Steve Cummins Transworld Group - Understanding Venture Financing

LAUNCHING YOUR STARTUP
Understanding Venture Financing
Steve Cummins, Transworld Group

Launching Your StartupLaunching Your Startup
 Understanding Venture Financing
 A Primer on Venture Capital
 Financing Your Venture
 Other Startup Considerations
 Raising Venture Capital
 The Transition from Idea to Execution
 Business Planning

My BackgroundMy Background
 28 years in technology-related ventures in all
capacities
 Founder / CEO, venture capital firm
 Founder / CEO, early Internet company
 Corporate finance / M&A, global investment bank
 Technology marketing
 Programmer / engineer
 Owner / inventor of 14 issued and pending patents
worldwide
 Education
 Bachelor of Industrial and Systems Engineering,
Georgia Institute of Technology
 Master of Business Administration,
Amos Tuck School at Dartmouth College

Impact of U.S. SmallImpact of U.S. Small
BusinessesBusinesses
 25.8 million U.S. businesses
 “Small” businesses represent:
 99.9% of total businesses
 50% of the private work force
 41% of high tech jobs
 75% of net new jobs
 41% of private sales
 52% of private sector output
 97% of all U.S. exporters with 29% of export value
 Produce 13-14x patents per employee (and 2x
likely to be among the 1% most cited)

Impact of Venture-BackedImpact of Venture-Backed
CompaniesCompanies
 In the U.S.:
 $1.8 trillion in revenue in 2003 (9.6% of all sales)
 10.1 million jobs in 2003 (9.4% of employment)
 600,000 new net jobs from 2000-2003
 In Europe:
 1.0 million jobs in 2004
 630,000 new net jobs created from 2000-2004
 Highest growth rates in biotech, health care and medical
devices
 Largest absolute growth in university spin-offs

Impact of U.S. UniversitiesImpact of U.S. Universities
 Established > 4,100 new companies since
1980, 2/3 of which were still operating
 Executed > 30,000 active technology
transfer licenses (including > 4,500 in
2003), generating > $1.3 billion in license
income
 Launched > 2,200 new commercial
products between 1998-2003
 Performed > $30 billion of R&D in 2001
 Filed 8,000 U.S. patent applications in
2003

What is Venture Capital?What is Venture Capital?
 A cash investment made by professional, institutionally
backed investors to emerging growth businesses
 Generally made as cash in exchange for equity
(ownership) in the investee company
 Usually high risk, but with the potential for above-average
returns

U.S. Venture Capital MarketU.S. Venture Capital Market
Steve Cummins, Transworld Group Steve Cummins, Transworld Group

European Venture Capital MarketEuropean Venture Capital Market

Types of Venture CapitalTypes of Venture Capital
 Private
 Professionally managed
 Return on investment
focused
 May bring network,
business advice, credibility,
etc.
 Corporate
 Manage risk
 Distribution networks
 Product R&D
 Operational skills
 Spin-outs
 Academic
 Intellectual property
 Spin-outs
 Government
 Create new jobs and grow
economy
 Offer cash, tax incentives,
in-kind
 Stem brain-drain
 Angels
 Network, business advice,
credibility, etc.
 Live vicariously
 The 3Fs

Venture Capital InvestmentVenture Capital Investment
CriteriaCriteria
 Management Team
 Track record
 Relevancy
 Bet on the jockey, not the horse!
 Concept
 Solves real problem
 Favorable market dynamics
 Disruptive
 Unfair advantages & sustainable competitive advantages
 Proper capitalization

The Venture Capital NumbersThe Venture Capital Numbers
GameGame
 Receive 1000s of business plans each year
 Read 100s of plans
 Meet with dozens of companies
 Fund a handful
 Portfolio expectations:
 60% die or go nowhere (living dead)
 30% yield 2-4x in 4-7 years
 10% (hopefully 20%) are tremendous successes (e.g., 10x,
100x, 1000x!)

