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  1. 1. Venture Capital How to Sell Your Soul for a Buck
  2. 2. VC Characteristics <ul><li>Usually early-stage equity or equity-linked financing </li></ul><ul><li>Involves high risk </li></ul><ul><li>Lacks liquidity or marketability </li></ul><ul><li>Returns are primarily from capital gains </li></ul><ul><li>Provided by patient investors - who may give value-added advice </li></ul>
  3. 3. 9 Years of VC Funding Source: National Venture Capital Association $10,993 $4.46 2464 1996 $21,004 $7.31 2873 2004 $21,579 $7.09 3042 2002 $18,911 $6.69 2825 2003 $40,798 $9.17 4451 2001 $104,827 $13.38 7832 2000 $53,580 $9.92 5403 1999 $20,900 $5.88 3557 1998 $14,646 $4.75 3084 1997 Total $ Avg/Deal Deals Year
  4. 4. Venture-Backed IPOs Performance http:// www.ventureeconomics.com/vec/news_ve/2005VEpress/VEpress01_04_06.pdf
  5. 5. What do VC’s Want? <ul><li>“ VCs simply want to believe that the valuation of a company – either public stock price or private valuation – will grow high and stay high long enough for them to sell their interest.” </li></ul><ul><li>Source: Cliff Conneighton; Venture Management Handbook: An Entrepreneur’s Guide to Stock, Finance, and Contracts - pg 99 </li></ul>
  6. 6. What do VC’s Want? <ul><li>5X or better capital growth in 5 - 10 yrs. </li></ul><ul><li>25% annual capital gains at a minimum </li></ul><ul><li>Eventual liquidity (3 - 5 years) </li></ul><ul><li>Excitement! </li></ul>
  7. 7. What do VC’s Get? Actual performance of venture capital and private equity funds http:// www.nvca.org/pdf/Performanceq32005final.pdf
  8. 8. What Kind of Company? <ul><li>At least $10M Revenue in 5 years </li></ul><ul><li>At least 20%/Yr Revenue Growth </li></ul><ul><li>At least 15% pretax profit margin </li></ul>
  9. 9. Four Essential Questions for the Business Plan <ul><li>Does any large, definable, and identifiable group of people really need your product or service? </li></ul><ul><li>Are they willing to pay someone (you or a competitor) considerably more than, perhaps twice, what it costs you to produce and deliver it? If the answer depends on volume, do you know what the volume/cost curve looks like? </li></ul><ul><li>Is there some sustainable advantage you will have, in proprietary technology, cost, capability or marketing, over others who do or would compete in this market? </li></ul><ul><li>Do you have the management team that can execute the plan successfully? </li></ul><ul><li>Conneighton Pg. 100 </li></ul>
  10. 10. Types of Ventures <ul><li>Life-Style Ventures </li></ul><ul><ul><li>5 Yr Revenue projections < $10 M </li></ul></ul><ul><ul><li>Started by people with life-style motives </li></ul></ul><ul><ul><li>90% of all startups </li></ul></ul><ul><ul><li>Zero interest to venture capitalists </li></ul></ul>
  11. 11. Types of Ventures <ul><li>Middle Market Ventures </li></ul><ul><ul><li>5 Yr Revenue projections $10 - $50M </li></ul></ul><ul><ul><li>Offer cash-out and capital gains opportunities </li></ul></ul><ul><ul><li>The backbone of the entrepreneurial economy </li></ul></ul><ul><ul><li>Rely heavily on bootstrap and individual financing </li></ul></ul><ul><ul><li>About 10% of startups </li></ul></ul>
  12. 12. Types of Ventures <ul><li>High Potential Ventures </li></ul><ul><ul><li>5 Yr Revenue projections > $50 M </li></ul></ul><ul><ul><li>Potential BIG winners </li></ul></ul><ul><ul><li>May require many rounds of financing of several million dollars </li></ul></ul><ul><ul><li>Expect to go public within 5 years </li></ul></ul><ul><ul><li>Less than 1% of startups </li></ul></ul>
  13. 13. Types of Ventures <ul><li>Proprietary Technology </li></ul><ul><ul><li>You own something way cool </li></ul></ul><ul><ul><li>VC’s are very interested </li></ul></ul><ul><li>Execution Play </li></ul><ul><ul><li>You are trying to do something better than anyone else. </li></ul></ul><ul><ul><li>VC’s are not very interested </li></ul></ul>
  14. 14. Types of VC’s <ul><li>Venture Capital Funds </li></ul><ul><ul><li>Over 1750 US venture capital and private equiy partnerships </li></ul></ul><ul><ul><li>$585 Billion capitalization </li></ul></ul><ul><ul><li>Fund about 500 companies/year </li></ul></ul><ul><ul><li>100 to 1 odds (at best) </li></ul></ul><ul><ul><li>Typically later-stage deal in excess of $3M </li></ul></ul>
