launching your startup understanding venture financing jim butterworth idea to market workshop...

LAUNCHING YOUR STARTUPUnderstanding Venture Financing

Jim ButterworthIdea to Market WorkshopUkraine, September 2008

Launching Your StartupLaunching Your Startup

Understanding Venture FinancingA Primer on Venture CapitalFinancing Your VentureOther Startup Considerations

Raising Venture CapitalThe Transition from Idea to ExecutionBusiness Planning

Peace and Prosperity Through Science and Collaboration www.crdf.org

My BackgroundMy Background

28 years in technology-related ventures in all capacities

Founder / CEO, venture capital firmFounder / CEO, early Internet companyCorporate finance / M&A, global investment bankTechnology marketingProgrammer / engineer

Owner / inventor of 14 issued and pending patents worldwide

EducationBachelor of Industrial and Systems Engineering,Georgia Institute of TechnologyMaster of Business Administration,Amos Tuck School at Dartmouth College


Impact of U.S. Small BusinessesImpact of U.S. Small Businesses

25.8 million U.S. businesses

“Small” businesses represent:99.9% of total businesses50% of the private work force41% of high tech jobs75% of net new jobs41% of private sales52% of private sector output97% 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-Backed CompaniesImpact of Venture-Backed Companies

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 2004630,000 new net jobs created from 2000-2004Highest growth rates in biotech, health care and medical devicesLargest 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


European Venture Capital MarketEuropean Venture Capital Market


Types of Venture CapitalTypes of Venture Capital

PrivateProfessionally managedReturn on investment focusedMay bring network, business advice, credibility, etc.

CorporateManage riskDistribution networksProduct R&DOperational skillsSpin-outs

AcademicIntellectual propertySpin-outs

GovernmentCreate new jobs and grow economyOffer cash, tax incentives, in-kindStem brain-drain

AngelsNetwork, business advice, credibility, etc.Live vicariously

The 3Fs


Venture Capital Investment CriteriaVenture Capital Investment Criteria

Management TeamTrack recordRelevancyBet on the jockey, not the horse!

ConceptSolves real problemFavorable market dynamicsDisruptive

Unfair advantages & sustainable competitive advantages

Proper capitalization


The Venture Capital Numbers GameThe Venture Capital Numbers Game

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 years10% (hopefully 20%) are tremendous successes (e.g., 10x, 100x, 1000x!)


How Venture Capital Funds WorkHow Venture Capital Funds Work

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 GPLP 2

LP 3

PortfolioCompany 1

PortfolioCompany 2

PortfolioCompany 3

PortfolioCompany 4

PortfolioCompany 5

LP 4

$100 Management

$10 PortfolioCompany 10

PortfolioCompany 9

PortfolioCompany 8

PortfolioCompany 7

PortfolioCompany 6

$10

$10

$10$10 $10

$10

$10

$10

$10

2%


Venture Capital EconomicsVenture Capital Economics

VC Fund IX, L.P.

LP 1 GPLP 2

LP 3

PortfolioCompany 1

PortfolioCompany 2

PortfolioCompany 3

PortfolioCompany 4

PortfolioCompany 5

LP 4

PortfolioCompany 10

PortfolioCompany 9

PortfolioCompany 8

PortfolioCompany 7

PortfolioCompany 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 fundingCash– Faster growth– Staying power– Competitive positioning– Credibility

Value-add investors– Credibility– Customer/partner introductions (“Keiretsu” effect)– Management expertise


Financing OptionsFinancing Options

Non-EquityPersonal fundsPersonal debtGrants and awardsCustomer pre-salesVenture leasingReceivables financingBusiness loansIn-kind contributionsJoint ventures

EquityVenture capitalAngelsThe “3Fs” – Friends, Family and FoolsCorporate direct investment

Equity is the most expensive form of capital!


Major Financing QuestionsMajor Financing Questions

How much?

When?

From where / whom?

