Venture Capital Fundraising Methodology December 12, 2011
What Is Venture Capital?
What Is Venture Capital? <ul><li>Private equity class specialized in funding and building early stage, high growth potenti...
Typical VC Fund Structure <ul><li>General Partners invest capital on behalf of Limited Partners </li></ul><ul><ul><li>LPs ...
Where Do VCs Invest? Life Sciences Clean Technology Information Technology
Industry Investment Trends, 2000-10 Source: MoneyTree Report – NVCA/PWC/Thomson Reuters
<ul><li>Web 2.0 driven by utility computing, social marketing, open platforms, advanced programming solutions, and open so...
Fund Example: SoftBank Capital <ul><li>Visit  www.softbankcapital.com  for overview </li></ul>
Fundraising Process You set the valuation.  I’ll set the terms.* *Don’t be fooled by the cover price
Why Raise Venture Capital? <ul><li>Guidance & Support </li></ul><ul><ul><li>Board participants; Interim executives </li></...
Typical Company Profile <ul><li>Team </li></ul><ul><ul><li>Ranges from a single, 1 st -time entrepreneur to a full team of...
Typical Deal Timeline <ul><li>Average firm reviews 1000+ deals per year </li></ul><ul><li>99% of deals turned down </li></...
Deal Evaluation <ul><li>Focus varies by firm, but key elements include: </li></ul><ul><li>Team </li></ul><ul><ul><li>Can t...
Financial Projections <ul><li>Focus on key revenue and expense drivers </li></ul><ul><ul><li>Sensitivities important given...
Term Sheet <ul><li>Price </li></ul><ul><ul><li>Pre vs. Post $ Valuation </li></ul></ul><ul><ul><li>Option Pool implication...
Term Sheet (cont’d) <ul><li>Board of Directors </li></ul><ul><ul><li>Investor Seats and Observers </li></ul></ul><ul><ul><...
Legal Documentation <ul><li>Stock Purchase Agreement </li></ul><ul><ul><li>Price and # of shares sold, reps & warranties <...
Subsequent Financing <ul><li>Bridge funding </li></ul><ul><ul><li>Discount into next round or warrants </li></ul></ul><ul>...
Exit Strategy <ul><li>Acquisition </li></ul><ul><ul><li>Strategic buyers </li></ul></ul><ul><ul><li>Financial buyers for h...
<ul><li>www.SoftBank.com </li></ul><ul><li>@joevc -  www.twitter.com/joevc </li></ul><ul><li>www.JoeMedved.com </li></ul>
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VC 101

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  • - Focus by sector, stage and geography
  • IT/Consumer had massive investment in late 90s. Volume and distribution has dropped significantly over time. Life Sciences has been more stable over time Industrial/Energy spiked more recently, although lack of capital efficiency scared some off in 2009 - Retailing/Distribution has practically disappeared as a category - Financial Services has dropped as well
  • Anti-Dilution Full Ratchet reprices the existing preferred to match the price of the new investors, which can cause a spiraling price effect that wipes out management and common If Series A invested $5M in the last round, those shares must represent $5M of value in the new deal, so a $5M pre on the next round would give all of the value to the Series A shareholders Weighted average approach results in a more reasonable price adjustment New Conversion Price = Old Conversion Price * ((Common Outstanding + Common Issuable at Old Price)/(Common Outstanding + Common Issuable at New Price)) With Narrow-Based, Common Outstanding can include just preferred class, all preferreds, and common With Broad-Based, Common Outstanding can include all preferreds converted, common, options and warrants, which is better for Company
  • VC 101

    1. 1. Venture Capital Fundraising Methodology December 12, 2011
    2. 2. What Is Venture Capital?
