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Similar to Early Stage Funding Options and Expectations_UL
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Early Stage Funding Options and Expectations_UL
- 1. Early Stage Venture Funding Options and Expectations Harish Gandhi hgandhi@YAHOO.com M81 Consultants Pvt Ltd
- 2. Agenda • Lifecycle of a startup and need for capital • Options for early stage • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ? 2 M81 Consultants Pvt Ltd
- 3. LifeCycle of a Startup 3 • Ideation / Concept stage • Initial market feedback • Market Sizing • Feasibility stage: Product dev. , value proposition • Early Customer Feedback • Select hires • Market Validation stage: BD, fine tune biz model, partnerships • Product Commercial, Some revenue • Customer Feedback • Early product diversification • Team Build out • Growth: Scalability, Teams, Process, Profitability • Market Validated • Biz model validated • Product diversification Maturity Time • Focus Execution • Financial predictability • Risk management Do you want to be in this business • What is this business? • Is it feasible? • Do atleast a few relevant “others” believe this? • No Going Back ! • Market Feedback • Re-work the model, value proposition • How do I grow faster • Adjacencies • Beat the “crap” out of the competition M81 Consultants Pvt Ltd
- 4. LifeCycle of a Startup & Funding 4 • Ideation / Concept stage • Initial market feedback • Market Sizing • Feasibility stage: Product dev. , value proposition • Early Customer Feedback • Select hires • Market Validation stage: BD, fine tune biz model, partnerships • Product Commercial, Some revenue • Customer Feedback • Early product diversification • Team Build out • Growth: Scalability, Teams, Process, Profitability • Market Validated • Biz model validated • Product diversification Maturity Time • Focus Execution • Financial predictability • Risk management IPOF F & F Angels Seed Early VC Growth VC PE Bank Financing Source of Funds Rs 10L-30L 50L – 5 Cr US$ 1–5m US$ 10 – 25m US$ 20M+ M81 Consultants Pvt Ltd
- 5. Agenda • Lifecycle of a startup and need for capital • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ? 5 M81 Consultants Pvt Ltd
- 6. Venture Economics • Venture fund invested over 3-4 years • Money returned to investors (LPs) 7- 10 years • Typical return 2.5x – 3.5X (IRR 18% – 25%) • Few super hits, few writeoffs • Model works with significant stakes & large exits • Expectations of return from each investment • Vary by stage of VC • Early stage VCs • Return expectation 7 – 10X or higher • For Ser A VC min $40 to $50m exit 6 M81 Consultants Pvt Ltd
- 7. Types of Venture Funds / Which VC to pick ? Types of VCs • Stage of Investment (correlates with Ticket Size) • Sector Focus • Corporate VCs Picking a VC • Sector, Stage • Investment Cycle of fund • Ability to provide reserves for future investment • Philosophy • Non-monetary Contribution – “Value Addition” 7 M81 Consultants Pvt Ltd
- 8. What can you expect from a Venture Fund • Other than money (acceleration of growth) • Assistance /Sounding board for actions, strategies • Large Network for customer contacts, advisors • Active assistance in hiring senior members of team • Appointment of Board members, Advisors • Corporate Governance • Credibility • - again – varies by stage of VC • On the Flip side - • Lower level of freedom (spending, reporting, governance, speed (?)) • Decisions being made by a balanced board rather than founder • Lower equity holding (but potentially much higher value) 8 M81 Consultants Pvt Ltd
- 9. Agenda • Lifecycle of a Startup and need for capital • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ? 9 M81 Consultants Pvt Ltd
- 10. Early Stage: Venture Fundable businesses • Team • Early stage - risky • Large Market • Nascent market but rapidly growing and potential to be large • Large existing market with a disruptive play or discontinuity • Scalable • Build the business efficiently and quickly • Strong Value Proposition • Why you will win • Defensible • Differentiability (IP) • Defensible first mover advantage • Exits (IPO, Trade Sale) 10 M81 Consultants Pvt Ltd
- 11. Team • Relevant Experience • Domain • Functional • Passion (strong belief, risk taking, ambition) • Young !!! • Ability to Sell, Hire and Inspire • Execution capability • Business and Operational Experience 11 Team Market Value Proposition Scalable Defensible M81 Consultants Pvt Ltd
- 12. Scalable : Capital 12 Input: Effort, Capital Output: Revenue, Profits Technology Facilitates Capital Efficiency Team Market Value Proposition Scalable Defensible M81 Consultants Pvt Ltd
- 13. Biz Model Scalability: Case Study Enterprise Software: Scalability Barriers • Small Ticket Price • Fragmented market, Competition • Technical sale , Long Sales Cycle • Demanding Customer, Customization What would be interesting - Large ticket Price - Channel / distribution - Upsell / Cross Sell; Recurring revenues - Strong demand (regulation, compliance) Team Market Value Proposition Scalable Defensible M81 Consultants Pvt Ltd 13
