Venture Capital 101 to BCIT Nov 08


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  • F, F & EEs can be in the form of debt Best financing is still revenue from target customers
  • Should help all buyers understand your business and it’s value to them
  • PDF, available for download
  • PDF, available for download
  • Which is the most important assumption? Still need to know the market share and size of market
  • Which is the most important assumption? Still need to know the market share and size of market
  • This one will get me in trouble But you want to win the competition, so find a way
  • Venture Capital 101 to BCIT Nov 08

    1. 1. Entrepreneurship & Strategy Class Title
    2. 2. My Bio <ul><li>Entrepreneur – 3 meaningful startups </li></ul><ul><li>Corporate Finance – negotiated over 100 transactions, CIBC Investment Banking </li></ul><ul><li>Boards </li></ul><ul><ul><li>Chair of a pre-revenue start-up </li></ul></ul><ul><ul><li>Founding director of MetroBridge, recent IPO </li></ul></ul><ul><ul><li>Director of fastest-growing local VC, BCAF </li></ul></ul>
    3. 3. About Stirling Mercantile <ul><li>Sectors </li></ul><ul><li>Mid market financings </li></ul><ul><li>Early-stage VC financings </li></ul><ul><li>Mergers and acquisitions </li></ul><ul><li>Valuations and fairness opinions </li></ul><ul><li>Public market advisory services </li></ul>
    4. 4. About Stirling Mercantile
    5. 6.
    6. 7. BC Advantage Funds <ul><ul><li>$85 million under management </li></ul></ul><ul><ul><li>A Venture Capital Corporation (VCC) fund </li></ul></ul><ul><ul><ul><li>30% tax credit available </li></ul></ul></ul><ul><ul><li>Invest in promising emerging life science and technology companies in British Columbia </li></ul></ul><ul><ul><li>2006 CVCA &quot;Deal of the Year&quot; Winner </li></ul></ul><ul><ul><li> </li></ul></ul>
    7. 8. Sources of Financing <ul><li>Equity –family, employees, friends, angels, VCs, Private Equity </li></ul><ul><li>Debt – banks, subordinated lenders & others </li></ul><ul><li>Grants – governments and government supported agencies </li></ul>Background .
    8. 9. The Financing Map F, F & E Seed, Angel Series A Series B Year 1 2 3 4 5 Beta Customers Early Adopters Crossing the Chasm Mainstream Growth Design Beta V. 1 V. 2 IP Roadmap Funding Roadmap Background .
    9. 10. What happens when you bring in equity investors? <ul><li>Dilution </li></ul><ul><li>More governance and oversight </li></ul><ul><li>Additional management </li></ul><ul><li>Capital to accelerate development </li></ul><ul><li>Access to broader network </li></ul><ul><li>Added business insight </li></ul>Background .
    10. 11. Standard Terms <ul><li>Preferential treatment: </li></ul><ul><ul><li>First payment upon exit (acquisition or IPO) </li></ul></ul><ul><ul><li>Protection against dilution </li></ul></ul><ul><ul><li>Right to purchase more </li></ul></ul><ul><ul><li>Varying levels of control over business </li></ul></ul><ul><li>Motivated solely by return on investment </li></ul>Background
    11. 12. What Do VCs Need? <ul><li>Strong team, with integrity </li></ul><ul><li>Clear, lucrative and sustainable value proposition </li></ul><ul><li>Large market opportunity and the ability to scale into it </li></ul><ul><li>Realistic valuation and deal terms </li></ul>.
    12. 13. What Do VCs Want? <ul><li>Traction from the target market </li></ul><ul><li>2 or 3 independent board candidates </li></ul><ul><li>Appropriate deal size for their fund </li></ul><ul><li>Appropriate market sector for their fund </li></ul><ul><li>Transaction ready due diligence binder/site </li></ul><ul><li>Close proximity </li></ul>.
    13. 14. What Should You Look For in a VC? <ul><li>More than money </li></ul><ul><li>“Been there, done that” management </li></ul><ul><li>Corporate governance </li></ul><ul><li>Exit strategies </li></ul>.
