vcic playbook

8/9/2019 VCIC Playbook

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VCIC

PlaybookVersion 1

January 2015



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Table of Content

1.

Introduction to the playbook ....................................................................................... 3

2.

The competition ......................................................................................................... 3

3.

Process ...................................................................................................................... 4

1.1

Due Diligence ....................................................................................................... 5

1.2

Due Diligence Interview ........................................................................................ 7

1.3

Valuation ............................................................................................................ 10

1.4 Deliverables ........................................................................................................ 10

1.5

Negotiation ......................................................................................................... 13

1.6

Q&A .................................................................................................................... 15

2 Soft Skills .................................................................................................................. 16

3

Versioning ................................................................................................................. 17

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Appendix ................................................................................................................... 18



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1. Introduction to the playbook

The aim of this playbook is to offer a guide to the VCIC competition to CBS students.

During our journey from CBS competition to Global Final, we had to learn the hard way

by ourselves and we wished we had known some things before. This playbook is

therefore aimed not at giving you pre-digested answers and solutions, but at providing

tips about the various aspects of the competition. It has to be integrated with other

resources (vcic.org being one of them) and willingness to spend time and effort.

2. The competition

The Venture Capital Investment Competition (VCIC) was established by the University of

North Carolina Kenan-Flagler Business School for MBA students. The VCIC allows

MBA students to play the role of venture capitalists, researching and evaluating

entrepreneurs and their business ideas to make investment decisions.

The first leg of the competition, hosted at CBS, provides a few short days of research

before a one-day competition to determine a winning team. The winning team advances

to the regional finals. The team that wins at the regional finals advances to the global

finals, held each year at UNC in Chapel Hill, North Carolina.

The VCIC creates an opportunity for all MBA students, from those interested in

entrepreneurship and venture capital to those who have no professional interest but

want to engage in a fun opportunity to learn about a different field.

Some participate in the VCIC competition for the fun of a one-day game; some enjoy the

learning opportunity the VCIC creates. And, of course, some participants play to win.

Part of the key to getting the most out of the VCIC experience is knowing into which

category you fit and finding like-minded classmates to complete a well-rounded team.

In the pages ahead, we attempt to lay out details of the competition and the most

important aspects to consider in organizing and playing the game. Our hope is to make

the experience as enjoyable, educational, and professional as possible, and to raise the



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level of play at CBS in order to make the advancing CBS team as well prepared and

competitive as possible against the teams from rival schools.

Remember that the VCIC is meant to simulate a real VC/entrepreneur experience, but it

is also a game. Teams must always balance the most realistic opportunities and

decisions with the ones that are most likely to advance their game. Not every game-

winning decision is the one you would make if this were not a competition, and not every

decision you would make in real life will help you win the game.

Good luck, play hard, and have fun!

3. Process

In this section we will touch upon the process of the game. This is intended as a

complement to the VCIC experience as highlighted on VCIC.dk website. Please note

that each school/leg schedule may vary, although the basic pillars of the process remain

the same: Due Diligence, Research, Due Diligence Interview, Valuation, Deliverables

and Negotiation.



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1.1 Due Diligence

The Due Diligence represents the first phase of the competition, and it starts when the

teams receive the business plans. The goal of the due diligence is to get as much

information as possible about the startups that you are investigating. This will allow you

to both be able to choose the company you want to invest in and to be prepared for the

due diligence interview.

Here we will focus more on the due diligence activities prior to the due diligence

interview happening during the day of the competition (for this, refer to section 1.2).

Considering that you will have to perform the due diligence on 3 to 5 startups in less

than 2 days, you have to be as efficient and effective as possible. Here are some tips:

• Everyone on the team should have a basic understanding of the startups, so each of

you should start by reading all business plans.

• To assess the startups you can use the structured methodology developed by the

Keiretsu Forum (http://www.keiretsuforum.com/). The methodology defines 8

categories to be analyzed and gives a score of 0 (weak), 1 (good), or 2 (strong) to the

venture. You can find the 8 categories in the attached file (see Appendix 1).

Remember, this is an iterative process, the more you find out about a company the

better your overall assessment will be. Also, consider that you can use the Keiretsu in

the attachments that you will have to deliver to the judges.