How Venture Capital FundsHow Venture Capital Funds
WorkWork
 General partners (GPs) manage the
fund
 Capital comes from institutional “limited
partners” (LPs)
 Singularly focused: ROI
 GPs get an annual fee
 Once LPs get investment back, GPs
get a portion of the profits
 LPs get the remaining profits

Venture Capital EconomicsVenture Capital Economics
VC Fund IX, L.P.
LP 1 GP
LP 2
LP 3
Portfolio
Company 1
Portfolio
Company 2
Portfolio
Company 3
Portfolio
Company 4
Portfolio
Company 5
LP 4
$100 Management
$10 Portfolio
Company 10
Portfolio
Company 9
Portfolio
Company 8
Portfolio
Company 7
Portfolio
Company 6
$10
$10
$10
$10 $10
$10
$10
$10
$10
2%

Venture Capital EconomicsVenture Capital Economics
VC Fund IX, L.P.
LP 1 GP
LP 2
LP 3
Portfolio
Company 1
Portfolio
Company 2
Portfolio
Company 3
Portfolio
Company 4
Portfolio
Company 5
LP 4
Portfolio
Company 10
Portfolio
Company 9
Portfolio
Company 8
Portfolio
Company 7
Portfolio
Company 6
$180 $20
$100
$25
$40
$35

Financing Your VentureFinancing Your Venture
 Not all startups require external funding
 Cash flow comes ultimately and most importantly from
customers, NOT from investors
 Benefits of external funding
 Cash
 Faster growth
 Staying power
 Competitive positioning
 Credibility
 Value-add investors
 Credibility
 Customer/partner introductions (“Keiretsu” effect)
 Management expertise

Financing OptionsFinancing OptionsNon-Equity
 Personal funds
 Personal debt
 Grants and awards
 Customer pre-sales
 Venture leasing
 Receivables financing
 Business loans
 In-kind contributions
 Joint ventures
Equity
 Venture capital
 Angels
 The “3Fs” – Friends, Family
and Fools
 Corporate direct investment
Equity is the most
expensive form of capital!

Major Financing QuestionsMajor Financing Questions
 How much?
 When?
 From where / whom?
 What terms?
 Security
 Valuation
 Control
 Timing

Raise Money from a PositionRaise Money from a Position
of Strengthof Strength
 Have cash in the bank
 Prepare to build your company without any outside
investment (bootstrap)
 Seek to secure multiple competing offers
 Raise money when you can, not when you have to (Sun
Tzu – “In times of war, prepare for peace”)
 Have a call to action

Seek True Value-AddedSeek True Value-Added
InvestorsInvestors
 Understand your business
 Operating experience
 Domain and/or geographic experience
 Rolodex / network
 Relevant portfolio
 Relevant limited partners (in your space)
 Deep pockets / courage to stay the course

Fundraising ProcessFundraising Process
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Business Plan
Submissions
Investor
Presentations
Term Sheet
Negotiations
Final
Documentation
Funding
Budget 4-5 months, or more

Understanding Venture Financing
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008

Raising Venture Capital
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008

Lifecycle of a StartupLifecycle of a Startup
 Conception / Invention
 Seed Stage
 Formation /
incorporation
 Market research
 Product research
 Early Stage
 Product
development
 Team formation
 Infrastructure build-
out
 Launch
 Growth Stage
 Expansion Phase
 Exit
 Post-Exit

Lifecycle of a StartupLifecycle of a Startup Conception / Invention
 Seed Stage
 Formation /
incorporation
 Market research
 Product research
 Early Stage
 Product development
 Team formation
 Infrastructure build-out
 Launch
 Growth Stage
 Expansion Phase
 Exit
 Post-Exit

Startup FundamentalsStartup Fundamentals
Solid foundation =
best chance of
funding your venture

Pour a Solid FoundationPour a Solid Foundation
 Market-driven concept
 Talk to prospective customers
 Assess market and competition
 Resolve legal issues upfront
 Satisfy prior employment obligations
 Incorporate properly
 Check intellectual property rights
 Spin-out cleanly
 Form a solid team
 Management, board, advisors, professionals
 Teamwork begets success
 If possible, kick-start the business
 Spin-out / acquisition
 Key customer

Be Market-Driven!Be Market-Driven!
 Purchase decisions are based on
relationships – understand your
customers
 Understand and model your customers’
economic benefit:
 How are they currently solving the problem?
 How will their work processes change by using
your product?
 What is their economic benefit / ROI?
 Your product / service must be better,
faster and cheaper

Protect Your Assets!Protect Your Assets!

