Venture Capital Course Overview

Venture Capital: FINAN 6310
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.

Advanced Venture Capital: FINAN 6310
Entrepreneur’s journey
Overhang
When to sell
Secondary Markets &
Accredited Investors
Agenda

Venture Capital: Financing New Ventures: FINAN 6300
The Entrepreneur’s Journey
Victoria Arnold, Winner Young Business of the Year Award, Association of
Scottish Business Women. Photo credit: Glasgow Caledonian University

Businesses start
as a spark of inspiration
about an opportunity or
the solution to a problem

I Have An Idea!
Starting a Company
Photo Credit: Rovio Entertainment, Ltd.
NewCo is Born

Starting a Company

How should NewCo be structured?
Sole proprietorship, Partnership,
C or S Corporation, Limited Liability Company
Starting a Company
Where should NewCo be domiciled?
Delaware? Nevada? San Francisco? Utah?
decisions, decisions…

Starting a Company
Sole Proprietorship

Starting a Company
Partnership

Starting a Company
Limited
Partnership

Starting a Company
Corporation
(C or S Corp)

Starting a Company
Corporation
(C or S Corp)
Limited Liability Company

Starting a Company
Domicile

Funding Options
How do we fund NewCo to start operations?
First rule of finance: Never run out of cash.

Funding Options
Bootstrap
Personal funds
Credit cards
Sweat equity
Borrow against assets
(i.e., home or car)
Pitch competitions
Grants
How do we fund NewCo to start operations?
Venture Capital
Corporate VCs
Banks
SBA Loans
Family Offices
Institutional Investors
Private Equity
Hedge Funds
Public (Wall Street)
Foreign
Crowdfunding
Family, Friends & Fools
Angels, High Net Worth
Accredited Angel
Networks, Broker RIAs

Matching Your Company With Investors
© 2013 Gartner, Inc. and/or its affiliates. All rights
reserved.
#GartnerSYM
Choosing the right funding
10 Gartner
Idea and MVP Adoption & Monetization Growth Exit
Crowd Funding
Corporate VCs
VCs
Incubators & Accelerators
Angels
Banks
Tech Banks
Bootstrap
PE
Micro VCs
Source: Gartner How to Raise Strategic VC Funding and Grow Your Startup.by Vassil Mladjov Nov 2014

As your company matures,
your funding options change.

The best investor at this stage, may be the
one who can introduce you to the investor you
need at the next stage.

Investor Rules of Thumb
Investor Type Investment Typical IRR Typ. Horizon
Founder ? 100% to 500% 5–10 years
Angel $100k–$300k 25% to 100% 2–5 years
Super Angel/Seed VC $500k–$2M 100% to 200% 3–7 years
VC Series A $1M–$10M 100% to 200% 3–7 years
VC Series B $5M–$100M 200% and up 2-5 years
IPO Investors $50M + 20% to 50% 1 year or less
Consider the risk, time horizon, and required
return of your target investor when you design
your capital structure.
InvestorTypes

EQUITY
VALUATION
FINANCING ROUND
Price per Share (PPS)
Bootstrap

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
Founder
2.9M
$10K
$0.003
$10,000
2,900,000

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
$0.003
Angel
$1.00
Founder
Accredited
Investor
2.9M
$10K
100K
$100K
$3,000,000
3,000,000

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
$0.003
Angel
$1.00
EOPP
Founder
Accredited
Investor
Employees
2.9M
$10K
100K
$100K
$0
350K
$3,000,000
3,350,000

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
$0.003
Angel
$1.00
Seed
$1.25
EOPP
Founder
Accredited
Investor
Employees Seed VC or
Super Angel
2.9M
$10K
100K
$100K
$0
350K
$1M
800K
$5,187,500
4,150,000

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
$0.003
Angel
$1.00
Seed
$1.25
Series A
$2.00
EOPP
Founder
Accredited
Investor
Super Angel
A-VC
2.9M
$10K
100K
$100K
$0
350K
$1M
800K
$5M
2.5M
$13,300,000
6,650,000