• After the first round of reading business plans and first assessment through the

Keiretsu table you should be able to start eliminating companies you don’t find

particularly interesting. Remember, though, that you still have to meet all the

entrepreneurs and ask relevant questions, as this is part of the judging criteria.

Therefore spend the right amount of time to prepare for the interview, but not more.

• For the remaining startups you can consider to assign the further research to the

team member most expert in the particular industry/field the startup operates in. This

helped us save a lot of time.

• Define times when you will reconvene and go through the overall assessment

together to check whether a startup can be eliminated or if you need any additional

research.



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1.1.1 Research

The due diligence must be backed up with good research. The most important items to

be researched are:

• Idea: Check how unique the idea is. Sometimes your basic experience/knowledge

can guide you through this, but remember that most good ideas might not resonate

with you immediately. Therefore, try to ask the following questions:

o Are there other startups that have the same/similar idea?

o How user-friendly, easy to use, is the product/service?

o How easy is it to copy the idea?

o Are the big players in the market using substantial resources to work on the

same idea?

Useful resources: Google, Tech Magazines, Techcrunch.

! Team: Researching the team is often neglected, yet it is very important because a

great team can make a mediocre idea fly, whereas a mediocre team will probably

screw up the best idea. Therefore check the background of the team:

o Is its expertise diversified (technical, sales, strategy, leadership, etc.)?

o What is the team members’ track record (successful ventures in the past,

former positions, etc.)?

o Are the team members fully devoted to the ongoing venture, or are they

occupied with other tasks as well?

o Have there been any last-minute-changes in the team. Has someone jumped

off?

o Are they currently looking to fill key roles (e.g. CTO, COO, etc.)?

Useful resources: Linkedin, Venturebeat, Crunchbase.

• Business plan, numbers: The business plans provided are in general rosy

presentations of best-case scenarios. You should perform a sanity check on the

business plan:

o Does the rationale make sense?

o How realistic are revenue projections? (Always be careful with expressions

like “The market size is 10 Billion $. If we only catch 1% of it, we still have

100 Million $ in revenues.”)



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o Try to calculate revenue projections based on data, not on alleged over-

cautious estimations. Example: try to find industry reports about the specific

industry/market. Break the numbers down to the venture’s target group.

Make a sensitivity analysis (pessimistic, realistic, optimistic).

o Perform a sanity check of the revenue model. Are customers really willing to

pay for the product/service?

o Is the target group big/juicy enough?

o Think about possible exit scenarios, if not given by the company. If they do,

check, whether they are realistic.

o Use the amazing databases you have access to via CBS library.

Useful resources: Global Market Information Database – GMID, Marketline, Statista,

Orbis.

• Company and competitors. You should have a good understanding and knowledge of

both the company and its competitors:

o When was the company founded?

o Who has already invested in it?

o Is there a board of directors? How big is it? Who is sitting on the board?

o Is there an advisory board? Who are the members (background research!)?

o Is there any information that the entrepreneur doesn’t share with you (e.g.

hidden convertible notes, etc.)?

o How far is the venture? Any milestones reached yet?

o Do the same research with competitors

Useful resources: Company’s website, Techcrunch, Crunchbase, Venturebeat.

1.2 Due Diligence Interview

By the time you get to the due diligence interview with the startups you have probably

made up your mind on which company you likely want to invest in. But that doesn’t mean

you can afford to neglect this round with any startup and focus only on your company of

interest.

So to start off the Due Diligence you want to pay utmost attention to prioritizing your

questions. You have to ask all the specific questions that you need the answers to but

remember that time is limited and you need to cover all topics. DO NOT get stuck in an



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argument or a discussion, ask your question, listen to the answer and move on. And if

the entrepreneur is taking too much time on particular questions, feel free to politely

interrupt and move on. The competition is for you not for them!!

Below is the list of some generic questions you want to ask and a couple of resources

you might find helpful in framing good questions. Sometimes you may run out of

questions, so be prepared to play off each other by being attentive and responsive

during the Due Diligence. The idea with these generic questions is that they act as good

icebreakers before you deep-dive into the company with your specific questions and can

be used as fillers if you are running out of questions:

! What is the market potential for your company's product or service? What is the

revenue potential for the industry, and what is its growth rate?

