare for the VC elavator pitch! Key points for building up your presentation  Since a VC elavator pitch is not an Investment Committee Presentation, it is recommend that we use the ―KISSS‖ concept of presenting as VCs‘ time are precious. ….and so are yours. 9-12 slides ONLY!  Elavator pitch should be around 5 to 15 minutes maximum including Q& A. VCs not asking you any question may reflect they are less interested. Get them excited! The more they ask; the more clearer the picture of the business and the bigger window of chances might open for you to get funded.  What ever you present, please do not claim ―You are the first in the world to..‖ unless you have hard evidence of the first patenter. Lets not put a booster on your invention or services as VCs also looks at other factors, experience and market leadership.  Less words in your presentation but more facts, figures, graphs and statistics of your potential customers , market sizes, technology platforms,etc.  When the time is up, the time is UP. Do not extend and try your luck. You can meet them again on the floor. NOTE: KISSS = ― Keep It Short and Simple Stupid. ―
  23. 23. Prepare for the VC elavator pitch! Slide 1 Company X E.g tag line/moto:” Vision for the Future” Investor Presentation This is a sample template of an Investor Presentation (IP). If you‘re looking for funding, you should have one, [Date] because sooner or later you‘ll have to make a presentation.
  24. 24. Prepare for the VC elavator pitch! Slide 2 Objective Seeking to raise RM x million to fund commercialization, marketing and working capital activities. Please specify your objective of this presentation. You have limited time. VCs have limited time. If you let them know earlier your intention, they will have a clear mind of how much to be raised in parallel with the evaluation of your business proposition.
  25. 25. Prepare for the VC elavator pitch! Slide 3 Business Proposition  Company X. provides [service or product] to [customers, market segment] helping them to [value proposition which must be better or cheaper by at least 25%] compared to solutions available today. General Rule: Four bullet points to a page, no more than four words to a bullet point , clearly explain your business proposition. Explain, when was your company established, what does it do and what is the value proposition for your (product/services) to a target market.
  26. 26. Prepare for the VC elavator pitch! Slide 4 The Product/ Services Faster, better and / or cheaper – by  Patented widget process at least 25% to have reasonable a chance against established competitors. Emphasize what the  Increases effectiveness by 60% benefits are here, and save the 90- slide technical discussion on how it is  Decreases cost by 40% accomplished for later due diligence.  Backward compatible with legacy systems  Strong expansion opportunities into additional markets [X, Y and Z] in the future A single product idea may not be the basis of a sustainable company in the long-run. If you have other markets that you can expand into in the future, say so.
  27. 27. Prepare for the VC elavator pitch! Slide 5 Technology Platform Your invention and creation are meant to be showcased. Please do not keep it to yourself. If VCs are to put money in your company, you should at least be able to explain a high level overview of your technology platform and how it drives your products/ services. Explain it in figure or diagram forms, with a KISSS concept. The more you confuse the VC , the chances your are not GETTING funded is bigger.
  28. 28. Prepare for the VC elavator pitch! One of the most important section in your pitch is this slide. Please understand and give full Slide 6 attention of the market. If you are not aware of the market, chances for creating value in your business is slow will hit a stumbling block. Show you have knowledge of the market. Do not under estimate the VCs understanding as they‘ve evaluate tons of business plans, communicated with industry players and for them to invest, they The Market know the market.  Forrester says that ―…‗billions and billions‘ of widgets in our industry will be sold, and growth will be infinite—forever.‖  We‘ve surveyed 20 companies in-depth, which are in our target market. Summary results: You also have to do a ―bottom up‖ market analysis, actually doing a survey of potential  Approx. 120 such companies in our market clients, or a thorough  Company sales revenues from $10-70 million, co.‘s mostlymarket will tell The segmentation breakdown. ―bottom up‖ profitableyou how many potential clients are  Annual widget purchases/co.: $1-12 million, median $3 million to you. actually relevant  Growth of widget purchases: about 17%/year for last three years  Market in volatile phase currently, due to technology change  Total Market potential: $350 million (based on ―bottom up‖ analysis)
  29. 29. Prepare for the VC elavator pitch! Slide 7 Competition  Ukr-Maf Inc.: Have developed ―personalized incentive plan‖ that supports aggressive sales force strategy, but product quality is poor.  NokEric Inc.: Have developed 3G-based widget sales concept, with very high quality, but can only be delivered through MMS Explain to them your competitor if you have any. VCs won‘t blindly believe if you don‘t have any. At least your competitors might be niche and segmentize. Explain how you plan to enter the market with the big boys or regional or global.