    3. 3. What Is Venture Capital? <ul><li>Private equity class specialized in funding and building early stage, high growth potential enterprises </li></ul>
    4. 4. Typical VC Fund Structure <ul><li>General Partners invest capital on behalf of Limited Partners </li></ul><ul><ul><li>LPs include endowments, pension funds, charities, corporations, individuals, and fund of funds </li></ul></ul><ul><ul><li>GP contributes personal capital as well </li></ul></ul><ul><ul><li>GP typically earn 2% annual management fees & 20% carried interest, i.e., share of profits </li></ul></ul><ul><li>Capital called as needed, with primary investing done in first 5 yrs of 10 yr fund cycle </li></ul><ul><li>Quality fund returns over 2x, or 20-25% IRR </li></ul><ul><ul><li>1/3 of deals will likely fail, 1/3 will return amount invested, and 1/3 will drive majority of returns </li></ul></ul>
    5. 5. Where Do VCs Invest? Life Sciences Clean Technology Information Technology
    6. 6. Industry Investment Trends, 2000-10 Source: MoneyTree Report – NVCA/PWC/Thomson Reuters
    7. 7. <ul><li>Web 2.0 driven by utility computing, social marketing, open platforms, advanced programming solutions, and open source tools </li></ul><ul><li>Enables more progress with fewer $ </li></ul><ul><li>Has yielded many successful startup incubators and seed funds </li></ul>Evolution of Venture Capital
    8. 8. Fund Example: SoftBank Capital <ul><li>Visit www.softbankcapital.com for overview </li></ul>
    9. 9. Fundraising Process You set the valuation. I’ll set the terms.* *Don’t be fooled by the cover price
    10. 10. Why Raise Venture Capital? <ul><li>Guidance & Support </li></ul><ul><ul><li>Board participants; Interim executives </li></ul></ul><ul><ul><li>Product management, business development and financial planning support </li></ul></ul><ul><li>Access </li></ul><ul><ul><li>Industry contacts </li></ul></ul><ul><ul><li>Leverage portfolio </li></ul></ul><ul><li>Credibility </li></ul><ul><ul><li>Stamp of approval with customers, partners and vendors </li></ul></ul><ul><li>Cash </li></ul><ul><ul><li>But at a high cost of capital, so Guidance, Access and Credibility should justify that cost </li></ul></ul>
    11. 11. Typical Company Profile <ul><li>Team </li></ul><ul><ul><li>Ranges from a single, 1 st -time entrepreneur to a full team of seasoned entrepreneurs </li></ul></ul><ul><li>Stage of Development </li></ul><ul><ul><li>Ranges from concept to approaching profitability </li></ul></ul><ul><ul><li>VCs typically sit between angel and growth/buyout investors, though some funds cross over stages </li></ul></ul><ul><ul><li>Larger fund investments in seed on the rise </li></ul></ul><ul><li>Size of Round </li></ul><ul><ul><li>Definitions vary, normalized range from $1M-$10M </li></ul></ul><ul><ul><li>Deals frequently syndicated between multiple funds to strengthen board and diversify risk </li></ul></ul>
    12. 12. Typical Deal Timeline <ul><li>Average firm reviews 1000+ deals per year </li></ul><ul><li>99% of deals turned down </li></ul><ul><li>Promising deals present to partnership 2-6 weeks post initial meeting </li></ul><ul><li>Partnership approved deals receive term sheet </li></ul><ul><li>Accepted term sheets followed by 2-6 weeks of final diligence and legal documentation </li></ul><ul><li>Average firm, in normal market, closes 8-12 new investments/yr </li></ul><ul><li>The earlier stage the business, the shorter the process typically runs </li></ul>Note: Graphic via NVCA; Industry statistics are approximations