! How did you calculate market potential? How do you determine industry sales and

growth rate?

! What makes your business different or unique?

! Why would someone be "compelled" to purchase your product or service? What

specific needs does it address?

! How do you know that your business has high-growth potential?

! What is it about your management team that makes them uniquely capable of

executing on this business plan?

! What are the primary risks facing this opportunity?

! Who are your competitors; what gives your company the competitive advantage?

! Does the company have proprietary intellectual property in the form of patents,

trademarks, copyrights, etc.?

! When will your company break even in terms of profitability and cash flow?

! How do you plan on acquiring and keeping potential customers?

! What drives customer satisfaction for this industry and for the product? And, how do

you know?

! Who is the end-user of the product or service offering?! What alliances or partnerships have you entered (e.g. joint ventures, marketing

alliances, licensing arrangements, selling/distribution agreements, channel

partnerships, software agreements, etc.)?

! What is the anticipated lifecycle of your product or service offering? What are your

current and future plans for R&D investment?



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! How do you plan to expand your team?

! What are the possible exit scenarios?

! What is the planned "Use of Proceeds"?

! What are you looking for in a Venture Capital partner?

! What was your last valuation?

Of course, during your research you should have a generic idea of what the answers to

these questions might be, that is why they are only ice breakers and used to set a

friendly tone and build a rapport with the entrepreneur. DO NOT dwell on minor details

for any specific questions and move on to the important ones ASAP.

We bring here also two examples from our experience:

1. In the European North round we had decided not to invest in one company, so

we gave less importance to the Due Diligence interview with that company by

asking only generic questions and showing a little less energy and interest in the

company. That almost cost us the win in the round; therefore, no matter what

company you have decided to invest to, the judges evaluate all Due Diligence

interviews.

2. At the global finals we were able to engage in all the Due Diligence sessions and

we got a feel of the entrepreneurs but really did not anticipate that the

entrepreneur we picked would have been a hard negotiator.

Lessons learned: Be aware, energetic and interested (genuinely, if possible) in all the

Due Diligence rounds. Secondly, be proactive and try to anticipate possible problems

with entrepreneurs in future rounds. There has to be compatibility between the VC and

the entrepreneur to make a winning combination. In section 2 we will discuss more in

detail about the soft skills and emotional intelligence you will need to be successful in the

competition.

Useful resources:

http://www.forbes.com/sites/allbusiness/2013/06/10/65-questions-venture-capitalists-will-ask-startups/

venturelab.com

thefunded.com



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1.3 Valuation

The valuation of the company is a crucial step determining the ownership percentages of

all equity holders, i.e., entrepreneurs, previous investors, and you as VCs.

Consequently, debates around valuations can become rather emotional, especially since

for startups precise valuations are hard to come up with (since future cash flows are

even harder to predict than for mature companies). Coming up with a precise valuation

is therefore tricky but there are some more or less commonly accepted ways of doing it.

First a word of warning: Since future cash flow predictions for startups are subject of

considerable uncertainties, don’t try a valuation based on discounted cash flows.

Instead, most commonly valuations are done using multiples. You can find various

multiple lists on the web and Aswath Damodaran

(http://pages.stern.nyu.edu/~adamodar/) maintains one of the more detailed lists. In

most cases, the best you can do will be a revenue multiple for the sector your startup is

active in. Considering that revenue multiples are the least accurate ones and keeping in

mind how religious entrepreneurs can become when discussing valuations, you should

make sure that you are able to provide a rationale on why you arrived at a certain

valuation, and you should be prepared to negotiate the valuation when combining them

with other terms on your term sheet.

In this context, your revenue estimate should be a bottom-up calculation based on

various statistics, e.g., how many customers will the startup be able to attract per

location and how much revenue will an average customer generate per transaction, as

opposed to top-down measures like “we will be able to capture at least 1% of a xx bn$

market!”.