Cash Flow is Your Life Blood!Cash Flow is Your Life Blood!
 CFIMITYM
 Cash flow comes ultimately and most importantly from
customers, not from investors
 Profit is not cash flow
 Capitalize properly

Business PlanningBusiness Planning
 “The plan is useless; it’s the planning that’s important.”
 General Dwight D. Eisenhower,
on the success of his D-Day invasion plan
 The process of uncovering and identifying what creates
and drives value in your business, and the risks involved
 A business plan is an output of the business planning
process

Output of the BusinessOutput of the Business
Planning ProcessPlanning Process
 Business plan (narrative)
 Pro forma financial statements
 PowerPoint pitch (12-13 pages)
 Elevator pitch (1-2 minutes)

A Business Plan…A Business Plan…
 Describes all the critical internal and external elements
and strategies for guiding the direction of your company
 Communicates how you will create sustainable value
 Identifies risks and uncertainties and communicates how
you will manage them
 Describes the company’s structure, objectives and future
plans

Uses of a Business PlanUses of a Business Plan
(Internal)(Internal)
 Refining your product /
service strategy
 Identifying key
customers
 Identifying milestones
and timelines
 Helping set objectives
& performance metrics
 Managing risk and
uncertainty
 Motivating and
focusing employees
 Analyzing capital
budgeting decisions
 Facilitating new
product development
 Integrating new
acquisitions
 Facilitating restarts,
restructuring and
turnarounds

Uses of a Business PlanUses of a Business Plan
(External)(External)
 Attracting key employees
 Educating potential investors
 Arranging strategic alliances
 Obtaining large contracts with strategic customers
 Facilitating mergers and acquisitions

The 12-13 Page PowerPointThe 12-13 Page PowerPoint
PitchPitch
1. Summary (1)
 Mission
statement
 What is the
idea?
 How will it create
value?
 Timeline /
milestones
 Expected results
 Specific request
(e.g., $)

The Mission StatementThe Mission Statement
To create [value/EVA]
by [product/service] for/to [customer(s)] by…
Strategic
Objective 1
Strategic
Objective 2
Strategic
Objective 3

The Mission StatementThe Mission Statement

Mission Statement ExampleMission Statement Example
To be Ukraine’s leading producer of “A-class” widgets to the
_______ sector by:
 Securing exclusive purchase contracts with 3 of the top 10
customers of A-class widgets in Ukraine;
 Creating proprietary manufacturing methods for the highest
yield of A-class widgets; and
 Building a world-class team of research & development
scientists and engineers.

PitchPitch
1. Summary (1)
 Mission statement
 What is the idea?
 How will it create value?
 Timeline / milestones
 Specific request (e.g., $)
1. Market Overview (2)
 Substantiation of need
 The opportunity (size,
trends, etc.)
 Markey validation
 Identification of
prospective customers

Major Pain PointsMajor Pain Points
 What is the major pain your customers face currently
and/or in the future?
 Cost
 Convenience
 Growth
 Focus
 Time-to-market
 Regulatory compliance
 Why are alternative products/services not addressing the
pain (fully)?
 Why won’t this change?

Favorable Market DynamicsFavorable Market Dynamics
 The market is large for our product/service:
 Size stat 1
 Size stat 2
 Size stat 3
 The market is growing for our product / service:
 Growth stat 1
 Growth stat 2
 Growth stat 3
 Market trends favor us:
 Trend 1
 Trend 2
 Trend 3

PitchPitch
1. Summary (1)
 Mission statement
 What is the idea?
 How will it create value?
 Timeline / milestones
 Specific request (e.g., $)
1. Market Overview (2)
 Substantiation of need
 The opportunity (size,
trends, etc.)
 Markey validation
 Identification of
prospective customers
3. Description of Product / Service
(2)
 Overview of product /
service, including high-
level technology
description
 Specific value
proposition (including
qualitative & quantitative
customer benefits)
 Correlate product /
service features &
benefits with market
needs
 Value chain dynamics

PitchPitch
4. Operating Plan (2)
 Production /
manufacturing
 Marketing /
distribution
 Sales & marketing
plan
4. Competitive Environment (2)
 Sustainable
competitive
advantages
 Alternatives
 Competition (existing
and potential

What’s Proprietary AboutWhat’s Proprietary About
Your Idea?Your Idea?
 Competitive Advantages
 Proprietary IPR
 Exclusive distribution
 Exclusive content / sources
 Proprietary manufacturing
 Proprietary integration
 Installed base / customer contracts
 Unparalleled capital structure
 Unparalleled scale, scope and/or focus
 Team with unique expertise and/or access
 First mover advantage
 Distinguish between momentary and sustainable
 Must correlate to strategic objectives

