Raising Venture Capital DermotBerkery
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Transcript of Raising Venture Capital DermotBerkery
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Raising Venture Capital for the Serious
Entrepreneur
Book by Dermot Berkery
GoogleBooks: XXX
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Creating a set of "stepping stones:
Step 1
Step 2
Step 3
Step 4
Step 5
Milestone 1Milestone 2Milestone 3
Milestone 4Milestone 5Milestone 6
Milestone 7Milestone 8
Milestone 9Milestone 10Milestone 11
Milestone 12Milestone 13Milestone 14
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Main Path and Alternatives:
Step 1
Step 2
Step 3
Step 4
Step 5
Step 2.1
Step 2.2
Step 2.3
Step 5.1
Step 5.2
Step 5.3
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Worst Case Szenario:
Step 1Step 2
reached?
Yes
No
Abandon the project
Restructuring the company
"bridging" to step 1
proceed
accelerate
partnering
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Large and Small Companies:
innovationbreakthrough products and services
manufacturing distribution
incremental product and service improvement
core competence
of small companies
core competence of large companies
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"J" Cash Curve of a Busniess:
0
cumulative generated
cash($)
time (years)
operating cash flow break even
cash flow break even
start-upbiotech company(ultimately sold)
start-up company
total investment
required
total investment
required
start-up companystart-up biotech company (ultimately sold)
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The seven-year marathon...
It takes at least five to seven years to build a business.There are three to four common financing stages in the development of a businessThe really big hits in a venture capital portfolio tend to be the ones held onto for seven to ten years.
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Activities in a new business that absorb capital...
Capital AssetsProduct development costsLeadership and administrationWorking capital (Working Capital = Current Assets − Current Liabilities)Sales ramp-up financing
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Evidence to include in a business plan:
Potential for accelerated growth in a big, accessible market An achievable position of market power - a sustainable, differentiated product or service propositionCapable, ambitious, trustworthy management
Evidence for opportunity...
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Tools and arguments
"ROI-spreadsheet": Focus on the economic benefits of the company's product or service: What is the company's superlative values proposition to customers and why is the company better placed than the competition to deliver this value?Sustainable and defensible position (e.g. patents, know-how, first-to-market,...) to allow market power to be exploitedVery high gross margins (greater than 70%)
Balanced team with deep domain knowledge and prior experiences and records
Evidence for opportunity...
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Evidence to include in a business plan:
Plausible, value-enhancing stepping stonesRealistic valuation to allow the investor to earn a sizable multiplePromising exit possibilities
Evidence for a good deal...
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Tools and arguments:
Outline of milestones / stepping stones and Alternative sets of milestonespossibility of an initial public offering (IPO) exit strategy
Evidence for a good deal...
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1. Fast growth2. High gross margins3. Low capital intensity
Companies that have the potential to provide very high returns on investment share three simple factors:
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How venture capitalists value early-stage companies
1. They look at the long-term and short-term future to identify possible value
2. They discount the future values back using multiples
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Long-term and short-term future value
short-term future value = value at the next financing round
investors will see a higher company value in the next round (in 12-18 months) to be compensated for the risksvaluation method: find examples of similar companies in other sectors
long-term future value = maximum valuation of the company = "exit value"
only possible if the company stays independent - i.e. an IPO is possible and plausible to explainvaluation method: compare with similar company
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Discounting the future values
First Round Second Round
Pre-IPO final (max.) value
10 to 20 times
6 to 8 times
3 to 5 times
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Why big companies buy small companies
Small companies are better at innovation than big companies!
Distribution Benefit
small company (stand alone)
small company (acquired by a big one)
revenue 10$ (100 %) 40$ (100 %)
development costs -4$ (-40 %) -4$ (-10 %)
administration costs -2$ (-20 %) -0,8$ (-2 %)
sales and distribution costs -6$ (-60%) 0$ (0 %)net profit -2$ (-20%) -35,2$ (88%)