Seed Funding and Venture Capital


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Seed Funding and Venture Capital

  1. 1. Seed Funding and Venture Capital CourseCertificate Program <br />Greg Horowitt, Managing Director, T2 Venture Capital<br />Kauffman Fellow, Class XV<br />
  2. 2. Overview<br />Introduction to Venture Capital <br />Instruction provided by:<br />Greg Horowitt, Managing Partner, T2 Venture Capital; Co-Founder, Global CONNECT, Kauffman Fellow, Class XV<br />Instruction focus:<br />Introduction of key terms <br />The role venture capital plays in the funding of early stage companies<br />The venture capitalist as a human capitalist<br />The right funding for you<br />Preparation and execution<br />
  3. 3. Venture 101<br />Seed Funding and Venture Capital Course Certificate Program <br />
  4. 4. Venture 101<br /><ul><li>Introduction to Private Equity and Venture Capital</li></ul>The ‘Capital Food Chain’<br />Overview of Venture Capital<br />History<br />Definitions<br />Evolution of the industry <br />Fund stages<br />VCs as individuals<br />Background (…where do these people come from?)<br />Qualities (…are they human?)<br />Style (…are they all so arrogant?)<br />Leadership (…how can I learn from them?)<br />What motivates them?<br />Where do they find their deals?<br />How do they assess an opportunity?<br />
  5. 5. Venture 101<br /><ul><li>The Entrepreneur</li></ul>How do you assess the right type of capital for your company?<br />Horses for courses<br />How much do you really need?<br />All venture firms are NOT the same<br />How do you know if it’s the right fit?<br />What diligence should you do on the investor / firm?<br />Besides capital, what else do they bring?<br />The ‘rich or king’ dilemma<br />What do YOU want??!!!<br />Why you….and why now?<br />What is your business really worth (valuation)?<br />Having a company ≠ having a business<br />What will the VCs expect from you? (…besides your first born child)<br />Communication (how to read the abstract signals some VCs send)<br />How do you get them to notice you? <br />When will they make you rich beyond your wildest dreams?<br />What is Venture Capital?<br />
  6. 6. Risk and Rewards <br />
  7. 7. The Capital Food Chain<br />Friends,family,fools<br />Grants, SBIRs, etc.<br />Angels<br />VCs<br />Strategic Partners<br />Venture Debt<br />Liquidity (M&A, IPO)<br />‘Inside’ money<br />Not equity<br />Seed Equity<br />Early Mid, Late<br />Early, Mid, Late <br />Mid, Late Stage<br />Usually later stage<br />
  8. 8. Internet<br />PersonalComputers<br />IntegratedCircuits<br />Microwaves/Defense<br />TestEquipment<br />VacuumTubes<br />The Birth of Venture Capital <br />Venture <br />Capital<br />Innovation Networks<br />1910<br />1960<br />1970<br />1980<br />2000<br />1990<br />1930<br />1940<br />1950<br />1920<br />Steve Blank, Stanford University 2009<br />
  9. 9. The Growth of Venture Capital <br /><ul><li>East Coast Family Offices
  10. 10. Whitney, Rockefeller, Bessemer (1946-1969)
  11. 11. West Coast IPOs
  12. 12. Varian, Hewlett Packard, Ampex (mid to late ‘50’s)
  13. 13. SBIC Act of 1958 (SBA)
  14. 14. 3:1 government match
  15. 15. 700 SBIC funds by 1965
  16. 16. Limited Partnerships
  17. 17. External investors as LPs (pension funds, endowments, HNW)
  18. 18. The General Partners (GP) manage the money in exchange for:
  19. 19. 2% management fee
  20. 20. 20% of the carried interest (profits)
  21. 21. Capital Gains Reduction (‘78)
  22. 22. 49.5%  28%
  23. 23. ERISA (Employee Retirement Income Security Act (‘79)
  24. 24. Pension Funds can invest</li></li></ul><li>Venture Capital is Born<br /><ul><li>Draper, Gaither & Anderson (‘58)
  25. 25. Rock and Davis (‘61)
  26. 26. Sutter Hill (‘64)
  27. 27. Patricof & Co. (‘69)
  28. 28. Kleiner Perkins (‘72)
