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New venture financing

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New venture financing

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New venture financing

  1. 1. On New Venture Financing Ziya G. Boyacigiller This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com
  2. 2. Copyright (c) 2003 Ziya G. Boyacigiller New Venture Financing Ziya Boyacigiller Sabanci University (Based on a Presentation by Andy Rachleff, Benchmark Capital)
  3. 3. Make a bet: 1. Give me 1TL each now, and I will give everyone back 1.25TL (except for one person) at the end of this presentation. 2. Give me 1TL each now, and I will give back one of you 10TL next month, and the others 0.25TL. 3. What would you do if I raised amounts by 1000X? Copyright (c) 2003 Ziya G. Boyacigiller
  4. 4. New-Venture Financing is about managing high-risk investments Copyright (c) 2003 Ziya G. Boyacigiller
  5. 5. Poker as a Metaphor… Copyright (c) 2003 Ziya G. Boyacigiller Wipe Out Ante Follow on Bets Chips Cards Dealt
  6. 6. Ziya G. Boyacigiller (c) 2008 6  In 2000, there were 454 spinoffs, within all American academic institutions, pp57  In 2000, average was 4.2% spinoffs-to-disclosures ratio within 26 selected universities (~37% of total with spinoffs) in USA. Pp68  During 1980-1996, MIT spinoffs = 134, went public = 24, 18% public “spin-off ratio, pp19 & pp30  Using 4.2% and 18%, we get 0.8%. This means almost 1 spinoff for 100 disclosures succeed to go public (IPO). (Note that this ratio is for MIT and is much higher than non-academic success rates. For example, the rate for most startup companies is probably over 10 times worse!) < 3 in 1,000 success rate…
  7. 7. “Success Bias” Idea to IPO Reviewed plans to IPO Funded plans to IPO 6 in 1,000,000 60 in 10,000 Less than 1 in 10 Source: Saratoga Venture Finance
  8. 8. 8 Venture Capital - Size of the Market  US - 2006  $27.5 bn  1446 transactions  $10.5 M average investment  Europe - 2006  Euro 4.1 bn  867 transactions  Euro 14 M average investment
  9. 9. Copyright (c) 2003 Ziya G. Boyacigiller Venture Capital Food Chain INSTITUTIONAL INVESTORS (Limited Partners – e.g. Endowments, Pension Funds, High worth individuals) VENTURE CAPITALISTS (Finding and Funding Entrepreneurial Companies) ENTREPRENEURS (Starting and Building Companies)
  10. 10. 10 Venture Capital - How the VCs make money?  Raise “fund” every 2-4 years  Pension funds, financial institutions, and specialist “fund of fund” investors, high net-worth individuals/families  Invest money over 3-5 years  ~ 1/2 investments lose money  ~ 1/3 investments break even  ~ 1/6 investments make (lots of) money  Very small “management fee” on funds managed  ~1-2.5% PA  “Carry”  ~20-25% x (Total Return-Total Amount Invested)
  11. 11. Copyright (c) 2003 Ziya G. Boyacigiller Asset Allocation for a Limited Partner
  12. 12. Copyright (c) 2003 Ziya G. Boyacigiller The Trade-off Between Risk & Return
  13. 13. Metric Used: IRR Copyright (c) 2003 Ziya G. Boyacigiller IRR  “Internal Rate of Return” Parameters: • Initial Investment • Follow on Investments • Cash Out • Time (maximum 10-12 years) Use Excel built in formula….
  14. 14. VC Firms Performance Kleiner Perkins Caufield & Byers IRR Sequoia IRR Matrix Partners IRR 1992 fund 39%/y 1992 fund 110%/y 1995 fund 223%/y 1994 fund 122%/y 1995 fund 175%/y 1997 fund 516%/y 1996 fund 287%/y 1998 fund 93%/y 2000 fund -30%/y 1999 fund -21%/y 1999 fund -5%/y 2001 fund -39%/y 2000 fund -16%/y 2000 fund -25%/y Source: Venture Scoreboard
  15. 15. VC Returns (as of 3/31/04) VC Fund Type 1 year 3 year 5 year Early Seed funding -2.9% -19.8% 47.1% Balanced funding 20.5% -9.4% 17.5% Later stage funding 38% -6.0% 7.1% All venture funds 15.7%* -13.3% 22.0% Stock Indexes Nasdaq 48.7% 2.7% -4.1% S&P 500 32.8% -1.0% -2.6%% Source: SJMN 7/22/04 * First double digit yearly return since 2000
  16. 16. Copyright (c) 2003 Ziya G. Boyacigiller Which of the following firms would you rather invest in? Each invests $1 million per company in 10 companies: 1. One gets 2x their money on all 10. 2. The other loses all their money in 8 and gets >20x their money on the remaining 2.