  30. 30. Prepare for the VC elavator pitch! Slide 8 Business model Business Model Drivers drivers really refer to features and abilities that you have that your competitors  Sustaining Competitive Advantage either can‘t get or won‘t develop  Ukr-Maf will self-destruct due to ‗legal enforcement‘ because it doesn‘t meet their business  NokEric will ignore this market, because $40 million is table model. Ukr-Maf crumbs for NokEric, but can‘t get respectability;  NokEric will continue to develop MMS-based widget sales, and NokEric won‘t will move aggressively on our market with ‗remote sales‘ in rework their systems to serve this market 2004 niche.  Critical Success Factors  Unique, sophisticated CRM system to insure bid at appropriate CSF‘s are what you really have moment to do well to win in your target  R&D Dept. will reduce mfg. costs by 50% to insure market. These competitiveness using patented ‗Shrink-O-Widget‘ technology. are ―endogenous‖ factors—those under your control.
  31. 31. Prepare for the VC elavator pitch! Slide 9 Key Risks  Slow market uptake  Key man risk: Ukr-Maf ―retaliation‖  Failure of key internal initiatives (Shrink-O-Widget) As a rule of thumb, you should never have more than three key risks, and you will not usually have less than two. Thus, if you have 4 or more key risks, you don‘t have a deal—go back to rethink your concept. Incidentally, there are thousands of minor.
  32. 32. Prepare for the VC elavator pitch! Slide 10 The management team is crucial, and you want to show a balanced, experienced team with good credentials. Unfortunately, this is often hard for a start-up to do. One approach is to assemble a ―virtual‖ team where some people are expected to join if offered the job upon funding – sometimes Management Team listed as ―to be hired.‖  CEO: Buck Young, 28  Buck has had a middle management job at NokEric, where they think pretty well of him and he‘s had a chance to take a close look at the future of the widgets market. He thinks he‘s smarter than everyone else, and therefore expects a VC to finance his scheme.  CTO: Ben Had, 54  Ben has worked all over the place, most recently at Cistel. He‘s a real adult with kids, salary, mortgage, the works. He worked with Buck a few years ago, and Buck sure is a sharp kid—especially if he can convince a VC to finance this project. The idea‘s great, well, as far as a CTO can tell. Ben carries an ABC business card, but he hasn‘t quit his job at Cistel yet.  CFO: Guy Big, 48  Guy is a Senior Vice President at Goldman Sachs. Buck met him at a cocktail party and asked if he could ―use Guy‘s name as a reference‖—which he has. Buck reckons he‘d be pleased to let Guy know about his proposed position—even offer him a job—if the VC finances the deal.
  33. 33. Prepare for the VC elavator pitch! You don‘t need a whole lot of Slide 11 detail here. The VC is just trying to answer the following questions: 1) How big does it get? 2) Does the growth look manageable? 3) Is the profitability within norms? 4) How much cash does it need? Financial Highlights Year 1 Year 2 Year 3 Year 4 Year 5 Revenues Annual Growth -- 14% % % % Pre-Tax Profits Pct of Revenues (55)% (8%) 2% 12% 11% Cash Investment (2.1) (0.9) -- -- --
  34. 34. Prepare for the VC elavator pitch! Slide 12 You need to say Funding Needs how long the money will last, and what is expected to be accomplished during that period.  Series A Funding: $3.0M  Milestones to be achieved (24 months)  Establish sales for initial product  Sales run-rate of $3.5M by end of 18 months Don‘t forget to  Profitability by the end of 24 months include what the investment is to  Use of funds be used for. Be reasonably  Key management hires $400K specific. Don‘t just say ―to run  Other technical & support staff $500K the business,‖ but show that  Product packaging & COGS $400K some thought was put into  Sales & marketing expense $950K determining the amount being  General operating expense $750K asked for.
  35. 35. Thank You ! roydean.osman@gmail.com
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