    13. 13. Deal Evaluation <ul><li>Focus varies by firm, but key elements include: </li></ul><ul><li>Team </li></ul><ul><ul><li>Can they execute on development, sales and support? </li></ul></ul><ul><li>Concept </li></ul><ul><ul><li>What is the product or service? </li></ul></ul><ul><ul><li>Why will customers buy it? </li></ul></ul><ul><li>Opportunity </li></ul><ul><ul><li>What is the market size and penetration strategy? </li></ul></ul><ul><ul><li>What is the competitive landscape? </li></ul></ul>
    14. 14. Financial Projections <ul><li>Focus on key revenue and expense drivers </li></ul><ul><ul><li>Sensitivities important given model immaturity </li></ul></ul><ul><ul><li>Viability of margins long term </li></ul></ul><ul><li>How much additional capital required? </li></ul><ul><ul><li>What is the potential dilution from later rounds? </li></ul></ul><ul><li>Focus on model details varies based on stage </li></ul><ul><ul><li>Seed stage may not yield revenue for 18-24 mos. </li></ul></ul><ul><ul><li>Later stage deals may consider debt financing, requiring covenant maintenance </li></ul></ul>
    15. 15. Term Sheet <ul><li>Price </li></ul><ul><ul><li>Pre vs. Post $ Valuation </li></ul></ul><ul><ul><li>Option Pool implications </li></ul></ul><ul><li>Liquidation Preference </li></ul><ul><ul><li>Liquidation: Sale of company as opposed to IPO </li></ul></ul><ul><ul><li>Multiples and Dividends </li></ul></ul><ul><ul><li>Participation: Full, Capped and Non-Participating </li></ul></ul><ul><ul><li>Stacked vs. pari passu </li></ul></ul><ul><ul><li>Impact on management ownership and resulting motivation </li></ul></ul><ul><li>Board Configuration </li></ul><ul><li>Option Pool: Pre vs. Post $ Dilution </li></ul><ul><li>Anti-Dilution Rights: Weighted Avg. thru Full Ratchet </li></ul><ul><li>Pro Rata Rights for future rounds </li></ul><ul><li>Protective Provisions </li></ul><ul><li>Term Sheet summary at www.AsktheVC.com </li></ul>
    16. 16. Term Sheet (cont’d) <ul><li>Board of Directors </li></ul><ul><ul><li>Investor Seats and Observers </li></ul></ul><ul><ul><li>Founder and Independent Seats </li></ul></ul><ul><li>Protective Provisions </li></ul><ul><ul><li>Veto rights for overall preferreds or by class </li></ul></ul><ul><ul><li>On changing rights of preferred class, selling existing or raising additional shares, change of control, board composition, raising debt </li></ul></ul><ul><li>Anti-Dilution </li></ul><ul><ul><li>Full Ratchet, Broad or Narrow-Based Wghtd Avg </li></ul></ul><ul><li>See term sheet series at www.AsktheVC.com </li></ul>
    17. 17. Legal Documentation <ul><li>Stock Purchase Agreement </li></ul><ul><ul><li>Price and # of shares sold, reps & warranties </li></ul></ul><ul><li>Certificate of Incorporation (a/k/a Charter) </li></ul><ul><ul><li>Establishes rights, preferences, privileges and restrictions of each class and series of stock </li></ul></ul><ul><li>Investor Rights Agreement </li></ul><ul><ul><li>Information, registration, and pre-emptive rights </li></ul></ul><ul><li>Voting Agreement </li></ul><ul><ul><li>Board composition, drag-along rights </li></ul></ul><ul><li>See www.NVCA.org for these and other template docs </li></ul>
    18. 18. Subsequent Financing <ul><li>Bridge funding </li></ul><ul><ul><li>Discount into next round or warrants </li></ul></ul><ul><li>External rounds </li></ul><ul><ul><li>Up rounds vs. Recaps </li></ul></ul><ul><li>Internal rounds </li></ul><ul><ul><li>Potential pay to play when syndicate broken </li></ul></ul><ul><li>Venture Debt </li></ul>
    19. 19. Exit Strategy <ul><li>Acquisition </li></ul><ul><ul><li>Strategic buyers </li></ul></ul><ul><ul><li>Financial buyers for high cash flow business </li></ul></ul><ul><li>IPO </li></ul><ul><ul><li>Market appetite for venture-backed deals </li></ul></ul><ul><ul><li>Sarbanes Oxley </li></ul></ul>
    20. 20. <ul><li>www.SoftBank.com </li></ul><ul><li>@joevc - www.twitter.com/joevc </li></ul><ul><li>www.JoeMedved.com </li></ul>

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