  29. 29. Sequoia (‘72)</li></li></ul><li>Types of Investment Capital <br /><ul><li>Angels</li></ul>Usually a wealthy individual who wants to stay ‘active and involved’<br />Often has some knowledge or connection to the technology or life sciences world<br />Usually makes smaller investments ($25-50K per investment as part of an angel group, or perhaps more as a single investor)<br />Wants to stay involved and feels their contribution to the start up goes beyond the ‘cash’ invested. <br /><ul><li>Institutional VC</li></ul>Professionally managed (GP) <br />Usually have a ‘theme’ or focus (sector, stage, industry, etc)<br />Money raised from pension funds, endowments, high net worth individuals, fund of funds, sovereign wealth funds, etc.<br />Most often set up as a Limited Partnership<br />2/20 (management fee + carried interest)<br /><ul><li>Grants</li></ul>Non-dilutive investment <br />Government programs<br />Foundations<br />
  30. 30. Types of Investment Capital <br /><ul><li>Strategic Ventures</li></ul>Usually corporate (think Intel, Qualcomm, Novartis, Google)<br />Often a focus on companies that are complimentary and synergistic to their internal efforts<br />Balanced ROI with strategic goals<br />Most often not the ‘lead’, and will invest with institutional VCs <br /><ul><li>Private Equity </li></ul>Invest in the tangible assets of a company<br />Buy low, sell high<br />Usually an investment bank that is compensated as a percentage of the deal<br />Usually syndicated capital <br />Motivated by ROI<br /><ul><li>Banks</li></ul>Issue debt (loans) secured by assets (receivables, property, equipment, etc.) or other assets (including intellectual property)<br />
  31. 31. Entrepreneurs:Go Where the Investors Are<br />Angels<br />Number of Investors<br />Valley of Death<br />VCs<br />$5 million<br />$10 million<br />Investment (one round)<br />
  32. 32. <100 IPOs (VC funded)<br />< 500 VC Seed/Start-up Investments<br />40-50,000 Angel Investments<br />500-700,000 New Companies<br />0<br />200,000<br />400,000<br />600,000<br />800,000<br />New Company FormationSource of Funds<br />Typical Year<br />
  33. 33. Outside Equity Capital for Entrepreneurs<br /><ul><li><1 in 10 Start-ups obtain angel financing
  34. 34. <1 in 1000 Start-ups are VC financed
  35. 35. <1 in 10,000 new companies go public
  36. 36. <1 in 10 angel deals see VC money</li></li></ul><li>Investor Motivation<br />ROI 5 year increase<br />Stage<br />Seed <br />Start-up<br />Early <br />Mid <br />Later<br />60% 10x+<br />50% 8x<br />40% 5x<br />30% 4x<br />25% 3x<br />
  37. 37. Venture Capital Method<br />Investment<br />Exit Year<br />Revenues (5th year)<br />Net Profit (5th year)<br />P/E (industry)<br />Company Value<br />Required ROI<br />Required Capital Growth<br />% Equity Required at Exit <br />Pre-money Valuation<br />$2 million<br />5th Year<br />$40 million<br />10% = $4 million<br />12X<br />$48 million<br />50% = 8X<br />$16 million<br />33%<br />$4 million<br />* In reality, we would need more than 33%, since dilution will probably occur<br />
  38. 38. Venture Mechanics: Valuation<br />Pre-money V: agreed value of company prior to this round’s investment (I)<br />Post-money valuation V= V + I<br />VC equity in company: I/V= I/(V+I), not I/V<br />Example: $5M invested on $10M pre-money gives VC 1/3 of the shares, not ½<br />This should be viewed as a partnership, not an acquisition<br />I and V are items of negotiation<br />Generally company wants large V, VC small V, but there are many subtleties…<br />This round’s V will have an impact on future rounds<br />Possible elements of valuation:<br />Multiple of revenue or earnings<br />Projected percentage of market share<br />
  39. 39. The Venture Lifecycle<br /><ul><li>Deal Sourcing
  40. 40. Deal Structuring
  41. 41. Value Creation
  42. 42. Preparation for exit
  43. 43. Liquidity event</li></li></ul><li>Venture Mechanics<br /><ul><li>Deal Sourcing:
