Venture Capital Primer Rev6


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Venture Capital Primer - Update

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  • accelerate the commercialization process; creating an environment that supports technology-based businesses; facilitating partnerships between firms, Arkansas' universities and economic development organizations; helping firms obtain early-stage capital; providing mentoring services and expert assistance in technology, business, organizational management and marketing; and helping with legal and intellectual property matters.
  • Venture Capital Primer Rev6

    1. 1. Raising Capital to Fund Growth Jeff Amerine, PMP Technology Licensing Officer Adjunct Instructor, Entrepreneurship University of Arkansas Advisor, Innovate Arkansas [email_address]
    2. 2. <ul><li>Introductions </li></ul><ul><li>Financing Basics </li></ul><ul><li>Where’s the Money? </li></ul><ul><li>What’s Available in Arkansas? </li></ul><ul><li>Financing Sources </li></ul><ul><li>What Attracts the Money? </li></ul><ul><li>Recap / Q&A </li></ul>
    3. 3. <ul><ul><li>BS, US Naval Academy 1984 </li></ul></ul><ul><ul><li>MS, Operations Management – University of Arkansas </li></ul></ul><ul><ul><li>US Air Force Officer 1984-1990 </li></ul></ul><ul><ul><li>System engineer, product manager, VP, CEO, CTO </li></ul></ul><ul><ul><ul><li>18 years in telecom and software technology development </li></ul></ul></ul><ul><ul><ul><li>7 startup ventures </li></ul></ul></ul><ul><ul><ul><li>3 Fortune 500s </li></ul></ul></ul><ul><ul><li>U of A Technology Licensing Officer & Adjunct Instructor, Entrepreneurship </li></ul></ul><ul><ul><li>Staff Advisor, Innovate Arkansas </li></ul></ul><ul><ul><li>Manager & Investor, Gravity Ventures Arkansas </li></ul></ul>
    4. 4. <ul><li>University of Arkansas Technology Licensing Office </li></ul><ul><ul><li>Access to 100+ technologies developed at the UA </li></ul></ul><ul><ul><li>Team of business and intellectual property professionals </li></ul></ul><ul><ul><li>Mission: </li></ul></ul><ul><ul><ul><li>Commercialize world-class research to build a sustainable knowledge-based economy to benefit Arkansas and the world. </li></ul></ul></ul><ul><ul><li>http:// </li></ul></ul>
    5. 5. Innovation Center 535 Research Center Blvd
    6. 7. <ul><ul><li>Patents </li></ul></ul><ul><ul><li>Trademarks </li></ul></ul><ul><ul><li>Copyrights </li></ul></ul><ul><ul><li>Trade Secrets </li></ul></ul>TM ©
    7. 10. <ul><li>What Does IA Do? </li></ul><ul><li>Accelerate the technology commercialization process </li></ul><ul><li>Facilitate partnerships between firms, universities and economic development organizations </li></ul><ul><li>Prepare firms to obtain early-stage capital </li></ul><ul><li>Provide expert assistance in technology, business, organizational management and marketing </li></ul><ul><li>Advise with legal and intellectual property matters </li></ul>
    8. 11. <ul><li>“I shall be telling this with a sigh </li></ul><ul><li>Somewhere ages and ages hence: </li></ul><ul><li>Two roads diverged in a wood, and I— </li></ul><ul><li>I took the one less traveled by, </li></ul><ul><li>And that has made all the difference.” </li></ul><ul><li>The Road Not Taken </li></ul><ul><li>By: Robert Frost </li></ul>
    9. 12. $$ Time Seed Early Growth Mature / Expansion Adrenaline Junkies Growth Leaders Crank Turners Revenues Expenses
    10. 13. <ul><li>Passion and commitment: You have to be a true believer </li></ul><ul><li>Value proposition: Solves a real problem or meets a real need </li></ul><ul><li>The team: Onboard the bus and in the right seats </li></ul><ul><li>Competitive advantage: Better, faster, cheaper </li></ul>