PitchPitch
 Production /
manufacturing
 Marketing /
distribution
plan
 Sustainable
competitive
advantages
 Alternatives
and potential
6. The Team (1)
 Management expertise &
relevance
 Board, advisors,
professionals & others
 Identify key hiring needs
6. Financials (1-2)
 Pro forma snapshot
 Key metrics / drivers
 Funding requirements
(optional)

Financial ProjectionsFinancial Projections
(in thousands) 2007 2008 2009 2010
Revenue driver 1 (1)
Revenue driver 2 (2)
Cost driver 1 (3)
Net Revenue
– Cost of Sales (4)
= Gross Profit
– SG&A (5)
= Pre-tax Income (Loss)
Notes
(1) Assumption 1
(2) Assumption 2
(3) Assumption 3
(4) Assumption 4
(5) Assumption 5
Numbers will
prove wrong!
Key is to
understand
drivers and
assumptions
since…

Funding RequirementsFunding Requirements
 Does your venture need external financing?
 How much & when?
 Venture capital, debt, etc.
 Capital structure considerations
 Options plans, etc.
 Position vis-à-vis in-kind contributions
 Use of proceeds; e.g.:
Staff $200,000
Technology & IPR development 150,000
Equipment & facilities 200,000
Other legal, operations, SG&A and misc. 100,000
Reserve (net of cash on hand) 100,000
Total $750,000

PitchPitch
 Production /
manufacturing
 Marketing /
distribution
plan
 Sustainable
competitive
advantages
 Alternatives
and potential
6. The Team (1)
 Management expertise &
relevance
 Board, advisors,
professionals & others
 Identify key hiring needs
6. Financials (1-2)
 Pro forma snapshot
 Key metrics / drivers
 Funding requirements
(optional)
6. Road Map (1)
 Major accomplishments
 90-day plan
 Horizon

PitchPitch
9. Appendix (as long as you want)
 Market details (e.g., surveys)
 Product details
 Operating & financial details
 Résumés (CVs)
 Articles / research reports
 Patents & IPRs
 Key contracts
 Brochures

The Elevator PitchThe Elevator Pitch
 One of the most important “outputs” of
business planning
 Convinces the “target person” to schedule
a longer meeting with you
 Empowers and enables the “target person”
to convince other appropriate people to
become interested in your idea
 Resonates, demonstrates sincerity
 Communicates a sense of value, empathy
and urgency
 No more than 1-2 minutes!

Part I SummaryPart I Summary
 Pour a solid foundation
 Protect your strategic assets (like IPRs)
 Value is in the business planning, not the business plan
 Be concise and to the point with pitch materials
 Be top-down customer-driven, not bottom-up product-
driven

Fundraising LessonsFundraising Lessons
 Network to gains access to VCs
 Don’t get hung-up on confidentiality
 Be persistent
 Be humble yet confident, and always courteous and
professional
 Embrace and learn from rejection
 Be greedy in the long-run (any % of something > 100% of
nothing!)

Believe In Your Idea!Believe In Your Idea!
“The wireless music box has no imaginable commercial value.”
David Sarnoff Associates, in rejecting a proposal for investment in the radio in the 1920s
“We don't like their sound, and guitar music is on the way out.”
Decca Recording Co., rejecting the Beatles in 1962
“There’s never going to be a market for the telephone, and
therefore we have declined the offer to take a license.”
Chairman of Western Union, in its annual report from the late 1800s
“Who the hell wants to copy a document on plain paper?”
National Inventors Council, as told in 1940 to Chester Carlson, founder of XEROX

Attributes of a SuccessfulAttributes of a Successful
EntrepreneurEntrepreneur
 Problem solver
 Decisive
 Leader & motivator
 Humble
 Passionate
 Persistent
 Optimistic
 Professional
 High integrity
 Critical path doer
 Impatient / bias toward
action (with analysis)
 Rejoices in others’
victories
 Focused on the long-
term goal

and …and … Just Do It!Just Do It!

Closing thoughts…Closing thoughts…
 Focus on the long-run
 What goes around comes around
 Friendships last longer than jobs
 Don’t let greed blind the objective
 Make the most of the experience
 Listen & learn
 Failure or rejection is what you make of it
 Entrepreneurship is a lifestyle choice
 Balance your risk & return
 Seize opportunities
 Life’s short, have fun!

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