    14. 15. What Should You Look For in a VC? <ul><li>More than money </li></ul><ul><li>Contacts </li></ul><ul><ul><li>for additional management </li></ul></ul><ul><ul><li>for customers </li></ul></ul><ul><ul><li>for partnerships </li></ul></ul>.
    15. 16. Why VCs Need ‘Home Runs’ <ul><li>40% return on a fund, which lasts about 7 to 10 years </li></ul>
    16. 17. One in Ten <ul><li>Some make a break-even or make a modest gain. Others die. </li></ul>$40m $100m
    17. 18. Goals <ul><li>Why build a business? </li></ul><ul><li>Lifestyle </li></ul><ul><ul><li>freedom (choose your own 16 hours a day) </li></ul></ul><ul><ul><li>Equity – all the spoils of success, all the pain of defeat </li></ul></ul><ul><ul><li>salary (less than market) </li></ul></ul><ul><li>OR </li></ul><ul><li>Build quickly for an exit – Sale or IPO </li></ul><ul><ul><li>Probably involves investors, loss of control </li></ul></ul><ul><ul><li>Could allow for retirement (on second or third try) </li></ul></ul>
    18. 19. Valuations <ul><li>Multiple of </li></ul><ul><ul><li>Revenue (eg. $10m x 2 = $20m) </li></ul></ul><ul><ul><li>Profit or EBITDA (eg. $3m x 6 = $18m) </li></ul></ul><ul><li>Discounted Cash Flow </li></ul><ul><li>All are better when company is growing </li></ul><ul><ul><li>(Importance of timing) </li></ul></ul>
    19. 20. Relative Valuations <ul><li>Big Co </li></ul><ul><li>Experienced management, board </li></ul><ul><li>Large revenues </li></ul><ul><li>Diversified customer base </li></ul><ul><li>Scaled Infrastructure </li></ul><ul><li>Worth 3 x Revenues </li></ul><ul><li>Small Co </li></ul><ul><li>Great founder, some holes on team </li></ul><ul><li>Small growing revenues </li></ul><ul><li>Concentrated customer base </li></ul><ul><li>Scalable infrastructure </li></ul><ul><li>Worth 1.5 x Revenues </li></ul>
    20. 21. Deal Drivers <ul><li>Accretive acquisitions </li></ul><ul><ul><li>You must add to buyer’s valuation </li></ul></ul><ul><ul><li>For example: </li></ul></ul><ul><ul><ul><li>Buyer: $100m Revenues x 3 = $300m market cap </li></ul></ul></ul><ul><ul><ul><li>Buys $10m Revenues x 1.5 = $15m cost, cash and stock </li></ul></ul></ul><ul><ul><ul><li>Adds $10m x 3 to valuation or $30m </li></ul></ul></ul>
    21. 22. Deal Drivers <ul><li>Strategic </li></ul><ul><ul><li>Add value to other products or assets </li></ul></ul><ul><ul><li>Adds customers </li></ul></ul><ul><ul><li>Keep away from competitors </li></ul></ul><ul><ul><li>Product or geographic expansion </li></ul></ul>
    22. 23. Marketing the Exit <ul><li>Plan the exit from the outset </li></ul><ul><li>Get to know your potential buyers early </li></ul><ul><li>Get to know your service providers early </li></ul>
    23. 24. Think Like A Buyer <ul><li>Strategic </li></ul><ul><ul><li>Market share, keep away from competitor </li></ul></ul><ul><li>Financial </li></ul><ul><ul><li>Earnings, valuation multiples, accretive value to a stock price </li></ul></ul><ul><li>Entrepreneur </li></ul><ul><ul><li>Lifestyle </li></ul></ul>.
    24. 25. Think Like A Buyer <ul><li>Spend money to… </li></ul><ul><li>… make money, or </li></ul><ul><li>… save money </li></ul>.
