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Venture Capital: An Entrepreneur's Manual


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Venture Capital: An Entrepreneur's Manual

  1. Startup Finance<br />An Entrepreneur’s Manual<br />
  2. About Index Ventures<br />Selected Investments<br />Index Ventures<br />Over €1.5bn under management<br />Active investor in web / internet<br /><ul><li>Pan European Venture Fund
  3. Based London & Geneva</li></li></ul><li>Agenda<br />Important reflections before you start<br />What are the financing options?<br />How to attract and engage investors?<br />Deal structure and what to expect during the investment process<br />
  4. A big undertaking<br />Starting a business is a big commitment<br />Energy & Passion<br />Time<br />Financial resources (yours and your investors)<br />Before thinking of financing, is worth taking a deep breath …<br />
  5. Key questions about you<br />Why am doing this<br />Make money<br />Lifestyle<br />“Change the world”<br />How long do you want to commit?<br />What level of financial risk are you prepared to take?<br />
  6. Key questions about the business<br />Be honest with yourself about the risks / unknowns<br />Do customers want the product / service?<br />Do you have the competence to build the product and the team<br />Can you monetise the product / service?<br />How competitive is / will the space be?<br />How big can the overall market become?<br />
  7. Agenda<br />Important reflections before you start<br />What are the financing options?<br />How to attract and engage investors?<br />Deal structure and what to expect during the investment process<br />
  8. Overview of financing options<br />Equity Financing<br />Non-Equity Financing<br />Angel Financing<br />Venture Capital<br />Self Finance / <br />Bootstrapping<br />Private Equity<br />Debt / <br />Bank Finance<br />Public<br />Stock Markets<br />
  9. Self financing / bootstrapping<br />Financing growth from previous cashflow and personal funds<br />Obviously need to have cashflows…<br />Most good bootstrapped companies emerge from a service or consulting companies that are productising their offering<br />Pros<br />Bootstrapped companies almost always spend cash more effectively than equity financed companies<br />Already being close to existing customers, give excellent ability to understand problems and define good solutions<br />Cons<br />Resources for product and market dev constrained by cashflows<br />May miss a big opportunity if other players raise finance and invest heavily<br />
  10. Debt / bank finance<br />Relatively limited funds will be available ; likely to want security anyway<br />Banks only lend to predictable businesses they can understand<br />If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance<br />Not particularly useful web or high growth tech industries<br />
  11. Pre-requisites<br />Large Potential<br />Market Opportunity<br />Unique Product <br />Or Concept<br />Passionate<br />Founding Team<br />Implications…<br />Need to move<br />rapidly<br />Intense<br />competition<br />likely<br />VC funding supports<br />Hiring<br />Rapid Product <br />Development<br />Partnerships<br />Infrastructure<br />Internationalisation<br />Commercialisation<br />Good reasons to raise equity finance<br />
  12. When NOT to raise VC<br />Application<br />is a feature <br />not a product<br />Market size is<br />too small<br />Motivation is<br />not financial<br />Risk is not that you waste time unsuccessfully trying to raise finance …<br />… real danger is that you do succeed in raising VC funds<br />Lose opportunity for small exit which could be personally lucrative<br />Lose opportunity to run lifestyle business<br />Get bound in to 3+ yrs work you may not enjoy<br />
  13. Equity Financing<br />Growth Fund<br />Seed<br />Early Stage<br />Series A, (B)<br />Later Stage<br />(B),C,D…<br />Pre-IPO / <br />Buy-out<br />Private<br />Equity<br />Investment Size <br />0 - €1m<br />€2m-€20m<br />€5m-€20m<br />€30m+<br />Potential Sources of Funds <br />Grant-funding<br />University seed funds<br />Friends and family<br />Angel Investors<br />(Venture Capital)<br />Venture Capital<br />(Wealthy) Angel investors <br />Venture Capital<br />Specialist Late stage tech investment funds<br />Hedge Funds<br />
  14. Agenda<br />Important reflections before you start<br />What are the financing options?<br />How to attract and engage investors?<br />Deal structure and what to expect during the investment process<br />
  15. Venture Capital – How the VC makes money<br />Raise fund every 2-4 years<br />Pension funds, financial institutions and specialist “fund of fund” investors<br />Invest money over 3-5 years<br />~ 1/2 of investments lose money<br />~ 1/3 of investments break even<br />~ 1/6 of investments make (lots) of money<br />Very small management fee on funds managed<br />~ 1-2.5% pa<br />Carry<br />~ 20-25%x (Total Return – Total Amount Invested)<br />
  16. Angels – How the Angel investor makes money<br />Unlike the VC the Angel invests their own money<br />Much smaller absolute returns can be very meaningful to an angel<br />The Angel approach is to invest small amounts at a very early stage / low valuation<br />€50-€250k at valuations of €500k-€4m<br />Two “exits” for angel<br />Firm might be sold quickly for €5-10m or less where the Angel can make 2-5x money<br />Firm raises VC money, after which Angel typically becomes more passive but has built up exposure very cheaply to a venture backed enterprise<br />The key thing when selecting an Angel therefore is whether they can help you raise VC finance<br />See which Angel investors have invested with which VCs<br />
  17. Venture Capital – What a good VC will add<br />Advice and Strategy<br />Hiring<br />Developers<br />Country Managers<br />Sales<br />CEO / CFO / COO<br />Advisory Board<br />Partnerships<br />Profile and PR<br />Further access to capital<br /><ul><li>Internationalisation
  18. Trusted service provider relationships
  19. Search / recruiting
  20. Branding / PR
  21. Finance, etc
  22. Exit optimisation