    11. 14. <ul><li>Focus, focus, focus: Avoid trying to “boil the ocean” </li></ul><ul><li>Repeatable, scalable processes: Execution is key </li></ul><ul><li>Choose your customers well! </li></ul><ul><li>Remember accounting profits are great but cash is king! </li></ul>
    12. 15. <ul><li>How do I finance my startup?? </li></ul><ul><li>Equity??? </li></ul><ul><li>Debt??? </li></ul><ul><li>Bootstrap??? </li></ul><ul><li>Other??? </li></ul>
    13. 16. <ul><li>Equity finance = selling shares or membership units </li></ul><ul><li>Advantages: Does not impact cash flow, higher risk tolerance. </li></ul><ul><li>Disadvantages: Loss of control; dilution of interest </li></ul>
    14. 17. <ul><li>Debt finance = taking a loan from a bank or individual </li></ul><ul><li>Advantages: Does not dilute ownership </li></ul><ul><li>Disadvantages: Loan payments, personal guarantees, banks don’t lend money to startups without assets </li></ul>
    15. 18. <ul><li>Bootstrapping= working for free or using “FFF” money </li></ul><ul><li>Advantages: May not dilute ownership, friendly terms </li></ul><ul><li>Disadvantages: Family issues, personal guarantees, not eating or having fun  …. </li></ul>Friends Family Fools
    16. 19. <ul><li>Government: Grants, SBIR/STTR, Loans, Recovery Act </li></ul><ul><li>Advantages: Does not dilute ownership </li></ul><ul><li>Disadvantages: Takes forever, political decision criteria, government rights and oversight </li></ul>
    17. 20. <ul><li>Angels </li></ul><ul><li>VCs </li></ul><ul><li>Strategic investors </li></ul><ul><li>Debt </li></ul><ul><li>Mezzanine </li></ul><ul><li>Public markets </li></ul><ul><li>Other </li></ul>
    18. 21. <ul><li>Mostly not here…but we are working on that point </li></ul>
    19. 22. <ul><li>Angel </li></ul><ul><ul><li>Fund for Arkansas’ Future </li></ul></ul><ul><ul><ul><li>$6M angel fund </li></ul></ul></ul><ul><ul><ul><li>Up to $500K investments </li></ul></ul></ul><ul><ul><li>Gravity Ventures Arkansas </li></ul></ul><ul><ul><ul><li>$>1M angel fund </li></ul></ul></ul><ul><ul><ul><li>$50K-100K investments </li></ul></ul></ul>
    20. 23. <ul><li>Public Sector Seed Capital </li></ul><ul><ul><li>Arkansas Science & Technology Authority (ASTA) </li></ul></ul><ul><ul><ul><li>Up to $50K-$300K in royalty/ debt financing </li></ul></ul></ul><ul><ul><li>Arkansas Development Finance Authority (ADFA) </li></ul></ul><ul><ul><ul><li>Risk Capital Matching Fund - $100K - $750K </li></ul></ul></ul><ul><li>Mezzanine </li></ul><ul><ul><li>Diamond State I & II </li></ul></ul><ul><ul><li>Look for EBITDA positive growth stage companies </li></ul></ul>
    21. 24. <ul><li>Other Investment Incentives </li></ul><ul><ul><li>Arkansas Economic Development Commission </li></ul></ul><ul><ul><ul><li>Equity investment state tax credits – 33.3% </li></ul></ul></ul><ul><ul><ul><li>Can be monetized and transferred </li></ul></ul></ul><ul><ul><li>ASTA </li></ul></ul><ul><ul><ul><li>R&D state tax credits – 33% </li></ul></ul></ul><ul><ul><ul><li>Can be monetized and transferred </li></ul></ul></ul><ul><ul><li>Arkansas Capital Corporation </li></ul></ul><ul><ul><ul><li>New Market Investment tax credits </li></ul></ul></ul><ul><ul><ul><li>SBA Loan Guarantees </li></ul></ul></ul>
    22. 25. <ul><li>Management Team, Management Team, Management Team </li></ul><ul><li>Intellectual Property that can be a barrier to entry </li></ul><ul><li>Customer traction – can the company execute? </li></ul><ul><li>Physical proximity to the investors </li></ul><ul><li>Other interested investors – nobody wants to be first </li></ul><ul><li>Entrepreneur skin in the game </li></ul><ul><li>Realistic valuation – this depends a lot on where you sit  </li></ul>
