Venture CapitalVenture Capital

How to Sell Your SoulHow to Sell Your Soulfor a Buckfor a Buck

VC CharacteristicsVC Characteristics Usually early-stage equity or equity-Usually early-stage equity or equity-

linked financinglinked financing Involves high riskInvolves high risk Lacks liquidity or marketabilityLacks liquidity or marketability Returns are primarily from capital Returns are primarily from capital

gainsgains Provided by patient investors - who Provided by patient investors - who

may give value-added advicemay give value-added advice

10 Years of Global VC 10 Years of Global VC FundingFunding

YearYear DealsDeals Avg/Avg/DealDeal

Total $Total $

19971997 30843084 $4.75$4.75 $14,646$14,64619981998 35573557 $5.88$5.88 $20,900$20,90019991999 54035403 $9.92$9.92 $53,580$53,58020002000 78327832 $13.38$13.38 $104,827$104,82720012001 44514451 $9.17$9.17 $40,798$40,79820022002 30423042 $7.09$7.09 $21,579$21,57920032003 28252825 $6.69$6.69 $18,911$18,91120042004 28732873 $7.31$7.31 $21,004$21,00420052005 29392939 $7.38$7.38 $21,700$21,70020062006 34163416 $7.46$7.46 $25.500$25.500Source: National Venture Capital Association

What do VC’s Want?What do VC’s Want? “ “VCs simply want to believe that the VCs simply want to believe that the

valuation of a company – either public valuation of a company – either public stock price or private valuation – will stock price or private valuation – will grow high and stay high long enough grow high and stay high long enough for them to sell their interest.”for them to sell their interest.”

Source: Cliff Conneighton; Venture Management Handbook: An Entrepreneur’s Source: Cliff Conneighton; Venture Management Handbook: An Entrepreneur’s Guide to Stock, Finance, and Contracts - pg 99Guide to Stock, Finance, and Contracts - pg 99

What do VC’s Want?What do VC’s Want?

5X or better capital growth in 5 - 10 yrs.5X or better capital growth in 5 - 10 yrs.

25% annual capital gains at a minimum25% annual capital gains at a minimum

Eventual liquidity (3 - 5 years)Eventual liquidity (3 - 5 years)

Excitement!Excitement!

What Do VC’s Get?What Do VC’s Get?

What Kind of Company?What Kind of Company?

At least $10M Revenue in 5 yearsAt least $10M Revenue in 5 years At least 20%/Yr Revenue GrowthAt least 20%/Yr Revenue Growth At least 15% pretax profit marginAt least 15% pretax profit margin

Four Essential Questions for Four Essential Questions for the Business Planthe Business Plan

Does any large, definable, and identifiable group of Does any large, definable, and identifiable group of people really need your product or service?people really need your product or service?

Are they willing to pay someone (you or a competitor) Are they willing to pay someone (you or a competitor) considerably more than, perhaps twice, what it costs you considerably more than, perhaps twice, what it costs you to produce and deliver it? If the answer depends on to produce and deliver it? If the answer depends on volume, do you know what the volume/cost curve looks volume, do you know what the volume/cost curve looks like?like?

Is there some sustainable advantage you will have, in Is there some sustainable advantage you will have, in proprietary technology, cost, capability or marketing, over proprietary technology, cost, capability or marketing, over others who do or would compete in this market?others who do or would compete in this market?

Do you have the management team that can execute the Do you have the management team that can execute the plan successfully?plan successfully?

Conneighton Pg. 100Conneighton Pg. 100

Types of VenturesTypes of Ventures Life-Style VenturesLife-Style Ventures

– 5 Yr Revenue projections < $10 M5 Yr Revenue projections < $10 M– Started by people with life-style motivesStarted by people with life-style motives– 90% of all startups90% of all startups– ZeroZero interest to venture capitalists interest to venture capitalists

Types of VenturesTypes of Ventures Middle Market VenturesMiddle Market Ventures

– 5 Yr Revenue projections $10 - $50M5 Yr Revenue projections $10 - $50M– Offer cash-out and capital gains opportunitiesOffer cash-out and capital gains opportunities– The backbone of the entrepreneurial economyThe backbone of the entrepreneurial economy– Rely heavily on bootstrap and individual Rely heavily on bootstrap and individual

financingfinancing– About 10% of startupsAbout 10% of startups

Types of VenturesTypes of Ventures High Potential VenturesHigh Potential Ventures

– 5 Yr Revenue projections > $50 M5 Yr Revenue projections > $50 M– Potential BIG winnersPotential BIG winners– May require many rounds of financing May require many rounds of financing

of several million dollarsof several million dollars– Expect to go public within 5 yearsExpect to go public within 5 years– Less than 1% of startupsLess than 1% of startups

Types of VenturesTypes of Ventures Proprietary TechnologyProprietary Technology

– You own something way coolYou own something way cool– VC’s are very interestedVC’s are very interested

Execution PlayExecution Play– You are trying to do something better You are trying to do something better

than anyone else.than anyone else.– VC’s are not very interestedVC’s are not very interested

Types of VC’sTypes of VC’s Venture Capital FundsVenture Capital Funds

– Over 1750 US venture capital and private Over 1750 US venture capital and private equiy partnershipsequiy partnerships

– $585 Billion capitalization$585 Billion capitalization– Fund about 500 companies/yearFund about 500 companies/year– 100 to 1 odds (at best)100 to 1 odds (at best)– Typically later-stage deal in excess of $3MTypically later-stage deal in excess of $3M

