confidential screening your own deal rana k. gupta managing director navigator technology ventures
TRANSCRIPT
Confidential
Screening YOUR OWN deal
Rana K. Gupta
Managing Director
Navigator Technology Ventures
Confidential
•How to pursue your idea• “Buckets of evaluation”
•How to pursue your idea• “Buckets of evaluation”
•What kind of deal you have•The line of ascension
•What kind of deal you have•The line of ascension
• Starting and screening companies• Starting and screening companies
Agenda
•Understanding Funding•Understanding Funding
Confidential
23.7M Businesses in America
23.7M Businesses in America
82.5% use some form of credit
$18.9B in Venture Investments in 2003 (2,847 deals)
82.5% use some form of credit
$18.9B in Venture Investments in 2003 (2,847 deals)
99.7% have <500 Employees61% have <5 Employees
99.7% have <500 Employees61% have <5 Employees
2/3 survive 2 years1/2 survive 4 years
2/3 survive 2 years1/2 survive 4 years
527,900 Business Births554,800 Business Deaths527,900 Business Births
554,800 Business Deaths
Source: 2003 SBA data
2003 Small Business Data
That’s 0.5% of all companies started
Confidential
The Deal Funnel
Ideas
Screening:- Run the numbers on the back of an envelope - Sleep on it - Reject it
100 Ideas
Funded
Financing: - Very much depends on the type of deal AND the perseverance of the entrepreneur
? of 100 Ideas
Succeed
Type of Company - 50% of restaurants fail?
? of 100 Deals
Spend Time
More screening: - Research - Talk with some people in the practice - Write a business plan- Determine the right type of funding
10 out of 100 Ideas
Confidential
•How to pursue your idea• “Buckets of evaluation”
•How to pursue your idea• “Buckets of evaluation”
•What kind of deal you have•The line of ascension
•What kind of deal you have•The line of ascension
• Starting and screening companies• Starting and screening companies
Agenda
•Understanding Funding•Understanding Funding
Confidential
Ascending the slope of business opportunities
Difficulty/Barrier toEntry/Cost toImplement
AND
PotentialReturn
OfferOpinion
Analyze Service Commercialize
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Here are examples of what I mean
Difficulty/Barrier toEntry/Cost toImplement
AND
PotentialReturn
OfferOpinion
Analyze Service Commercialize
- Newsletter - Journal
- Consult - Research
- Export/Import
- Distribute
Outsourced R&D
Product
Confidential
This is why the slope is so steep
Difficulty/Barrier toEntry/Cost toImplement
AND
PotentialReturn
OfferOpinion
Analyze Service Commercialize
Find a paying customer
- Find paying customers - Maybe some up front financing
- Secure proprietary position - Prototype - Market research - Paying customer(s) - Distribution channels - Manufacturer - Sales - Team - Rigorous financing
- Market research - Distribution channels - Product or service differentiation - Probably up-front financing
Confidential
Conclusions about the ascension line
• There is a continuum of business models that you can enter
• Along that continuum, you must understand what it takes to make money
• Usually, the more money that goes in, the more money you can potentially make
• Entrepreneurs rarely stop and think about where they are along this continuum
Be clear about what type of business you are starting– It will make all the difference as you consider how
to create and grow it
Confidential
•How to pursue your idea• “Buckets of evaluation”
•How to pursue your idea• “Buckets of evaluation”
•What kind of deal you have•The line of ascension
•What kind of deal you have•The line of ascension
• Starting and screening companies• Starting and screening companies
Agenda
•Understanding Funding•Understanding Funding
Confidential
Buckets for evaluationof new ideas
Venturable - Bootstrap - Small/Large Co. - Non-venturable
Licensable No Opportunity
New Idea!!
Confidential
Definition of ‘Venturable’
• This is a commercialization opportunity
• The opportunity is attractive enough for an outside party to invest its money in the company
• This is usually for a product company
• This requires a fast growth opportunity
• VCs and Angels look to make 5-10X their investment in less than five years
Confidential
What does a VC Deal look like?
• From the TECHNICAL side:• Distinct product – simpler is better• Clearly defined path for product development (No miracles required!)• Excellent proprietary position to create barrier to entry
– Need not be a patent– Can be trade secret/secret sauce, i.e. Sand Video
• From the BUSINESS side• Dramatic sales ramp-up potential• Able to reach $50M in sales in 5 years OR• Possible 10X return in 3-5 years after investment• Revenues within two years after investment• Fundable opportunity, i.e. reasonable rounds of investment will achieve major milestones
• From the MARKET side• Very large market – in the B’s and T’s• Addressable market at least in the hundreds of millions of dollars• Attractive buying cycle, i.e. consumer product mfrs, NOT insurance Cos.
Confidential
Definition of ‘Licensing’
• First, you have already invented/created/own something that someone else ‘needs’
• BUT there are clearly existing companies that can commercialize this better than you could
• Often these are attributes to a product• Requires significant protection around the idea – usually a
patent– There has to be something for the licensee to transfer/buy
from you• You’ll have to work with a lawyer
– This is bad – scientists and lawyers don’t usually do great business together well
Best to find business help even when working with a licensee
Confidential
Non-venturable - Definition
• A company that grows one customer at a time• OR from some other form of investing rather than VCs
– Customers– Vendors– SBIR– Factoring– Corporate funding/joint development
• May take (a lot) longer to reach maturity – this may be desirable– May only reach $1-10M in annual revenues
• Sale may not be the desired outcome• This is often a service company or a testing device
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Example of non-venturable
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•How to pursue your idea• “Buckets of evaluation”
•How to pursue your idea• “Buckets of evaluation”
•What kind of deal you have•The line of ascension
•What kind of deal you have•The line of ascension
• Starting and screening companies• Starting and screening companies
Agenda
•Understanding ‘Funding’•Understanding ‘Funding’
Confidential
Wrong question first
• Most people have an idea!!
• Then they look for funding to pursue the idea
• Wrong Question!!
• First question should be the goal of the venture:– Experience– Make money– Business for life– Sell the idea– Sell the business– Make $$
• How much money? When?
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Most important thought!!
• What are your goals?
• Why are you doing this?
• How long do you want to do this?– What if you could sell the idea for 3X your investment in three
years?
Most entrepreneurs have not thought about this question well enough
Confidential
Fundability
• This is just about the most over-looked variable in a deal - by the entrepreneur
• The fundability of the deal is dependent upon:– Timing– Amount of money– Milestones to be reached with that money– Who cares that those milestones are reached– Business model– Market size– Sales cycle– YOUR GOALS
Confidential
Fundability example
Easy example from the VC market – because too many people are looking to it
• Say a VC wants to make 10X her investment (gee, I wonder where I found that number?)
– Say you’re looking for $2M– Let’s further assume you’ll have a pre-money
valuation of $3M• So, a $5M post-money valuation
– You will grow to $20M in revenues in four years– Multiples in your industry are 2X revenue
Confidential
Fundability, continued
• So, here’s the math:– You say: in Yr 4, you’ll be worth ~$40M– The investor will have discounted your
revenues by 50%• Meaning your revenues will only reach $10M in
Yr4
– So, you’ll actually be worth $20M, in her eyes
• That’s only a 4X return on her money
Confidential
Conclusions
• Too few entrepreneurs screen their own deals
• This is understandable since you are often not provided the tools to do so
• Understand WHAT kind of deal you have• Understand HOW to pursue your deal to
derive the greatest value from it• Know your own goals for the venture