    25. 26. Structuring <ul><li>Understand leverage available to buyers </li></ul><ul><li>A profitable company can be purchased with a portion of subordinated debt, like 3 X EBITDA </li></ul><ul><li>The balance in equity </li></ul><ul><ul><li>Ratios must also consider total debt to equity </li></ul></ul><ul><ul><li>Strategics may go to 4x or 5x </li></ul></ul>$10m $2m $6m $4m Price EBITDA Sub-debt Equity
    26. 27. Business Plan <ul><li>Executive Summary </li></ul><ul><li>Product or Service Description </li></ul><ul><li>Industry and Opportunities </li></ul><ul><li>Marketing and Sales Plans </li></ul><ul><li>Competition, Competitive Advantages </li></ul><ul><li>Management and Board Members </li></ul><ul><li>Financials and ProFormas </li></ul>VCs Want
    27. 28. Executive Summary <ul><li>“Put it at the beginning but write it at the end” </li></ul><ul><li>Start with a simple description of who your clients are and why they will buy from you </li></ul><ul><li>Keep it down to about 2 pages – just enough to stimulate questions of interest </li></ul>. Background
    28. 29. Science Proposition vs. Value Proposition <ul><li>“We are making a next generation codec to bring the seventh layer of the OSI model to real-time online commerce”. </li></ul><ul><li>“Our software helps banks save money on processing cheques and transactions.” </li></ul>
    29. 30. Position Value to Customer Sales Unit Volume You Comp Comp VCs Want
    30. 31. Keep It Concise! <ul><li>Use grade 8 English, and test it </li></ul><ul><li>Ask yourself if each paragraph helps to explain why this company has value </li></ul>. VCs Want
    31. 32. Avoid Saying… <ul><li>Our projections are conservative </li></ul><ul><li>We have no competition </li></ul><ul><li>We have a first mover advantage </li></ul><ul><li>We only need to capture x% of the market share </li></ul>. VCs Want
    32. 33. Presentation <ul><li>A picture tells a thousand words, but… </li></ul><ul><li>… don’t spend time or money on graphics and eye-candy </li></ul><ul><li>Docs in PDF, available for download from your site </li></ul>. Background
    33. 34. Financial Models <ul><li>Estimates your future value </li></ul><ul><li>Focus on price and unit sales </li></ul><ul><li>Be able to back it all up – this is your credibility </li></ul>. Packaging, Financials
    34. 35. Bottom Up vs. Top Down <ul><li>Market = 100,000,000 </li></ul><ul><li>We will get 5% </li></ul><ul><li>At a price of $2,000 </li></ul><ul><li>We will sell $10,000,000 </li></ul><ul><li>Incredible! </li></ul><ul><li>Sales cycle = 60 days </li></ul><ul><li>Sales training = 60 days </li></ul><ul><li>We will hire 20 effective sales people… </li></ul><ul><li>… who will sell 21 per month </li></ul><ul><li>At a price of $2,000 </li></ul><ul><li>We will sell $10,000,000 </li></ul><ul><li>Credible! </li></ul>. Packaging, Financials
    35. 36. Due Dilly Binder <ul><li>All material contracts </li></ul><ul><li>Details of financials </li></ul><ul><ul><li>Inventory and valuable assets </li></ul></ul><ul><ul><li>HR tables and analysis </li></ul></ul><ul><ul><li>Comments on liabilities or notes to the Financials </li></ul></ul><ul><li>Don’t leave out anything salient </li></ul>. VCs Want
    36. 37. Due Diligence Folder/Binder A great example of a due dilly map, made available in the root of the folder or binder Packaging
    37. 38. Reading <ul><li>Books </li></ul><ul><ul><li>Good to Great </li></ul></ul><ul><ul><li>Art of the Start </li></ul></ul><ul><ul><li>The E Myth </li></ul></ul><ul><ul><li>7 Habits of Highly Successful People </li></ul></ul><ul><li>Blogs, RSS, Newsletters </li></ul><ul><ul><li>CFO Executive </li></ul></ul><ul><ul><li>VC Experts </li></ul></ul><ul><ul><li>The Deal </li></ul></ul><ul><ul><li>Kedrosky </li></ul></ul><ul><ul><li>Wall Street Prep </li></ul></ul><ul><li>Much more at Stirling Resources </li></ul>
    38. 39. Thank you <ul><li>A copy of this presentation is available at: </li></ul><ul><li> </li></ul>