    23. 26. <ul><li>Angels </li></ul><ul><ul><li>Typically high net worth individuals </li></ul></ul><ul><ul><li>Look to do very early stage seed investments </li></ul></ul><ul><ul><li>Often bring relevant domain knowledge </li></ul></ul><ul><ul><li>Occasionally form “Angel Funds” </li></ul></ul><ul><ul><li>This group can some times be broadened to include “ friends, fools, and family ” </li></ul></ul><ul><ul><li>Examples: Fund for Arkansas’ Future </li></ul></ul>
    24. 27. <ul><li>VC Firms grew out of Silicon Valley in the 1950s </li></ul><ul><li>Largest concentration around R&D Universities </li></ul><ul><li>Desired returns: Typically a minimum of 10X </li></ul><ul><li>Examples: Kleiner-Perkins, Sevin-Rosen, NMP </li></ul><ul><li>Investment Preferences: </li></ul><ul><ul><li>Proven management team </li></ul></ul><ul><ul><li>Intellectual property that creates high barriers </li></ul></ul><ul><ul><li>Customer traction </li></ul></ul>
    25. 28. Venture Fund LLP Limited Partners Venture Investments <ul><li>Public Institutions </li></ul><ul><li>Individuals </li></ul><ul><li>Private Equity Firms </li></ul><ul><li>Mutual Funds </li></ul>
    26. 29. <ul><li>Successful VC funds: </li></ul><ul><ul><li>Out of ten investments made after 3-5 years: </li></ul></ul><ul><ul><ul><li>One big home run – at least 10X or more return </li></ul></ul></ul><ul><ul><ul><li>Four marginal survivors </li></ul></ul></ul><ul><ul><ul><li>Three on life support </li></ul></ul></ul><ul><ul><ul><li>Two total failures </li></ul></ul></ul><ul><li>“ 1 home run (10x) out of ten investments ” ……Chrysalis VC Fund </li></ul><ul><li>Historical Returns – High teens to >30% </li></ul>
    27. 30. 1-2 Winners 10X Returns Due Diligence on 20 Investments Receive 1000s of Business Plans Read 1000s of Executive Summaries Invite 100s of Companies to Present Invest in 10
    28. 32. <ul><li>Industry Preference </li></ul><ul><li>Stage Preference </li></ul><ul><li>Investment Size Parameters </li></ul><ul><li>Geographic Preference </li></ul><ul><li>Risk Balancing and Age of Fund </li></ul><ul><li>Fund Experience and Expertise </li></ul><ul><li>Due Diligence </li></ul>
    29. 33. <ul><li>Based on VC perceived risk, usually not the risk the entrepreneur sees </li></ul><ul><li>Four main risk categories: </li></ul><ul><ul><li>Product/Technology risk </li></ul></ul><ul><ul><li>Market risk </li></ul></ul><ul><ul><li>Execution/Management risk </li></ul></ul><ul><ul><li>Financing Risk </li></ul></ul>
    30. 34. <ul><li>No “standard” way to determine valuation!! </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Net Present Value of Discounted Cash Flows </li></ul></ul><ul><ul><li>Multiple of Annual Revenues </li></ul></ul><ul><ul><li>Multiple of Net Income </li></ul></ul><ul><ul><li>Multiple of Subscribers </li></ul></ul><ul><ul><li>Valuation by Comparison </li></ul></ul><ul><ul><li>Use of Valuation Tools – </li></ul></ul>
    31. 35. <ul><li>Recommendation: </li></ul><ul><ul><li>Look at the comparable companies in your space </li></ul></ul><ul><ul><li>Set your valuation within the range of the comps </li></ul></ul><ul><ul><li>Be conservative </li></ul></ul><ul><li>Pre-revenue startups seldom have valuations greater than $1M-2M even with great IP and management </li></ul>
    32. 36. <ul><li>Term Sheet – a proposal to invest </li></ul><ul><li>Not binding </li></ul><ul><li>Outlines the deal points </li></ul><ul><li>Investment contingent on negotiation and due diligence </li></ul><ul><li>Key Points </li></ul><ul><ul><li>Pre-money valuation </li></ul></ul><ul><ul><li>Post-money valuation </li></ul></ul>
    33. 37. <ul><li>Pre-money valuation = $4M </li></ul><ul><li>Investment = $1M </li></ul><ul><li>Post-money valuation = $5M </li></ul><ul><li>VC ownership = $1M / $5M = 20% </li></ul><ul><li>VCs typical want preferred stock </li></ul>