1.4 Deliverables

Your deliverables will consist of three parts (you can find the first two herehttp://www.vcic.unc.edu/Team_Deliverables_Template.doc)

1. An executive summary for the judges provides the cornerstones of the deal you

are proposing to the chosen company, reasons why you chose the company and

some of your reservations, and a brief comment on the other companies in the

competition and why you didn’t select them.



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2. The term sheet for the entrepreneurs with which you will start the negotiation.

3. An appendix providing some additional material on how you arrived at your

conclusion potentially backing up your numbers for the valuation of the chosen

company. The appendix is limited to three pages.

1.4.1 Executive summary

The executive summary is more or less self-explanatory, and you can follow the

template prepared by VCIC. It will only be given to the judges. Keep it simple and make

sure that you already started drafting it prior to the competition day so that you are not

losing too much time on it during the final hours of the competition.

1.4.2 Term sheet

The term sheet will be given to the entrepreneurs and forms the basis for the

negotiation. For the sake of the competition, setting up a good term sheet means

walking the thin line of having easy-to-understand terms (entrepreneurs are often not too

familiar with technical terms and you don’t want to present them with a term sheet where

they don’t understand a word) and being able to prove that you know what you are doing

(the judges want to know if you understand the different dimensions of the term sheet

and what they mean). It’s part of the game and process for you to learn what all the

buzzwords actually mean, so we just brief you here on a high-level structure.

We fared rather well trying to keep it simple, and during the negotiation itself you

probably will be able to use some of the buzzwords and in case your entrepreneurs are

not familiar with them you can explain them then.

Content-wise, for the design of the term sheet there are no fixed rules (though a

template is provided as an option) and it depends very much on the individual situation

of the startup and what you as VCs will be able to add.

Still, a key term will be the valuation. Test the entrepreneurs’ view on the value of their

company already during the due diligence and make sure to have a bottom-up valuation

to explain your numbers convincingly when asked, or rather allowing you to adjust the

entrepreneur’s perspective in case they are far off your valuation.



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Another way to offset an unexpected valuation is by arranging for preferred stock with a

liquidation preference for you. In this case, you as a VC will be preferred in case a

startup is liquidated and you can, for example, receive a multiple of the nominal stock’s

value (e.g. a 2x return) and/or be allowed to additionally convert your stocks into regular

stocks and thereby be able to profit twice. Using such preferences needs to be done with

care so as not to appear too much like a barracuda as well as bearing in mind what

other preferences other investors might already have.

Board structure is another often-debated issue. As an investor you usually want to

protect your investment by having a say on the board (at least one seat) and ideally you

wouldn’t want the entrepreneur to have a majority because then they might be able to

highjack your investment. Ways around this are to have independent board members or

in case of syndication, the investors together have a majority.

In case there are additional key hires to be made, make sure you have an option pool

ready for these people. Here you need to be empathetic: If you are under the impression

that the startup needs a different C-suite person to make things happen, prepare a plan

on how to communicate it without being too blunt.

Finally, there are a number of terms impacting governance, e.g. impacting on who can

sell what shares to whom and under what conditions, under what conditions can an

entrepreneur leave a company, etc.

In conclusion, the categories on your term sheet will be: Valuation, option pool, closing

conditions, board structure, liquidation preference, dividends, anti-dilution, preemption

rights, tag along rights, drag along rights, or stock repurchase conditions.

Detailed explanations of these terms can be found on the Internet, and everyone on the

team has to be familiar with all of them (if the judges get the impression that some teammembers might not know them they can quiz team members on specific terms after the

negotiation).



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1.4.3 Appendix

You have a total of three pages to provide additional information on your choice that will

only be available to judges. We always had the impression that the judges do not read

the appendix but probably expect it to be there and at full length. And just in case they

actually do read it, unfortunately, it will have to make sense. Still, you will want to spend

as little time as possible on the appendix because you will be busy enough preparing the

term sheet and negotiation after the due diligence sessions.

We tended to use our first page summarizing the basic evaluation of all companies

following the one used by the Keiretsu Forum (see Due Diligence section), another page

on building the valuation and the third page on other considerations briefly mentioned on

the executive summary sheet.