    39. 40. Financial Models <ul><li>“ Plans are useless, but planning is indispensable” </li></ul><ul><li>Dwight D. Eisenhower </li></ul><ul><li>Not intended to be carved in stone </li></ul><ul><li>Represents your plan, expected to change </li></ul>. Packaging, Financials
    40. 41. Purpose <ul><li>Explain how the company scales </li></ul><ul><li>Must clarify price and sales growth </li></ul><ul><li>Estimate how much capital will be required </li></ul><ul><li>Shows you can plan to be fiscally responsible </li></ul>. Packaging, Financials
    41. 42. Price <ul><li>Support your price based on competition </li></ul><ul><li>Get client validation, in writing if possible </li></ul><ul><li>Consider how your price may change going forward </li></ul>. Packaging, Financials
    42. 43. Expenses <ul><li>Spend a lot of time on being accurate about your cost of sales and profit margin </li></ul><ul><li>Spend very little time getting the fixed expenses right, unless your business is different </li></ul><ul><li>Showing losses in the first 2 years is ok, assuming you have the cash to do so </li></ul>. Packaging, Financials
    43. 44. Cash Flows <ul><li>Must detail working capital requirements </li></ul><ul><li>Must show how much money the company will need and when </li></ul><ul><li>Can be simply added to the bottom of the income projection </li></ul>. Packaging, Financials
    44. 45. Scope <ul><li>Run out 60 months </li></ul><ul><li>First two years for cash flow </li></ul><ul><li>Last three for size of opportunity </li></ul><ul><li>Show prior actuals if you have them </li></ul>. Packaging, Financials
    45. 46. Bottom Up vs. Top Down <ul><li>Market = 100,000,000 </li></ul><ul><li>We will get 5% </li></ul><ul><li>At a price of $2,000 </li></ul><ul><li>We will sell $10,000,000 </li></ul><ul><li>Incredible! </li></ul><ul><li>Sales cycle = 60 days </li></ul><ul><li>Sales training = 60 days </li></ul><ul><li>We will hire 20 effective sales people… </li></ul><ul><li>… who will sell 21 per month </li></ul><ul><li>At a price of $2,000 </li></ul><ul><li>We will sell $10,000,000 </li></ul><ul><li>Credible! </li></ul>. Packaging, Financials
    46. 47. Assumptions <ul><li>Separate tab </li></ul><ul><li>Include most trigger cells on the same page for investor adjustment </li></ul><ul><li>First Things First </li></ul><ul><ul><li>Highlight key assumptions </li></ul></ul>. Packaging, Financials
    47. 48. Packaging, Financials
    48. 49. Packaging, Financials
    49. 50. Formatting Suggestions <ul><li>Use a different colour for triggers </li></ul><ul><li>Add simple graphs </li></ul><ul><li>Provide ratios </li></ul>. Packaging, Financials
    50. 51. Sales Growth <ul><li>Add a realistic monthly figure for unit sales growth in the first 18 to 24 months </li></ul><ul><li>Multiply that by your prices(s) to generate revenue </li></ul><ul><li>Scale it up in the last 3 years </li></ul>. Packaging, Financials
    51. 52. Total Revenue <ul><li>At critical mass, revenues should be significant </li></ul><ul><li>Don’t reverse engineer with unrealistic assumptions for sales growth </li></ul><ul><li>Find a way to get to $30 to $50 million in 5 to 7 years, with defendable assumptions, ie: </li></ul><ul><ul><li>Expand your markets </li></ul></ul><ul><ul><li>Add value for a higher price </li></ul></ul>. Packaging, Financials
    52. 53. Format for the Presentation <ul><li>One slide for assumptions </li></ul><ul><ul><li>Identify the key variables, likely price and take-up </li></ul></ul><ul><li>One slide for results </li></ul><ul><ul><li>Include ratios </li></ul></ul><ul><li>One slide for deal structure or closing cap table </li></ul>. Packaging, Financials
    53. 54. Expenses <ul><li>Be very accurate with your Cost Of Sales (so your margins are defendable) </li></ul><ul><li>Be accurate with SG&A and cash flows in first 24 months </li></ul><ul><li>Extrapolate the last 3 years </li></ul><ul><li>Scale expenses with revenue (EBITDA < 30%) </li></ul>
    54. 55. Thank you <ul><li>A copy of this presentation is available at: </li></ul><ul><li> </li></ul>