    34. 38. <ul><li>Typical VC deal needs an exit in 5-7 years </li></ul><ul><li>Want a 10X return minimum </li></ul><ul><li>Play for capital appreciation </li></ul><ul><ul><li>Example: $1M today = $10M @ Exit </li></ul></ul><ul><ul><li>VC Protections = Preferred Stock, Ratchets, Anti-dilution </li></ul></ul><ul><ul><li>VC Ownership will “Ratchet-up” if company misses milestones </li></ul></ul>
    35. 39. <ul><li>Key Points to Negotiate </li></ul><ul><ul><li>Board of Directors </li></ul></ul><ul><ul><li>Vesting & Acceleration </li></ul></ul><ul><ul><li>Option Pool & Acceleration </li></ul></ul><ul><ul><li>Preferred Stock </li></ul></ul><ul><ul><li>Anti-Dilution Protection </li></ul></ul>
    36. 40. <ul><li>Comprehensive review of everything </li></ul><ul><ul><li>Management references </li></ul></ul><ul><ul><li>Market size & need </li></ul></ul><ul><ul><li>Sales Pipeline & Customers </li></ul></ul><ul><ul><li>Strategic relationships </li></ul></ul><ul><ul><li>Financials </li></ul></ul><ul><ul><li>Intellectual property </li></ul></ul><ul><ul><li>Legal issues </li></ul></ul><ul><li>Grueling process that will find the BS! </li></ul><ul><li>Can last 30-90 days </li></ul>
    37. 41. <ul><li>Entrepreneurs’ Disease: 100% X 0 = 0 </li></ul><ul><li>Unrealistic valuations </li></ul><ul><li>Lack of preparation for having a VC “help” run your company </li></ul>
    38. 42. <ul><li>Excellent management that has a track record </li></ul><ul><li>Intellectual Property or Subject Matter Expertise that creates a competitive barrier </li></ul><ul><li>Solves big problems in big markets - $1B++ </li></ul><ul><li>Customer traction – i.e. somebody will buy your widget </li></ul><ul><li>Entrepreneur “skin in the game” </li></ul>
    39. 43. <ul><li>Skype </li></ul><ul><ul><li>VOIP service provider </li></ul></ul><ul><ul><li>Revenues based on “eyeballs”, advertising or some such </li></ul></ul><ul><ul><li>No cost for PC-to-PC calls </li></ul></ul><ul><ul><li>Initial VC investors: </li></ul></ul><ul><ul><ul><li>Draper –Richards: Bill Draper and Howard Hartenbaum - $250,000 initial investment </li></ul></ul></ul><ul><ul><li>Sells to eBay in 2006 for $2.1B </li></ul></ul><ul><ul><li>Initial VCs make 1300X return on their initial investment </li></ul></ul>Irrational Exuberance?? Possibly, but some big hits still happen – RARELY.
    40. 44. <ul><li>Guy Kawasaki interviews: </li></ul><ul><ul><li>Mike Moritz, Sequoia Capital and Paul Graham, Y Combinator </li></ul></ul><ul><ul><li> </li></ul></ul>
    41. 45. <ul><li>Existing Fortune 500 firms </li></ul><ul><li>Look to invest in technologies that can benefit their business portfolio </li></ul><ul><li>Open to “Extrapreneurship” i.e. spin-outs </li></ul><ul><li>Create their own venture funds </li></ul><ul><li>Examples: GE, IBM, Intel, Honda, NEC, Chevron </li></ul><ul><li>Upside: Can bring tremendous market access </li></ul><ul><li>Downside: Very slow moving typically </li></ul>
    42. 46. Honda Strategic Venturing (HSV) Strategic venture investment arm of the global Honda R&D organization . <ul><li>Window to Global Innovation : Create new value jointly by bridging the outside entrepreneurs and our internal R&D through venture investing </li></ul><ul><li>Spinout of Internal R&D projects : Develop new businesses via technology carve-outs which find a better commercial fit outside of Honda </li></ul><ul><li>Entrepreneurship at Honda R&D : Enhance Honda’s innovation spirit by harnessing entrepreneurship in the global venture community </li></ul>
    43. 47. Drive Innovation