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
$0.003
Angel
$1.00
Seed
$1.25
Series A
$2.00
Series B
$5.00
EOPP
Founder
Accredited
Investor
Super Angel
A-VC
B-VC
2.9M
$10K
100K
$100K
$0
350K
$1M
800K
$5M
2.5M
$17.5M
3.5M
$50,750,000
10,150,000

EQUITY
VALUATION
FINANCING ROUND
Bootstrap
$0.003
Angel
$1.00
Seed
$1.25
Series A
$2.00
Series B
$5.00
IPO
$13.00
EOPP
Founder
Accredited
Investor
Super Angel
A-VC
B-VC
Public
2.9M
$10K
100K
$100K
$0
350K
$1M
800K
$5M
2.5M
$17.5M
3.5M
5.5M
15,650,000

FINANCING ROUND
Price per Share (PPS) Bootstrap Angel Seed Series A Series B IPO
EOPP
$203,450,000
ITY
VALUATION
15,650,000
How much is each investor worth now?
• 35.1% Public $71,500,000
• 22.4% B-VC $45,500,000 (17,500,000)
• 16.0% A-VC $32,500,000 (5,000,000)
• 5.1% Seed $10,400,000 (1,000,000)
• 2.2% Employees $4,550,000
• 0.6% Angel $1,300,000 (100,000)
• 18.5% Entrepreneur $37,700,000 (10,000)

NewCo is now public, so…
When should you sell your stock?
(the hardest question for all investors)

Overhang
When to sell
Secondary Markets &
Agenda
✓

Can’t Sell Until
Lock Up Period Expires.
Typ 180 days
Lock Up/Leak Out Agreements
http://www.sec.gov/answers/lockup.htm
SRSLY?

LinkedIn
Lockup Expires

Overhang

Overhang
Overhang = Cheap Stock

Overhang
Post IPO your ability to raise
money is a function of the price
and volume of your stock

Illegal to manipulate
Stupid not to orchestrate

Situational awareness

You only need one thing for
your stock price to rise…
… more buyers than sellers.
every. single. day.

Overhang
When to sell
Secondary Markets &
Agenda
✓
✓

But then when is the
best time to sell?

Post IPO: When Should You Sell Your Stock?
Earnings Projections for NewCo
YEAR One Two Three Four Five
Earnings per Share (EPS) $1.00 $1.75 $2.50 $3.25 $4.00

Single-year CAGR, or percentage growth over previous year.
Est. Growth Rate (CAGR) NA 75% 43% 30% 23%

Estimated Price/Earnings (P/E) Ratio 20 40 40 30 23
P/E indicates starting value at 20x trailing earnings.
Note P/E capped at 40, even when growth rate is higher.
P/E and Growth Rate converge if company is fair valued.

Estimated Price/Earnings (P/E) Ratio 20 40 40 30 23
Price per Share (Low) $13 $35 $50 $65 $80
Price per Share (High) $20 $70 $100 $97.5 $91
Are investors happy now?
Yes, you orchestrated an accretive deal structure.

Four Possible Exits for Investors:
• Cash Cow
• M&A
• IPO
• Crash & Burn
• M&A
• IPO

Overhang
When to sell
Secondary Markets &
Agenda
✓
✓
✓

Private shares of stock are illiquid
… most of the time.

Secondary markets for
private shares exist.

Typically private shares are
• Restricted from sale for at least one year
• Comes with disclosures that there may never
be a market to sell the shares
• May only be sold with the company’s
permission
• May only be sold to accredited investors

What’s an accredited investor?

Photo Credit: history.com U.S. Presidents
Historical Context
Remember this?
1921
The stock
market moves
indoors.
Oct 24, 1929
Black Thursday
starts the crash
that ushers in the
Great Depression.
1933
The Securities
Act
1934
The Securities
Exchange Act

All sales of
securities must
be registered,
unless…
… you have an exemption.

One such exemption
is if you sell only to
accredited investors.

Accredited investors
• Earned at least $200k ($300k combined with
spouse) for the last 2 years and expect to
continue, OR,
• Have a net worth over $1 million (excluding
their home)
• Other rules apply to companies.

Overhang
When to sell
Secondary Markets &
Agenda
✓
✓
✓
✓

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