1.5 Negotiation

The negotiation leg of the competition is the most stressful and nuanced portion of the

game. As you sit across from the entrepreneur, you must sell your firm and explain why

you’ve chosen their company for investment. On the other hand, you must also be

detailed in substantiating your valuation and concerns when the entrepreneur asks for

more. Your team must show that it works together, yet you must also lead with your

team’s strengths. You must stand firm for what is important to your side, while still

showing progress and an ability to find suitable compromise toward finalizing a deal. It is

a delicate and challenging balancing act. Plus it lasts for less than 15 minutes.

Additionally, different judges view the negotiation differently. The VCIC instructions (and

the local and regional competitions) state that the negotiation accounts for two-thirds of a

team’s score. In the global final, many judges throw out the earlier work and judge all

teams that advance to the negotiation round as starting with a blank slate. In addition,

some judges view a successful negotiation as one where the team advocates for

themselves and holds firm, while others value conciliation and compromise. It is tough

to play to all audiences, and the most successful teams are the ones who adjust within

those 15 minutes to what is in front of them most like how a real VC would.



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In addition, some judges value teamwork, with every member playing a role in the

negotiation, while others think that smart teams allow their best negotiator to represent

the team. It is important to both show team unity and cohesion while still playing to your

team’s strengths.

So many factors play into how the negotiation should play out, in the eyes of the judges,

that laying out a successful blanket strategy is impossible. Depending on the

entrepreneur, the right strategy could be outright conciliation or it might be ending the

negotiation early and walking away. The winning team will stay alert and know exactly

which card to play at the right time.

With all those nuances and factors to consider as the negotiation proceeds, there do still

remain some universal points every team should keep in mind when approaching their

negotiation:

• Sell the entrepreneur to themselves. You chose them for investment, and it’s

important to say why. What is it about the entrepreneur and their idea that caused

you to select them? Doing this effectively creates the rapport that forms the early

foundation for a successful negotiation;

• Sell your firm to the entrepreneur . Each team must enter the negotiation with the

view that an entrepreneur will have several options, and so you must motivate them

to want to work most with you and your team. What does your team and VC profile

bring to the table that will best propel the company you chose to the next level and a

valuable exit?

• Don’t become adversarial. The negotiation represents the moment the VC and the

entrepreneur decide to work together, and the VC will likely take a seat on the

company’s board. Your negotiation must show ability and desire to work together.

This is not done with overt conflict;

• Know your alternatives. A team must know on which elements of their term sheet

they are willing to compromise, and on which they plan to stay firm. A team must also

establish a walk-away point, at which they are ready to walk away from the

negotiation if they reach an impasse. In our experience, we could have done much

better at global finals if we had been more prepared on this;



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• Don’t pad the term sheet. Many teams feel the need to pad a term sheet so there is

room to move during negotiations. Unfortunately, there isn’t time to play with all the

levers on the term sheet, so a smart strategy is to shoot right down the line with a fair

term sheet, allowing the negotiation to hone in on the one or two points that will frame

the negotiation discussion;

• Do your research. It is essential to enter the negotiation prepared. Every moment in

the VCIC leads up to those final 15 minutes. For example, your due diligence session

with the entrepreneur should include time to ask about what items on the term sheet

(other than valuation) and aspects of an investment partner are most important to

them. That will allow you to sell to those points during the negotiation;

• Have fun. Yes, it’s quick and stressful, but getting rattled, frustrated, or angry will not

only ruin the experience, it will sink your chances of victory. You are building a

working relationship, and that must have an element of poise, professionalism, and

friendliness.

We hope this information is helpful in devising a negotiation strategy that works best for

your team. Though the strongest teams will best react to the surprises that await them

when they are face-to-face with the entrepreneur, the advice listed above will increase

your chances of positioning yourself best to take advantage of the opportunities the

negotiation portion of the competition presents.

1.6 Q&A

After the negotiation, you will have a 10-minute Q&A session with the judges. How each

judge perceives this session may vary a lot and so there is no unique strategy to adopt.

You should expect that you will be asked about: the rationales of your choices in the

executive summary and term sheet, how and why you made certain choices/moves

during the negotiation, and the meaning of VC jargon that you used in the term sheet. Be

prepared to state and defend your position.