    44. 48. Alternative Energy <ul><li>Fuel cell, hydrogen reformer </li></ul><ul><li>Battery, Bio-fuel, Solar energy </li></ul><ul><li>Energy harvesting </li></ul>Robotics Communication for Mobility <ul><li>Sensors, Gyros, Radar </li></ul><ul><li>Actuators, Motors </li></ul><ul><li>Image processing, voice recognition </li></ul><ul><li>Wireless Communication </li></ul><ul><li>In-vehicle network </li></ul><ul><li>Human machine interface </li></ul>Advanced Materials <ul><li>High performance materials: coating, fabric, rubber, structure, nano </li></ul><ul><li>Functional materials: catalysts, membranes, electrodes </li></ul>High Interest Technologies
    45. 49. <ul><li>Target: </li></ul><ul><ul><li>Game-changing technologies </li></ul></ul><ul><ul><li>Technologies that can contribute to Honda’s R&D road map </li></ul></ul><ul><li>Primary Interest: Mutual Strategic Value </li></ul><ul><ul><li>We offer: </li></ul></ul><ul><ul><ul><li>Funding </li></ul></ul></ul><ul><ul><ul><li>Joint development with Honda R&D </li></ul></ul></ul><ul><ul><ul><li>Product / Market knowledge </li></ul></ul></ul><ul><ul><li>We seek: </li></ul></ul><ul><ul><ul><li>Board observer rights </li></ul></ul></ul><ul><ul><ul><li>Strategic commercial rights </li></ul></ul></ul><ul><li>Investment Size: </li></ul><ul><ul><li>Seed-to early-stage: </li></ul></ul><ul><ul><ul><li>HSV Fund (Honda’s technology venture fund w/ partner Atrium) </li></ul></ul></ul><ul><ul><li>Mid-to late-stage: </li></ul></ul><ul><ul><ul><li>Honda Motors direct investment </li></ul></ul></ul>
    46. 50. <ul><li>Some venture firms focus on debt </li></ul><ul><ul><li>Gives first preference on assets </li></ul></ul><ul><ul><li>Can be convertible to equity </li></ul></ul><ul><ul><li>Avoids/limits shareholder dilution… </li></ul></ul><ul><ul><li>But it has to be paid every month </li></ul></ul><ul><ul><li>Examples: Western Tech Investments, Silicon Valley Bank, Commercial banks/SBA loans </li></ul></ul>
    47. 51. <ul><li>Growth financing to get to liquidity event </li></ul><ul><li>Targeted at profitable companies that need to scale </li></ul><ul><li>Last stage financing before M&A activity or IPO -  </li></ul><ul><li>Typically $10M-$100M or more in financing </li></ul><ul><li>Can be debt/equity and is typically a syndicate of private equity funds </li></ul>
    48. 52. <ul><li>Forget about it…. </li></ul><ul><li>Post 2001 - virtually unavailable </li></ul><ul><li>Sarbanes-Oxley (SOX) requirements have a further stifling impact </li></ul><ul><li>Not a good exit or liquidity strategy for US-based tech startups at this point </li></ul><ul><li>Some rare exceptions still arise… </li></ul>
    49. 53. <ul><li>US Government </li></ul><ul><ul><li>SBIR/STTR funding can be a great source of seed, pre-seed funding </li></ul></ul><ul><ul><li>Universities know how to get this funding </li></ul></ul><ul><ul><li>No dilution, no equity, and no debt </li></ul></ul><ul><ul><li>Some Incubators use this to get companies rolling: </li></ul></ul><ul><ul><ul><li>Virtual Incubation Company (VIC) </li></ul></ul></ul><ul><ul><li>Process can be slow and involved </li></ul></ul>
    50. 54. $$ Time Seed Early Growth Mature / Expansion Angels VCs Strategic Investors Debt Investors Revenues Revenues Expenses Mezzanine Bootstrap – self financing SBIR/STTR
    51. 56. University R&D Technology Engine Entrepreneurial Culture Available Venture Finance
    52. 57. University R&D Technology Engine Entrepreneurial Culture Available Venture Finance
    53. 58. <ul><li>The Road Less Traveled – new ventures are critical to our economic health and success! </li></ul><ul><li>The team, the plan, and a good finance strategy are key </li></ul><ul><li>A “startup culture” has to be nurtured </li></ul><ul><li>Arkansas is taking steps to create the right environment </li></ul>
    54. 59. Raising Capital to Fund Growth Jeff Amerine, PMP Technology Licensing Officer Adjunct Instructor, Entrepreneurship University of Arkansas Advisor, Innovate Arkansas [email_address] “Techpreneurship Blog” http://