- 14. Value Proposition 14 » Is there a genuine need for the product / service? » How is it being addressed today ? » Who is best positioned to fulfill this need ? » Why will the customer select you, continue to use your service/product ? » Cheaper, Better, Faster Team Market Value Proposition Scalable Defensible M81 Consultants Pvt Ltd
- 15. Defensible • Intellectual Property (Nice but not critical) • Installed Base – Platform Play • Installed Base – deep entrenchment, hard to remove • First to Market - if Network effect (sometimes scale) • Specialized knowledge / Resources • NOT PRICE (unless sustainable cost advantage) Team Market Value Proposition Scalable Defensible M81 Consultants Pvt Ltd 15
- 16. Less likely to be Venture Fundable • Entrepreneur • Lack of experience / knowledge in related area • Lack of sales and operational experience in founding team • Mindset: Always prioritizes profits over growth • Mindset: Reluctant to divest equity (or only limited amounts) • Mindset: Not open to feedback, change • Market • Small Market / aiming to build a 20 Cr company in 5 yrs • Uncertain Business model, Scalability challenges • Differentiability and Competition • Me too product / service • Capital Requirement • Risk of consuming too much capital (other than E-Commerce !) 16 M81 Consultants Pvt Ltd
- 17. When to Approach an early stage Venture Fund ? • VC unlikely to make a bet on multiple risk factors • Team • Technology and Product risk • Competitive Risk • Market and Business Model risk • Exit Risk • Product ready / close to being ready & customer traction • Some validation of assumptions, business model, market size • Presence of Business and Operations guy on team 17 M81 Consultants Pvt Ltd
- 18. Agenda • Lifecycle of a business and need for capital • Options for early stage capital (cover types of VCs) • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ? 18 M81 Consultants Pvt Ltd
- 19. Investment Process Deal Identification / Preliminary Analysis Deal Validation Due Diligence & Closure Issue of Term Sheet Typically 1% of deals get through the funnel 30 – 45 days 30 - 45 days 15 days Prelim Market Analysis Discussion : Internal + External Experts Deep Dive: Team, Market, DIfferentiation Fact Validation. Accounting & Legal Diligence Background checks Minimum durations 19 M81 Consultants Pvt Ltd
- 20. Deal Validation – Decision Parameters & Challenges Team Market Size Differentiator -- Teams are enthusiastic and passionate -- Often lacks experience in functions like marketing, distribution and finance Key – Ability to bring right talent on board -- Early stage businesses lacks established business models -- Uncertainty on Pricing, Customer Behavior Key – Customer References, Experts Opinion, Detailed analysis based on demographics, existing solutions and similar businesses in other markets -- Competition is not very clear -- Lack of IP Key – Identify key success factors in the business M81 Consultants Pvt Ltd 20
- 21. Due Diligence and Closure • A fact validation process • Not a decision making process • However; deals can break at Due Diligence level too • Accounting, Legal Due Diligence and Background checks – Typically these are done by third parties with active involvement of Canaan’s team Process of validating business facts, company structure, financials etc M81 Consultants Pvt Ltd 21
- 22. Agenda • Lifecycle of a business and need for capital • Options for early stage capital (cover types of VCs) • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ? 22 M81 Consultants Pvt Ltd
- 23. Dealing with Term Sheets • Valuation • Type of Equity (Preferred vs common) • Board Participation • Liquidation Preference • Conversion and Anti Dilution Provision • ROFR – Right of First Refusal, Co-Sale • Redemption • Affirmative Rights and Information Rights • ESOP Letter of Intent to invest in a given opportunity on specific terms and conditions M81 Consultants Pvt Ltd
- 24. Agenda • Lifecycle of a business and need for capital • Options for early stage capital (cover types of VCs) • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ? 24 M81 Consultants Pvt Ltd
- 25. What happens post funding? Early Stage • Constitution of a BOD, Monthly Board Meetings • Establishment of milestones (revenue, customer wins, product roadmap) • Validation of key assumptions • Business model fine tuning • Assistance in Hiring As business grows: • Focus on Profitable growth • Focus on Execution • High scrutiny of financials – top line, bottom line • Risk Management • Internal Audits 25 M81 Consultants Pvt Ltd
- 26. What if Funding discussion doesn’t work out ? • Know why • Not in area of interest ? • Missing something critical? Adapt if you agree • Try other VCs • Stay in touch and provide updates on progress 26 M81 Consultants Pvt Ltd
- 27. Thank You HGANDHI@YAHOO.COM M81 Consultants Pvt Ltd