  23. Knowledge / contacts with relevant buyers
  24. Experience with process</li></li></ul><li>What does an investor look for? <br />Technology<br />Traction<br />Team<br />$$$<br /><ul><li>Can evaluate each as
  25. Exceptional
  26. Good / credible
  27. Mediocre / incomplete
  28. Misconception that being good / credible across the board is what VCs look for
  29. Can always add credible attributes to the mix later
  30. We focus on finding opportunities which rate as exceptional in one attribute</li></li></ul><li>Identifying relevant VC partners<br />Has funds <br />to invest<br />Do create a shortlist<br />Rifle is a better weapon than a shotgun<br />Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors<br />Match of <br />Size/Stage/<br />Geography<br />Excellent<br />track record<br />Shortlist<br />Relevant<br />Portfolio<br />No directly<br />competitive<br />investments<br />
  31. Getting on radar screens<br />Out of the blue email is a longshot<br />Try to build context<br />Analyse portfolio companies – are there any links there?<br />Analyse contact network and advisors<br />Analyse press coverage<br />Participate in blog conversations<br />Attend events and conferences<br />Relevant PR around product also helps<br />VCs spend their time looking for businesses with momentum<br />
  32. Agenda<br />Important reflections before you start<br />What are the financing options?<br />How to attract and engage investors?<br />Deal structure and what to expect during the investment process<br />
  33. Sharing relevant information<br />Pre - first meeting<br />Pre - termsheet<br />Post - termsheet<br />100 page business plan not required<br />20 page ppt which clearly answers main questions is best bet<br />Product<br />Market<br />Business Model<br />Team<br />Competition<br />Product Roadmap<br />Technology Overview<br />Business Development<br />Financial Status<br /><ul><li>Dialogue rather than documentation – expect lots of meetings
  34. Calls with current / prospective customers or partners
  35. Meeting broader team
  36. Brainstorming around strategy
  37. Identifying key hires post closing
  38. Formal presentation to VC partnership
  39. Some additional reference calls with partners / customers
  40. Personal reference calls
  41. Legal / accounting audit (if relevant)
  42. Drafting legal documentation</li></ul>2-4 weeks<br />1-2 Months<br />
  43. Types of investment<br />Ordinary Share investment<br />Simplest form, often used by angels<br />All shareholders have similar rights<br />Company Board composed according to<br />Convertible Loan<br />Sometimes used by both Angels and VCs<br />Typically when another financing is anticipated soon<br />Loan will convert (with a discount ~25%) into the next financing round<br />Preferred Share Investment<br />Typical Structure used by VCs and occasionally larger Angels investing as a group<br />
  44. Understanding a termsheet – case study<br />Anything between 2 and 15 pages (if points are spelt out in fuller legalise)<br />Sample phrasing is <br />“[XXX fund] proposes to lead a Series A preferred share financing of €5m at a €8m pre-money valuation. As part of the investment process an employee option pool of 15% on a post money basis will be put in place. Typical venture capital terms including participating liquidation preference, etc. etc …”<br />What does it all mean?<br />
  45. Case Study – Cap Table<br />
  46. but that’s so unfair…<br />Board Representation<br />Liquidation Preference<br />Participation rights<br />Anti-dilution rights<br />Element of reverse vesting<br />Certain control and veto rights<br />Period of exclusivity to close legals<br />Photo Source: Philip Greenspun, MIT<br />Venture Capital – “Typical Deal Terms”<br />
  47. Case Study - liquidation preference<br />
  48. Case Study - liquidation preference<br />
  49. Case Study - liquidation preference<br />
  50. Case Study - liquidation preference<br />
  51. Case Study - liquidation preference<br />
  52. Case Study - Antidilution<br />If a subsequent investment round is done a price lower than the previous investment round then the previous investment round is repriced (more stock issued to Series A)<br />Two flavours<br />Broad-based – Series A price ratchets down based on size of Series B relative to Previous post-money valuation<br />Narrow-based – Series A price ratchets down based on size of Series B relative to Size of Series A<br />Say €5m Series B done at €0.75 per share<br />Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25) = €0.93<br />Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) = €0.875<br />
  53. Case Study – Reverse Vesting<br />The value of startup is typically in the promise of future labour from the founders<br />Investors seek to secure this by reverse vesting founder stock, typically over 3 or 4 years<br />For startups typically all founder stock is subject to reverse vesting.<br />For later stage companies perhaps half the stock might be subject to vesting<br />NB – this also protects founders from each other<br />
  54. <ul><li>Revenues / Profitability
  55. Growth rate
  56. Team quality
  57. Strategic fit with buyer community
  58. Well managed exit process</li></ul>Entrepreneur’s Equation<br />Value at exit<br /><ul><li>Fewest strategic errors made
  59. Hiring (quality & speed)
  60. Partnerships
  61. Product development</li></ul>Probability of getting there<br /><ul><li>Valuation at initial round
  62. Valuation and dilution at subsequent rounds
  63. Option grants</li></ul>% share of business at exit<br />Choosing the right VC - Valuation should not be the decisive factor<br />
  64. Key things to consider when choosing an investor<br />Right partner at a fair price<br />vs.<br />Any partner at best price<br />Relationship<br />With key individual(s); and <br />broader team <br />References<br />Speak to other founders<br />Portfolio<br />Relevant experience<br />Non competitive<br />Community you want to be part of<br />Valuation and associated deal terms<br />
  65. Thank you<br />Ben Holmes<br />Email:<br />Skype: ben_holmes<br />
  66. Artwork – (Transparent Layers)<br />