Venture Capital Primer Rev2 101309
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Transcript of Venture Capital Primer Rev2 101309
Raising Capital to Fund Growth
Jeff Amerine, PMPTechnology Licensing Officer
Adjunct Instructor, EntrepreneurshipUniversity of Arkansas
Advisor, Innovate [email protected]
Introductions Financing Basics Where’s the Money? What’s Available in Arkansas? Financing Sources What Attracts the Money? Recap / Q&A
• About me:– US Naval Academy 1984– US Air Force Officer 1984-1990– System engineer, product manager, VP, CEO, CTO
• 18 years in telecom and software technology development
• 7 startup ventures• 3 Fortune 500s
– U of A Technology Licensing Officer & Adjunct Instructor, Entrepreneurship
– Staff Advisor, Innovate Arkansas
“I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the
difference.”
The Road Not TakenBy: Robert Frost
$$
Time
Seed Early Growth Mature / Expansion
Adrenaline Junkies
Growth Leaders
Crank Turners
Revenues
Expenses
Passion and commitment: You have to be a true believer
Value proposition: Solves a real problem or meets a real need
The team: Onboard the bus and in the right seats
Competitive advantage: Better, faster, cheaper
Focus, focus, focus: Avoid trying to “boil the ocean”
Repeatable, scalable processes: Execution is key
Choose your customers well!
Remember accounting profits are great but cash is king!
How do I finance my startup??Equity???Debt???
Bootstrap???Other???
Equity finance = selling shares or membership units
Advantages: Does not impact cash flow, higher risk tolerance. Disadvantages: Loss of control; dilution of interest
Debt finance = taking a loan from a bank or individual
Advantages: Does not dilute ownership Disadvantages: Loan payments, personal guarantees, banks don’t lend money to startups without assets
Bootstrapping= working for free or using “FFF” money
Advantages: May not dilute ownership, friendly terms Disadvantages: Family issues, personal guarantees, not eating or having fun….
Friends Family Fools
Government: Grants, SBIR/STTR, Loans, Recovery Act
Advantages: Does not dilute ownership Disadvantages: Takes forever, political decision criteria, government rights and oversight
Angels VCs Strategic investors Debt Mezzanine Public markets Other
Mostly not here…but we are working on that point
Angel – Fund for Arkansas’ Future◦ $6M angel fund◦ Will do up to $500K investments
Seed Capital◦ Arkansas Science & Technology Authority (ASTA)◦ Will do up to $50K-$300K in royalty/ debt financing
Mezzanine ◦ Diamond State I & II◦ Look for EBITDA positive growth stage companies
• Other Investment Incentives– Arkansas Economic Development Commission
• Equity investment state tax credits – 33.3% • Can be monetized and transferred
– ASTA• R&D state tax credits – 33%• Can be monetized and transferred
– Arkansas Capital Corporation• New Market Investment tax credits• SBA Loan Guarantees
Management Team, Management Team, Management Team
Intellectual Property that can be a barrier to entry Customer traction – can the company execute?
Physical proximity to the investors Other interested investors – nobody wants to be first Entrepreneur skin in the game
Realistic valuation – this depends a lot on where you sit
Angels◦ Typically high net worth individuals◦ Look to do very early stage seed investments◦ Often bring relevant domain knowledge◦ Occasionally form “Angel Funds”◦ This group can some times be broadened to
include “friends, fools, and family”◦ Examples: Fund for Arkansas’ Future
• VC Firms grew out of Silicon Valley in the 1950s• Largest concentration around R&D Universities• Desired returns: Typically a minimum of 10X• Examples: Kleiner-Perkins, Sevin-Rosen, NMP
• Investment Preferences: – Proven management team– Intellectual property that creates high barriers– Customer traction
Venture Fund LLP
Limited PartnersVenture Investments
•Public Institutions•Individuals•Private Equity Firms•Mutual Funds
Successful VC funds:◦ Out of ten investments made after 3-5 years:
One big home run – at least 10X or more return Four marginal survivors Three on life support Two total failures
“1 home run (10x) out of ten investments” ……Chrysalis VC Fund
Historical Returns – High teens to >30%
1-2 Winners10X Returns
Due Diligence on 20 Investments
Receive 1000s of Business Plans
Read 1000s of Executive Summaries
Invite 100s of Companies to Present
Invest in
10
Returns by Asset Class
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Yr. 1 Yr. 3 Yr. 5 Yr. 10 Yr. 20
Early/Seed VC
Balanched VC
Later Stage VC
All Venture
NASDAQ
S&P 500
Industry Preference Stage Preference Investment Size Parameters Geographic Preference Risk Balancing and Age of Fund Fund Experience and Expertise Due Diligence
Based on VC perceived risk, usually not the risk the entrepreneur sees
Four main risk categories:◦ Product/Technology risk◦ Market risk◦ Execution/Management risk◦ Financing Risk
No “standard” way to determine valuation!!