  17. 17. Copyright (c) 2003 Ziya G. Boyacigiller Summary of the Investment Business
  18. 18. Copyright (c) 2003 Ziya G. Boyacigiller How do you find Right/Non-Consensus?
  19. 19. Copyright (c) 2003 Ziya G. Boyacigiller How can you recognize vision? •Early insight into technology inflection point (disruptive innovation) •The Napkin test
  20. 20. Single most important determinant of success that overwhelms all else is the choice of industry. Copyright (c) 2003 Ziya G. Boyacigiller
  21. 21. Copyright (c) 2003 Ziya G. Boyacigiller Second Most Important Determinant of Success is the Effect of Management Team •When a great management team meets a lousy market market wins •When a lousy management team meets a great market market wins •When a great management team meets a great market something special happens
  22. 22. Execution  “Effect of Management Team” Copyright (c) 2003 Ziya G. Boyacigiller
  23. 23. Copyright (c) 2003 Ziya G. Boyacigiller Capital Intensity •Least Amount of Money = Most Attractive Business •Minimize Capital Required by High gross margins (Unfair advantage) monopoly Rapid escape velocity (Product/Market fit) importance=high, satisfaction=low
  24. 24. Copyright (c) 2003 Ziya G. Boyacigiller How do Valuation & Terms get established? •Look at milestones achieved YDY (aynasi istir kisinin, lafa bakilmaz…) DWYSYWD (credibility is doing what you promise…) •Look at comparables (It’s just like buying a house…) •Then it’s up to supply & demand
  25. 25. Copyright (c) 2003 Ziya G. Boyacigiller Milestones Chart to CF+
  26. 26. Copyright (c) 2003 Ziya G. Boyacigiller Term Sheet TERM SHEET FOR SERIES A PREFERRED STOCK FINANCING OF [Insert Company Name], INC. [ __, 200_]       This Term Sheet summarizes the principal terms of the Series A Preferred Stock  Financing of [___________], Inc., a [Delaware] corporation (the “Company”).  In  consideration of the time and expense devoted and to be devoted by the Investors with  respect to this investment, the No Shop/Confidentiality and Counsel and Expenses  provisions of this Term Sheet shall be binding obligations of the Company whether or  not the financing is consummated.  No other legally binding obligations will be created  until definitive agreements are executed and delivered by all parties.  This Term Sheet is  not a commitment to invest, and is conditioned on the completion of due diligence, legal  review and documentation that is satisfactory to the Investors.  This Term Sheet shall be  governed in all respects by the laws of the [State of Delaware]. 
  27. 27. Copyright (c) 2003 Ziya G. Boyacigiller It is all about the pie… 50% 10%
  28. 28. Copyright (c) 2003 Ziya G. Boyacigiller
  29. 29. Copyright (c) 2003 Ziya G. Boyacigiller
  30. 30. Copyright (c) 2003 Ziya G. Boyacigiller
  31. 31. Ref: Golden Horn Ventures 31 Reasons to Raise VC Unique Product or Concept Excellent Development Capability Large Potential Market Opportunity Intense Competition Likely Need to Move Rapidly Implications VC Funding Supports: • Capital • Network • Experience & Expertise • Credibility & PR
  32. 32. Copyright (c) 2003 Ziya G. Boyacigiller What VCs Don’t Look For •Another Microsoft! •Do you think they care if you build a long-term great company (beyond their holding period)? - No benefit to IRR or distributions - Impacts their reputation
  33. 33. Copyright (c) 2003 Ziya G. Boyacigiller Who is the ideal funding source? Potential Market Size Ideal Funding Source Small Bootstrap or Angel Unclear Bootstrap or Angel then VC Large Venture Capital
  34. 34. Copyright (c) 2003 Ziya G. Boyacigiller How should you choose among Venture Capitalists / Investors •Industry experience / perspective •Recruiting help (network) •Partnering/Contacts •Brand/Credibility •Price/Stage •Funding Required •Location •Chemistry
  35. 35. Copyright (c) 2003 Ziya G. Boyacigiller Who should you ask for advice? •Successful Entrepreneurs •Top deal lawyers •Investment bankers •Frequent advisors to the VCs - Professors - Angel Investors •Inovent •Endeavor

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