VCAP

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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
  • VCAP

    1. 1. Venture CapitalFundraising Methodology<br />
    2. 2. What Is Venture Capital?<br />
    3. 3. What Is Venture Capital?<br />Private equity class specialized in funding and building early stage, high growth potential enterprises<br />
    4. 4. Typical VC Fund Structure<br /><ul><li>General Partners invest capital on behalf of Limited Partners
    5. 5. LPs include endowments, pension funds, charities, corporations, individuals, and fund of funds
    6. 6. GP contributes personal capital as well
    7. 7. GP earns 2% annual management fees & 20% carried interest, i.e., share of profits
    8. 8. Capital called as needed, with primary investing done in first 5 yrs of 10 yr fund cycle
    9. 9. Quality fund returns 3x capital, or 18-20% IRR
    10. 10. 1/3 of deals will likely fail, 1/3 will return amount invested, and 1/3 will drive majority of returns</li></li></ul><li>Where Do VCs Invest?<br />InformationTechnology<br />Life Sciences<br />Clean Technology<br />
    11. 11. Fund Example: SoftBank Capital<br />Focused on early stage high growth technology based businesses benefiting from the rapid deployment and adoption of broadband and mobile technologies<br />Experienced Team(5 former CEOs)<br />Select Historical Investments<br />Select CurrentInvestments<br />
    12. 12. Industry Investment Trends<br />Source: MoneyTree Report – NVCA/PWC/Thomson Reuters<br />
    13. 13. Renewable Energy<br />Renewables dominating “Green” VC investing and expected to grow with support of Obama administration<br />Billions of dollars in loans and grants available for R&D for everything from new battery technologies to more efficient use of fossil fuels<br />VC challenged by capital requirements for large green infrastructure deals<br />Source: FastCompany/Chubby Brain<br />
    14. 14. Fundraising Process<br />You set the valuation. I’ll set the terms.*<br />*Don’t be fooled by the cover price<br />
    15. 15. Why Raise Venture Capital?<br /><ul><li>Guidance & Support
    16. 16. Board participants; Interim executives
    17. 17. Product management, business development and financial planning support
    18. 18. Access
    19. 19. Industry contacts
    20. 20. Leverage portfolio
    21. 21. Credibility
    22. 22. Stamp of approval with customers, partners and vendors
    23. 23. Cash
    24. 24. But at a high cost of capital, so Guidance, Access and Credibility should justify that cost</li></li></ul><li>Typical Company Profile<br /><ul><li>Team
    25. 25. Ranges from a single, 1st-time entrepreneur to a full team of seasoned entrepreneurs
    26. 26. Stage of Development
    27. 27. Ranges from pre-revenue to approaching profitability
    28. 28. VCs sit between angel and growth/buyout investors, though some funds cross over into these stages
    29. 29. Size of Round
    30. 30. Definitions vary, normalized range from $2M-$15M
    31. 31. Deals frequently syndicated between multiple funds to strengthen board and diversify risk</li></li></ul><li>Typical Deal Timeline<br /><ul><li>Average firm reviews 1000+ deals per year
    32. 32. 99% of deals turned down
    33. 33. Promising deals present to partnership 2-6 weeks post initial meeting
    34. 34. Partnership approved deals receive term sheet
    35. 35. Accepted term sheets followed by 2-6 weeks of final diligence and legal documentation
    36. 36. Average firm, in normal market, closes 8-12 new investments/yr</li></ul>Note: Graphic via NVCA; Industry statistics are approximations<br />
    37. 37. Deal Evaluation<br />Focus varies by firm, but key elements include:<br />Concept<br />What is the product or service?<br />Why will customers buy it?<br />Opportunity<br />What is the market size and penetration strategy?<br />What is the competitive landscape? <br />Team<br />Can they execute on development, sales and support?<br />
    38. 38. Financial Projections<br />Focus on key revenue and expense drivers<br />Sensitivities important given model immaturity<br />Viability of margins long term<br />How much additional capital required?<br />What is the potential dilution from later rounds?<br />Focus on model details varies based on stage<br />Seed stage may not yield revenue for 18-24 mos.<br />Later stage deals may consider debt financing, requiring covenant maintenance<br />
    39. 39. Term Sheet<br />Price<br />Pre vs. Post $ Valuation<br />Option Pool implications<br />Liquidation Preference<br />Liquidation: Sale of company as opposed to IPO<br />Multiples and Dividends<br />Participation: Full, Capped and Non-Participating<br />Stacked vs. pari passu<br />Impact on management ownership and resulting motivation<br />Board Configuration<br />Option Pool: Pre vs. Post $ Dilution<br />Anti-Dilution Rights: Weighted Avg. thru Full Ratchet<br />Pro Rata Rights for future rounds<br />Protective Provisions<br />Term Sheet summary at www.AsktheVC.com<br />
    40. 40. Term Sheet (cont’d)<br />Board of Directors<br />Investor Seats and Observers<br />Founder and Independent Seats<br />Protective Provisions<br />Veto rights for overall preferreds or by class<br />On changing rights of preferred class, selling existing or raising additional shares, change of control, board composition, raising debt<br />Anti-Dilution<br />Full Ratchet, Broad or Narrow-Based Wghtd Avg<br />See term sheet series at www.AsktheVC.com<br />
    41. 41. Legal Documentation<br /><ul><li>Stock Purchase Agreement
    42. 42. Price and # of shares sold, reps & warranties
    43. 43. Certificate of Incorporation (a/k/a Charter)
    44. 44. Establishes rights, preferences, privileges and restrictions of each class and series of stock
    45. 45. Investor Rights Agreement
    46. 46. Information, registration, and pre-emptive rights
    47. 47. Voting Agreement
    48. 48. Board composition, drag-along rights
    49. 49. See www.NVCA.org for these and other template docs</li></li></ul><li>Subsequent Financing<br />Bridge funding<br />Discount into next round or warrants<br />External rounds<br />Up rounds vs. Recaps<br />Internal rounds<br />Potential pay to play when syndicate broken<br />Venture Debt<br />
    50. 50. Exit Strategy<br />Acquisition<br />Strategic buyers<br />Financial buyers for high cash flow business<br />IPO<br />Market appetite for venture-backed deals<br />Sarbanes Oxley<br />

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