Examples: ◦ Net Present Value of Discounted Cash Flows◦ Multiple of Annual Revenues◦ Multiple of Net Income◦ Multiple of Subscribers◦ Valuation by Comparison◦ Use of Valuation Tools – www.equitynet.com
Recommendation: ◦ Look at the comparable companies in your space
◦ Set your valuation within the range of the comps
◦ Be conservative
Pre-revenue startups seldom have valuations greater than $3M-4M even with great IP and management
Term Sheet – a proposal to invest Not binding Outlines the deal points Investment contingent on negotiation and
due diligence
Key Points◦ Pre-money valuation◦ Post-money valuation
Pre-money valuation = $4M Investment = $1M Post-money valuation = $5M
VC ownership = $1M / $5M = 20%
VCs typical want preferred stock
Typical VC deal needs an exit in 5-7 years Want a 10X return minimum Play for capital appreciation
◦ Example: $1M today = $10M @ Exit
◦ VC Protections = Preferred Stock, Ratchets, Anti-dilution
◦ VC Ownership will “Ratchet-up” if company misses milestones
Key Points to Negotiate
◦ Board of Directors
◦ Vesting & Acceleration
◦ Option Pool & Acceleration
◦ Preferred Stock
◦ Anti-Dilution Protection
Comprehensive review of everything◦ Management references◦ Market size & need◦ Sales Pipeline & Customers◦ Strategic relationships◦ Financials◦ Intellectual property◦ Legal issues
Grueling process that will find the BS! Can last 30-90 days
Entrepreneurs’ Disease: 100% X 0 = 0
Unrealistic valuations
Lack of preparation for having a VC “help” run your company
Excellent management that has a track record
Intellectual Property or Subject Matter Expertise that creates a competitive barrier
Solves big problems in big markets - $1B++
Customer traction – i.e. somebody will buy your widget
Entrepreneur “skin in the game”
Skype◦ VOIP service provider◦ Revenues based on “eyeballs”, advertising or some such◦ No cost for PC-to-PC calls◦ Initial VC investors:
Draper –Richards: Bill Draper and Howard Hartenbaum - $250,000 initial investment
◦ Sells to eBay in 2006 for $2.1B
◦ Initial VCs make 1300X return on their initial investment
Irrational Exuberance?? Possibly, but some big hits still happen – RARELY.
Guy Kawasaki interviews:◦ Mike Moritz, Sequoia Capital and Paul Graham,
Y Combinator◦ http://www.building43.com/videos/2009/08/07/fire
side-chat-money-and-passion/
• Existing Fortune 500 firms• Look to invest in technologies that can benefit
their business portfolio• Open to “Extrapreneurship” i.e. spin-outs• Create their own venture funds• Examples: GE, IBM, Intel, Honda, NEC, Chevron
• Upside: Can bring tremendous market access• Downside: Very slow moving typically
Honda Strategic Venturing (HSV)
Strategic venture investment arm of the global Honda R&D organization.
• Window to Global Innovation : Create new value jointly by bridging the outside
entrepreneurs and our internal R&D through venture investing• Spinout of Internal R&D projects : Develop new businesses via technology
carve-outs which find a better commercial fit outside of Honda • Entrepreneurship at Honda R&D : Enhance Honda’s innovation spirit by
harnessing entrepreneurship in the global venture community
Drive Innovation
Alternative Energy• Fuel cell, hydrogen reformer • Battery, Bio-fuel, Solar energy• Energy harvesting
Robotics
Communication for Mobility
• Sensors, Gyros, Radar• Actuators, Motors• Image processing, voice recognition
• Wireless Communication• In-vehicle network• Human machine interface
Advanced Materials• High performance materials: coating, fabric,
rubber, structure, nano• Functional materials: catalysts, membranes,
electrodes
High Interest Technologies
Target: ◦ Game-changing technologies ◦ Technologies that can contribute to Honda’s R&D road map
Primary Interest: Mutual Strategic Value◦ We offer:
Funding Joint development with Honda R&D Product / Market knowledge
◦ We seek: Board observer rights Strategic commercial rights
Investment Size: ◦ Seed-to early-stage:
HSV Fund (Honda’s technology venture fund w/ partner Atrium)◦ Mid-to late-stage:
Honda Motors direct investment
Some venture firms focus on debt◦ Gives first preference on assets◦ Can be convertible to equity◦ Avoids/limits shareholder dilution…◦ But it has to be paid every month
◦ Examples: Western Tech Investments, Silicon Valley Bank, Commercial banks/SBA loans
Growth financing to get to liquidity event
Targeted at profitable companies that need to scale
Last stage financing before M&A activity or IPO -
Typically $10M-$100M or more in financing
Can be debt/equity and is typically a syndicate of private equity funds
Forget about it…. Post 2001 - virtually unavailable
Sarbanes-Oxley (SOX) requirements have a further stifling impact
Not a good exit or liquidity strategy for US-based tech startups at this point
Some rare exceptions still arise…
US Government◦ SBIR/STTR funding can be a great source of seed,
pre-seed funding
◦ Universities know how to get this funding
◦ No dilution, no equity, and no debt
◦ Some Incubators use this to get companies rolling: Virtual Incubation Company (VIC)
◦ Process can be slow and involved
$$
Time
Seed Early Growth Mature / Expansion
Angels
VCs
Strategic InvestorsDebt Investors
Revenues
Revenues
Expenses
Mezzanine
Bootstrap – self financing
SBIR/STTR
UniversityR&D
TechnologyEngine
Entrepreneurial
Culture
AvailableVentureFinance
UniversityR&D
TechnologyEngine
EntrepreneurialCulture
AvailableVentureFinance
The Road Less Traveled – new ventures are critical to our economic health and success!
The team, the plan, and a good finance strategy are key
A “startup culture” has to be nurtured
Arkansas is taking steps to create the right environment
Raising Capital to Fund Growth
Jeff Amerine, PMPTechnology Licensing Officer
Adjunct Instructor, EntrepreneurshipUniversity of Arkansas
Advisor, Innovate [email protected]
“Techpreneurship Blog”http://blog.innovatearkansas.org