What terms?SecurityValuationControlTiming


Raise Money from a Position of StrengthRaise Money from a Position of 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-Added InvestorsSeek True Value-Added Investors

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


LAUNCHING YOUR STARTUPUnderstanding Venture Financing


LAUNCHING YOUR STARTUPRaising Venture Capital


Launching Your StartupLaunching Your Startup

Understanding Venture FinancingA Primer on Venture CapitalFinancing Your VentureOther Startup Considerations

Raising Venture CapitalThe Transition from Idea to ExecutionBusiness Planning


Lifecycle of a StartupLifecycle of a Startup

Conception / Invention

Seed StageFormation / incorporationMarket researchProduct research

Early StageProduct developmentTeam formationInfrastructure 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 conceptTalk to prospective customersAssess market and competition

Resolve legal issues upfrontSatisfy prior employment obligationsIncorporate properlyCheck intellectual property rightsSpin-out cleanly

Form a solid teamManagement, board, advisors, professionals Teamwork begets success

If possible, kick-start the businessSpin-out / acquisitionKey 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 Business Planning ProcessOutput of the Business Planning 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 Plan (Internal)Uses of a Business Plan (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 Plan (External)Uses of a Business Plan (External)

Attracting key employees

Educating potential investors

Arranging strategic alliances

Obtaining large contracts with strategic customers

Facilitating mergers and acquisitions


The 12-13 Page PowerPoint PitchThe 12-13 Page PowerPoint Pitch

1. Summary (1)Mission statementWhat is the idea?How will it create value?Timeline / milestonesExpected resultsSpecific request (e.g., $)


The Mission StatementThe Mission Statement

To create [value/EVA]by [product/service] for/to [customer(s)] by…

Strategic Objective 1




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; andBuilding a world-class team of research & development scientists and engineers.




2. Market Overview (2)Substantiation of needThe opportunity (size, trends, etc.)Markey validationIdentification of prospective customers


Major Pain PointsMajor Pain Points

What is the major pain your customers face currently and/or in the future?

CostConvenienceGrowthFocusTime-to-marketRegulatory compliance

Why are alternative products/services not addressing the pain (fully)?

Why won’t this change?Peace and Prosperity Through Science and Collaboration www.crdf.org

Favorable Market DynamicsFavorable Market Dynamics

The market is large for our product/service:Size stat 1Size stat 2Size stat 3

The market is growing for our product / service:

Growth stat 1Growth stat 2Growth stat 3

Market trends favor us:Trend 1Trend 2Trend 3




2. Market Overview (2)Substantiation of needThe opportunity (size, trends, etc.)Markey validationIdentification of prospective customers

3. Description of Product / Service (2)

Overview of product / service, including high-level technology descriptionSpecific value proposition (including qualitative & quantitative customer benefits)Correlate product / service features & benefits with market needsValue chain dynamics



4. Operating Plan (2)Production / manufacturingMarketing / distributionSales & marketing plan

5. Competitive Environment (2)

Sustainable competitive advantagesAlternativesCompetition (existing and potential


What’s Proprietary About Your Idea?What’s Proprietary About Your Idea?

Competitive AdvantagesProprietary IPRExclusive distributionExclusive content / sourcesProprietary manufacturingProprietary integrationInstalled base / customer contractsUnparalleled capital structureUnparalleled scale, scope and/or focusTeam with unique expertise and/or accessFirst mover advantage

Distinguish between momentary and sustainable

Must correlate to strategic objectives






6. The Team (1)Management expertise & relevanceBoard, advisors, professionals & othersIdentify key hiring needs

7. Financials (1-2)Pro forma snapshotKey metrics / driversFunding 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 considerationsOptions 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






6. The Team (1)Management expertise & relevanceBoard, advisors, professionals & othersIdentify key hiring needs

7. Financials (1-2)Pro forma snapshotKey metrics / driversFunding requirements (optional)

8. Road Map (1)Major accomplishments90-day planHorizon



9. Appendix (as long as you want)Market details (e.g., surveys)Product detailsOperating & financial detailsRésumés (CVs)Articles / research reportsPatents & IPRsKey contractsBrochures


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 Successful EntrepreneurAttributes of a Successful Entrepreneur

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-runWhat goes around comes aroundFriendships last longer than jobsDon’t let greed blind the objective

Make the most of the experienceListen & learnFailure or rejection is what you make of it

Entrepreneurship is a lifestyle choiceBalance your risk & returnSeize opportunitiesLife’s short, have fun!


LAUNCHING YOUR STARTUPRaising Venture Capital


launching your startup understanding venture financing jim butterworth idea to market workshop...

Documents

portfolio company

investee company

venture capital financing

venture capital funds

impact of venture

fund capital

venture capital numbers

handful portfolio expectations