Steve Cummins Transworld Group - Understanding Venture Financing

LAUNCHING YOUR STARTUPUnderstanding Venture Financing

Steve Cummins, Transworld Group

Launching Your StartupLaunching Your Startup

Understanding Venture Financing

A Primer on Venture Capital

Financing Your Venture

Other Startup Considerations

Raising Venture Capital

The Transition from Idea to Execution

Business Planning



My BackgroundMy Background

28 years in technology-related ventures in all capacities

Founder / CEO, venture capital firm Founder / CEO, early Internet company Corporate finance / M&A, global investment bank Technology marketing Programmer / engineer

Owner / inventor of 14 issued and pending patents worldwide

Education Bachelor of Industrial and Systems Engineering,

Georgia Institute of Technology Master of Business Administration,

Amos Tuck School at Dartmouth College



Impact of U.S. Small Impact of U.S. Small BusinessesBusinesses

25.8 million U.S. businesses “Small” businesses represent:

99.9% of total businesses

50% of the private work force

41% of high tech jobs

75% of net new jobs

41% of private sales

52% of private sector output

97% 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 Impact of Venture-Backed CompaniesCompanies

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 2004

630,000 new net jobs created from 2000-2004

Highest growth rates in biotech, health care and medical devices

Largest 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

2003Steve Cummins, Transworld Group


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

Steve Cummins, Transworld Group Steve Cummins, Transworld Group

European Venture Capital MarketEuropean Venture Capital Market


Types of Venture CapitalTypes of Venture Capital

Private

Professionally managed

Return on investment focused

May bring network, business advice, credibility, etc.

Corporate

Manage risk

Distribution networks

Product R&D

Operational skills

Spin-outs

Academic

Intellectual property Spin-outs

Government

Create new jobs and grow economy

Offer cash, tax incentives, in-kind

Stem brain-drain Angels

Network, business advice, credibility, etc.

Live vicariously The 3Fs


Venture Capital Investment Venture Capital Investment CriteriaCriteria

Management Team Track record

Relevancy

Bet on the jockey, not the horse!

Concept Solves real problem

Favorable market dynamics

Disruptive

Unfair advantages & sustainable competitive advantages

Proper capitalization



The Venture Capital Numbers The Venture Capital Numbers GameGame

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 years

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



How Venture Capital Funds How Venture Capital Funds WorkWork

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 funding

Cash

Faster growth

Staying power

Competitive positioning

Credibility

Value-add investors

Credibility

Customer/partner introductions (“Keiretsu” effect)

Management expertise



Financing OptionsFinancing OptionsNon-Equity Personal funds

Personal debt

Grants and awards

Customer pre-sales

Venture leasing

Receivables financing

Business loans

In-kind contributions

Joint ventures

Equity Venture capital

Angels

The “3Fs” – Friends, Family and Fools

Corporate direct investment


Equity is the most expensive form of capital!

Major Financing QuestionsMajor Financing Questions

How much?

When?

From where / whom?

What terms?

Security

Valuation

Control

Timing



Raise Money from a Position Raise Money from a Position of Strengthof 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 Seek True Value-Added InvestorsInvestors

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

Jim ButterworthIdea to Market WorkshopUkraine, September 2008

LAUNCHING YOUR STARTUPRaising Venture Capital

Jim ButterworthIdea to Market WorkshopUkraine, September 2008

Launching Your StartupLaunching Your Startup

Understanding Venture Financing

A Primer on Venture Capital

Financing Your Venture

Other Startup Considerations

Raising Venture Capital

The Transition from Idea to Execution

Business Planning



Lifecycle of a StartupLifecycle of a Startup

Conception / Invention Seed Stage

Formation / incorporation

Market research Product research

Early Stage

Product development

Team formation Infrastructure build-

out

Launch Growth Stage Expansion Phase Exit Post-Exit


Lifecycle of a StartupLifecycle of a Startup Conception / Invention

Seed Stage

Formation / incorporation

Market research

Product research

Early Stage

Product development

Team formation

Infrastructure 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 concept Talk to prospective customers

Assess market and competition Resolve legal issues upfront

Satisfy prior employment obligations

Incorporate properly

Check intellectual property rights

Spin-out cleanly Form a solid team

Management, board, advisors, professionals

Teamwork begets success If possible, kick-start the business

Spin-out / acquisition

Key customerSteve Cummins, Transworld Group


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 Output of the Business Planning ProcessPlanning 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 Uses of a Business Plan (Internal)(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 Uses of a Business Plan (External)(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 The 12-13 Page PowerPoint PitchPitch

1. Summary (1)

Mission statement

What is the idea?

How will it create value?

Timeline / milestones

Expected results Specific request

(e.g., $)


The Mission StatementThe Mission StatementTo 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; and

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




1. Summary (1)

Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $)

1. Market Overview (2)

Substantiation of need The opportunity (size,

trends, etc.) Markey validation Identification of

prospective customers


Major Pain PointsMajor Pain Points

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

Convenience

Growth

Focus

Time-to-market

Regulatory compliance

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

Why won’t this change?



Favorable Market DynamicsFavorable Market Dynamics

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

Size stat 2

Size stat 3

The market is growing for our product / service: Growth stat 1

Growth stat 2

Growth stat 3

Market trends favor us: Trend 1

Trend 2

Trend 3




1. Summary (1)

Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $)

1. Market Overview (2)

Substantiation of need The opportunity (size,

trends, etc.) Markey validation Identification of

prospective customers

3. Description of Product / Service (2)

Overview of product / service, including high-level technology description

Specific value proposition (including qualitative & quantitative customer benefits)

Correlate product / service features & benefits with market needs

Value chain dynamics



4. Operating Plan (2)

Production / manufacturing

Marketing / distribution

Sales & marketing plan

4. Competitive Environment (2)

Sustainable competitive advantages

Alternatives

Competition (existing and potential


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

Competitive Advantages Proprietary IPR Exclusive distribution Exclusive content / sources Proprietary manufacturing Proprietary integration Installed base / customer contracts Unparalleled capital structure Unparalleled scale, scope and/or focus Team with unique expertise and/or access First mover advantage

Distinguish between momentary and sustainable Must correlate to strategic objectivesSteve Cummins, Transworld Group









Alternatives


6. The Team (1)

Management expertise & relevance

Board, advisors, professionals & others

Identify key hiring needs6. Financials (1-2)

Pro forma snapshot Key metrics / drivers Funding 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 considerations Options 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









Alternatives


6. The Team (1)

Management expertise & relevance

Board, advisors, professionals & others

Identify key hiring needs6. Financials (1-2)

Pro forma snapshot Key metrics / drivers Funding requirements

(optional)6. Road Map (1)

Major accomplishments 90-day plan Horizon



9. Appendix (as long as you want)

Market details (e.g., surveys)

Product details

Operating & financial details

Résumés (CVs)

Articles / research reports

Patents & IPRs

Key contracts

Brochures



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 Attributes of a Successful EntrepreneurEntrepreneur

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-run

What goes around comes around

Friendships last longer than jobs

Don’t let greed blind the objective

Make the most of the experience

Listen & learn

Failure or rejection is what you make of it

Entrepreneurship is a lifestyle choice

Balance your risk & return

Seize opportunities

Life’s short, have fun!



Steve Cummins Transworld Group - Understanding Venture Financing

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