Types of VC’sTypes of VC’s Business AngelsBusiness Angels

– The “invisible” capital marketThe “invisible” capital market– Unknown number of individuals (low Unknown number of individuals (low

profile)profile)– 3 to 1 odds of finding one3 to 1 odds of finding one– Typically early-stage deal of $100-Typically early-stage deal of $100-

500K involving multiple investors500K involving multiple investors– Find one and you’ve found 5 or 10Find one and you’ve found 5 or 10

How to Find an AngelHow to Find an Angel Look close to homeLook close to home Check civic and charitable organizationsCheck civic and charitable organizations Check for private pilotsCheck for private pilots Check for expensive hot carsCheck for expensive hot cars Use gatekeepers (lawyers, accountants)Use gatekeepers (lawyers, accountants) Check other startupsCheck other startups

How to Court an AngelHow to Court an Angel Show them a great business planShow them a great business plan Kiss their %!!Kiss their %!! Ask them for advice (Beware of Ask them for advice (Beware of

Micromanagers)Micromanagers) Act like you have done your homeworkAct like you have done your homework Don’t act like you know everythingDon’t act like you know everything Act Act EXCITED!EXCITED!

Types of FinancingTypes of Financing Bootstrap FinancingBootstrap Financing

– Personal savingsPersonal savings– Family and friendsFamily and friends– Credit cardsCredit cards– Second mortgagesSecond mortgages– Customer advancesCustomer advances– Extended terms from vendors/suppliersExtended terms from vendors/suppliers80% of the Inc. 500 fastest growing private 80% of the Inc. 500 fastest growing private

companies were financed companies were financed solelysolely by these by these methods.methods.

Types of FinancingTypes of Financing Early-Stage FinancingEarly-Stage Financing

– Seed financing: A small amount of Seed financing: A small amount of capital to prove a concept or qualify capital to prove a concept or qualify for startup capitalfor startup capital

– Startup financing: for completing Startup financing: for completing product development and initial product development and initial marketing to get ready to do businessmarketing to get ready to do business

– First-stage financing: funds required First-stage financing: funds required to begin full-scale operationto begin full-scale operation

Types of FinancingTypes of Financing Expansion FinancingExpansion Financing

– Second-stage financing: provides Second-stage financing: provides working capital for initial expansionworking capital for initial expansion

– Third-stage or mezzanine financing: Third-stage or mezzanine financing: provides funds for a major expansion provides funds for a major expansion after the company has become after the company has become profitableprofitable

Types of FinancingTypes of Financing Bridge FinancingBridge Financing

– May be needed between stagesMay be needed between stages– Usually used before going publicUsually used before going public– Meant to be repaid from the next Meant to be repaid from the next

round of financinground of financing

Cost of Venture CapitalCost of Venture Capital

Stage CostSeed 80%

Startup 60%First Stage 50%

Second Stage 40%Third Stage 30%

Bridge 25%

Capital Gain/ROI Capital Gain/ROI ConversionConversion

Exit YearGrowth 3 4 5 7 10

3X 44 32 25 17 124X 59 41 32 22 155X 71 50 38 26 177X 91 63 48 32 2110X 115 78 58 39 26

A 7-fold increase in the value of the investment in 5 years is a 48% annualized rate of return on equity.

Reasons for RejectionReasons for Rejection Lack of confidence in managementLack of confidence in management Unsatisfactory risk/reward ratioUnsatisfactory risk/reward ratio Absence of a well-defined business Absence of a well-defined business

planplan Unfamiliarity with products or Unfamiliarity with products or

marketsmarkets Too much wishful thinkingToo much wishful thinking

Too Much Wishful Too Much Wishful Thinking…Thinking…

Investors expect to bear risk.Investors expect to bear risk. Investors expect YOU to know how Investors expect YOU to know how

much risk they will bear and to much risk they will bear and to TELL them.TELL them.

They need to believe that YOU They need to believe that YOU understand the risk and will be understand the risk and will be able to MANAGE it.able to MANAGE it.

A Note on SBICs…A Note on SBICs… Small Business Investment Program (1958) The Small Business Investment Program (1958) The

government licenses privately organized and government licenses privately organized and managed venture capital firms to make equity managed venture capital firms to make equity capital or long-term loans (5+ years) available to capital or long-term loans (5+ years) available to small companies.small companies.

Get government-backed (cheap) long term loans Get government-backed (cheap) long term loans to provide this funding.to provide this funding.

Funding is generally in the $250,000 to $5Mill Funding is generally in the $250,000 to $5Mill rangerange

Specialized SBICs (SSBICs) make investments in Specialized SBICs (SSBICs) make investments in socially and economically disadvantaged socially and economically disadvantaged entrepreneurs only.entrepreneurs only.

Information on SBICs…Information on SBICs… National Association of Small National Association of Small

Business Investment Companies: Business Investment Companies: www.nasbic.orgwww.nasbic.org

SBA’s site: Good luck…SBA’s site: Good luck… Answers.com -- Answers.com --

http://www.answers.com/topic/smahttp://www.answers.com/topic/small-business-investment-company-sbll-business-investment-company-sbicic

Other InformationOther Information Garage.comGarage.com

– www.garage.comwww.garage.com– Pairs high-tech entrepreneurs with Pairs high-tech entrepreneurs with

seed financing sources.seed financing sources.

Sources of InformationSources of Information vFinance.comvFinance.com

– www.vfinance.comwww.vfinance.com– List of 1800 VC firms, database of List of 1800 VC firms, database of

23,000 angel investors23,000 angel investors National Venture Capital AssociationNational Venture Capital Association

– www.nvca.orgwww.nvca.org– Lots of info for and about VCsLots of info for and about VCs