  15. 15. Types of VC’s <ul><li>Business Angels </li></ul><ul><ul><li>The “invisible” capital market </li></ul></ul><ul><ul><li>Unknown number of individuals (low profile) </li></ul></ul><ul><ul><li>3 to 1 odds of finding one </li></ul></ul><ul><ul><li>Typically early-stage deal of $100-500K involving multiple investors </li></ul></ul><ul><ul><li>Find one and you’ve found 5 or 10 </li></ul></ul>
  16. 16. How to Find an Angel <ul><li>Look close to home </li></ul><ul><li>Check civic and charitable organizations </li></ul><ul><li>Check for private pilots </li></ul><ul><li>Check for expensive hot cars </li></ul><ul><li>Use gatekeepers (lawyers, accountants) </li></ul><ul><li>Check other startups </li></ul>
  17. 17. How to Court an Angel <ul><li>Show them a great business plan </li></ul><ul><li>Kiss their %!! </li></ul><ul><li>Ask them for advice (Beware of Micromanagers) </li></ul><ul><li>Act like you have done your homework </li></ul><ul><li>Don’t act like you know everything </li></ul><ul><li>Act EXCITED! </li></ul>
  18. 18. Types of Financing <ul><li>Bootstrap Financing </li></ul><ul><ul><li>Personal savings </li></ul></ul><ul><ul><li>Family and friends </li></ul></ul><ul><ul><li>Credit cards </li></ul></ul><ul><ul><li>Second mortgages </li></ul></ul><ul><ul><li>Customer advances </li></ul></ul><ul><ul><li>Extended terms from vendors/suppliers </li></ul></ul><ul><ul><li>80% of the Inc. 500 fastest growing private companies were financed solely by these methods. </li></ul></ul>
  19. 19. Types of Financing <ul><li>Early-Stage Financing </li></ul><ul><ul><li>Seed financing: A small amount of capital to prove a concept or qualify for startup capital </li></ul></ul><ul><ul><li>Startup financing: for completing product development and initial marketing to get ready to do business </li></ul></ul><ul><ul><li>First-stage financing: funds required to begin full-scale operation </li></ul></ul>
  20. 20. Types of Financing <ul><li>Expansion Financing </li></ul><ul><ul><li>Second-stage financing: provides working capital for initial expansion </li></ul></ul><ul><ul><li>Third-stage or mezzanine financing: provides funds for a major expansion after the company has become profitable </li></ul></ul>
  21. 21. Types of Financing <ul><li>Bridge Financing </li></ul><ul><ul><li>May be needed between stages </li></ul></ul><ul><ul><li>Usually used before going public </li></ul></ul><ul><ul><li>Meant to be repaid from the next round of financing </li></ul></ul>
  22. 22. Cost of Venture Capital
  23. 23. Capital Gain/ROI Conversion A 7-fold increase in the value of the investment in 5 years is a 48% annualized rate of return on equity.
  24. 24. Reasons for Rejection <ul><li>Lack of confidence in management </li></ul><ul><li>Unsatisfactory risk/reward ratio </li></ul><ul><li>Absence of a well-defined business plan </li></ul><ul><li>Unfamiliarity with products or markets </li></ul><ul><li>Too much wishful thinking </li></ul>
  25. 25. Too Much Wishful Thinking… <ul><li>Investors expect to bear risk. </li></ul><ul><li>Investors expect YOU to know how much risk they will bear and to TELL them. </li></ul><ul><li>They need to believe that YOU understand the risk and will be able to MANAGE it. </li></ul>
  26. 26. Don’t Forget Partnering <ul><li>Companies cooperate for common goals </li></ul><ul><li>Usually involves cost/revenue sharing </li></ul><ul><li>May involve equity stake </li></ul><ul><li>May lead to eventual buyout </li></ul>
  27. 27. Sources of Information <ul><li>Garage.com </li></ul><ul><ul><li>www.garage.com </li></ul></ul><ul><ul><li>Pairs high-tech entrepreneurs with seed financing sources. </li></ul></ul>
  28. 28. Sources of Information <ul><li>vFinance.com </li></ul><ul><ul><li>www.vfinance.com </li></ul></ul><ul><ul><li>List of 1800 VC firms, database of 23,000 angel investors </li></ul></ul><ul><li>National Venture Capital Association </li></ul><ul><ul><li>www.nvca.org </li></ul></ul><ul><ul><li>Lots of info for and about VCs </li></ul></ul>

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