In addition, you should expect that if someone in your team has been less active during

due diligence interview or negotiation, she/he might be asked to answer questions

during this phase, meaning that everyone on the team should always be aware of what

is going on.



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2 Soft Skills

Soft skills play a crucial part in the game. You can have the most prepared team on VC

jargon, due diligence research, valuation, etc., but without the necessary soft skills you

won’t win.

While being able to present yourself as a kick-ass VC fund, you will need to demonstrate

the following:

! Establish the rapport (also called the “Bambi Eye effect”): During both the due

diligence interview and the negotiation phase, the establishment of a good and

collaborative rapport is essential. This might mean, for example, using the first minute

out of 15 (and trust me, that’s a lot) for an introductory joke or small talk. The reason

behind this is that you are trying to establish collaboration through a VC deal: you

wouldn’t want to work with somebody you don’t like, would you? In addition,

entrepreneurs have a voting right for the Entrepreneurs’ Choice award, and they are

more likely to vote for a team with whom the interview went smoothly.

! Empathy: This goes along with establishing the rapport. As no person is like another,

you should be able to immediately perceive how to start a conversation and establish

the rapport. What could work for someone might not work for someone else.

! Assertiveness: Every decision you take as a VC fund should have a strong rationale,

so you should be firm when you have a discussion with entrepreneur and judges.

However you don’t want to sound too aggressive when expressing your views and

therefore remember to use an assertive way of communicating things. This is

especially needed during the negotiation phase and in the Q&A with judges as you

will have to defend your decisions but at the same time not being perceived as an

asshole.

! Cohesive: Remember you are a team. The decisions you make should reflect the

team, even if there is disagreement among the team members. The worst that could

happen is during either due diligence interview or negotiation somebody on the team

disagrees in front of the entrepreneur and the judges with what has been said.



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3 Versioning

We would like to improve this document competition after competition. Therefore we

keep here a table of versioning to keep track of what has been changed over the yeas.

Version Date Author(s) Version Highlights

1 Jan 2015VCIC winning team of MBAclass of 2014

First document version



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4 Appendix

Appendix 1 – Keiretsu Table

Company X

Category

Score

Characteristics Comments0 = weak; 1 = good;2 = strong

Valueproposition

Product, value proposition for customers, clearproblem, seriousness of problem, willingness tochange

Business modelScalability, ability to capture margins & value, salescycles, uniqueness, disruptiveness, position invalue system, viral “multiplier” elements

MarketMarket potential, growth, value system andmargins, market trends, competition

TractionRevenue, growth, customers, markets, salesmodel, KPIs. Early stage: R&D progress or otherrelevant KPIs

TeamThe right team for the next 1-2 years: Teambackground, track record, competencies. Strongvision, willingness to listen and change

TechnologyBarriers-to-entry, technology advantage, patents,ability to dominate, hard to imitate, disruptiveness,

innovation level

Exit routesExit candidates, ability to acquire, IPO possibilities,potential exit multiples. Current and potentialexposure possibilities

TermsCapital structure, valuation, terms, controlmechanisms, investment case (IRR), financial risk,capital amount

0 Add scores for total score 0-20.

Total Note: multiply traction and team by 2x



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Appendix 2 – Summary of useful resources

! VCIC.org website offers a lot of useful resources you should have a look at prior to

the event. Here some links:

http://www.vcic.org/students/help-for-contestants/

http://www.vcic.unc.edu/files/VCIC%20Prep%20Session%20VC%20101.pptx

http://www.vcic.unc.edu/files/VCIC%20Prep%20Session%20The%20Game.pptx

http://www.vcic.unc.edu/Team_Deliverables_Template.doc

! Corporate Finance Book, chapter 32

! Book: “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” by Brad

Feld. This book is suggested for teams that want to dig more into details, probably a

best fit for the winning team at CBS in preparation to the next round.

! Websites: Google, Tech Magazines, Techcrunch, Linkedin, Venturebeat,

Crunchbase. Venturelab.com, thefunded.com

! Database you have access via CBS: GMID - Global Market Information Database,

Marketline, Statista, Orbis.

! Aswath Damodaran multiples http://pages.stern.nyu.edu/~adamodar/

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