  44. 44. Where do VCs find deals?</li></ul>Other VCs<br />Service providers (lawyers, accountants, etc)<br />Angel investor groups<br />Individual angels<br />….from a trusted colleague / friend in their network<br /><ul><li>Analysis (research)</li></ul>Scouting universities and other Research Labs<br />Looking at opportunities in a related space to existing portfolio companies<br /><ul><li>Rarely, but on occasion: </li></ul>Funding programs such as SBIR, STTR<br />Trade Organizations<br />Business Plan Competitions<br />Corporate events<br />Networking events<br />
  45. 45. Venture Mechanics<br /><ul><li>Deal development:
  46. 46. What do they look for?</li></ul>Great management that is emotionally competent<br />Market opportunity that is trending in the right direction<br />Sustainable competitive advantage<br />Managed and mitigated risk<br />Convinced that people will buy the product…and hopefully buy it again and again and….<br />Solid team with high integrity<br />Strong IP position and / or significant trade secret<br />Entrepreneurial passion, relentlessness imagination, flexibility, coachability, and ‘pushing hard at the edges’ <br />VCs want to be assured that they will get their money out before they die<br />
  47. 47. Venture Mechanics<br /><ul><li>Deal Evaluation</li></ul>What must we confirm?<br />How do we calibrate the opportunity against the market?<br />What don’t we know, and what is the risk of not finding out?<br />How do we find this information and what is the cost?<br />Are there any deal killers?<br />
  48. 48. You, the Entrepreneur<br /><ul><li>Deal Structuring</li></ul>Alignment of goals and expectations<br />What motivates you, the entrepreneur? <br />Fame?<br />Wealth?<br />Peer positioning?<br />Social good?<br />Do you play nicely with others?<br />What do you want for yourself, and where do you see yourself 5 years from now?<br />How do you assess if you should take outside, dilutive capital?<br />How do you do due diligence on a potential investor?<br />Look at their portfolio companies, and identify synergies<br />Talk to their entrepreneurs<br />Ask around. Find out about the individual as well as the firm. <br />What diligence will they do on you? (Answer: Everything)<br />
  49. 49. Value Creation<br /><ul><li>What the VC will bring to the table
  50. 50. The pre-investment relationship
  51. 51. Helping entrepreneurs validate, calibrate, and refine value proposition
  52. 52. Assistance in building global advisory boards
  53. 53. Introductions to other investors
  54. 54. Mentorship and education
  55. 55. Helping them understand what’s ahead
  56. 56. The post-investment relationship</li></ul>Being an effective board member<br />Mentorship, coaching and insights<br />Using networks to accelerate value creation<br />Access to high quality talent<br />Access to domain and market experts<br />Access to customers and partners<br />Access to licensees / licensors <br />Engineering a liquidity event<br />
  57. 57. Value Creation<br /><ul><li>What will you bring to the table?
  58. 58. Execution and adaptation off business model to market demands and customer needs
  59. 59. Being able to attract, motivate, and empower team members
  60. 60. Being capable of synthesizing new ideas, and demonstrating relevance
  61. 61. Being able to mobilize and allocate resources efficiency and effectively
  62. 62. Giving customers what they need, AND what they want
  63. 63. Leadership and talent development
  64. 64. Staying ‘authentic’
  65. 65. How to use 360° feedback (from customers, team, market trends, valued advisors)</li></li></ul><li>The Exit!<br /><ul><li>Exits</li></ul>Preparing for the exit<br />Timing<br />Factors which influence the timing<br />Market conditions <br />Investor desires<br />Entrepreneur desires<br />Capital constraints<br />Offers for mergers or acquisition<br />Availability of necessary future resources<br />Competition<br />Mechanics<br />Communication<br />Execution<br />
  66. 66. Thank you<br />Greg Horowitt<br />Managing Director<br /><br />