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Venture Capital. Amanda Thurn Mariem Myers. Contents. What is venture capital? History of venture capital Why do you need venture capital? Why not get a bank loan? Angel investors What do you give up? Why do you care? Where do you get venture capital? Who do you contact?
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Venture Capital Amanda Thurn Mariem Myers
Contents • What is venture capital? • History of venture capital • Why do you need venture capital? • Why not get a bank loan? • Angel investors • What do you give up? • Why do you care? • Where do you get venture capital? • Who do you contact? • How do you convince them? • The Elevator Pitch
What is Venture Capitalism? • In short, it is a way to obtain money and experience for a business via private equity • Otherwise, money is gained through • Personal Savings • Bootlegging • Use of company’s profits early-on to grow • Bank Loans • Venture Capitalists (VCs) • Individuals willing to invest in the business
What is Venture Capitalism? • Venture Capital from a Company’s Viewpoint • Company starts up and seeks investors to grow • A business plan is created for the VCs to look at • If VCs interested, the first round of money (seed money) is given out • Typically will receive 3 to 4 rounds of funding • VCs get stock and some control in the company for invested money • VCs on the board of directors • Amount of stock given to VCs happens during the pre-money valuation • Post-money valuation happens after VCs invest money • Original shareholders values diluted from 100% to whatever is decided upon during the pre and post-money valuation
History of venture capital • Some of the first Venture Capitalist were the Vanderbilts, Whitneys, Rockefellers and Warburgs in the first half of the 20th century. VC was then the domain of wealthy individuals and families. • The Small Business Investment Act of 1958 was the first step toward a professionally-managed venture capital industry. The Act officially allowed for the licensing of private "Small Business Investment Companies" the first Venture capital firms.
History of venture capital • The late 1990s were a boom time for VC, they benefited from a huge surge of interest in the Internet and other computer technologies. Initial public offerings of stock for technology and other growth companies were in abundance and venture firms were reaping large returns. NASDAQ Composite Index
History of Venture Capital • VC funding has since spread widely through the medical field. • Examples: • The Vertical Group is one of many VC firms • Many start-ups have begun in recent years after sequencing the human genome, centered around early disease detection and prevention.
Investments in industry 2010 $ In millions Berkeley Entrepreneurs Forum Shaking the MoneyTree presentation: http://entrepreneurship.berkeley.edu/main/index.html
Many businesses and start up companies are too small and/or inexperienced to raise enough money for expenses on their own Expenses include R&D, employee salaries and benefits, and manufacturing and production costs. Venture Capitalists are expected to bring not only managerial and technical expertise but also capital to their investments Why do you need venture capital?
Why VC over a bank loan? • Venture capital funds are generally a pooled investment vehicle that invests financial capital of third party investors in enterprises that are too risky for the standard capital markets or bank loans • If a bank did loan you money, you would have no say in how the money is spent • Sometimes getting a loan can be a shot in the dark!
Advantages of Venture Capital • Increase in start up capital will allow for access to new technology and amenities available • Increase company’s net worth in short time period • Provide resources • Mentor - with strategic, operational and financial advice. • Alliances - Venture capitalists can introduce the company to an extensive network of strategic partners both domestically and internationally. • Facilitate exit - Assist in preparing initial public offering (IPO) of its shares stock exchange such as, NASDAQ and also facilitate a trade sale.
Disadvantages of Venture Capital • In-direct Investment: Most Venture capitalists are firms that have investors or limited partners who provide funds • Ownership rights • Expenses and Profits highly regulated • May influence management infrastructure • Equity on a company will last for an infinite time period • Selection process is very strict and there are many strict requirements that venture capitalists place on the companies they invest in.
Angel Investors Many start up companies seek out angel investors because of the strict requirements venture capitalists have for potential investments Angel investors typically invest their own money More willing to invest in highly speculative opportunities May have had a prior relationship with the entrepreneur. Known to invest between $250,000 to $1M, whereas family and friend investments are typically from $0 to $250,000 and VC’s are from $1M to $2M They “fill the gap” between “family and friend” investments and Venture Capital Angel investors and Angel networks invest annually just as much as venture capitalists into start up companies, but invest in 10X as many companies Recently groups have emerged aside from VC and Angel Investors which allow groups of small investors or entrepreneurs to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process Alternatives to Venture Capital
Super Angels : • Super Angels are those were angel investors and have subsequently raised small funds with which to invest in emerging, young companies. • Super Angels Investors
Where do you get venture capital? • Can make contact with prospective investors through attorneys, consultants or business brokers. • Start with local VC firms (in-state) • Provides networking for out of state expansion • California has the highest concentration of VC investment compared to any other state in the country
Your zip code matters ! Berkley Entrepreuneurs Forum Data based on report from Thomson Reuters
Advice to get started: • Advice for entrepreneurs looking for Venture capitalists : • Be a people person • Know your capital investor as much as they know you . • Be active about your managerial decisions. Tips on raising money http://www.youtube.com/watch?v=151xSrGdEqo&NR=1&feature=fvwp WHO should you target to invest in your company/idea ? –Ensure the firm you are targeting is actively investing in your specific market area –When looking at a firm, Research which partner at the firm you should target Introduction –Sending in a “cold” email is very unlikely to get a response –Have someone introduce you if at all possible. •People in companies they invested in, people they know, other investors –Meet them where they are •Conferences, events, where they hang out You need to have all of your material prepared.
How do you convince a VC to invest in your idea/company? • The first step to getting a VC interested in your business is to explain to them what their potential rewards could be. You need to have a quick, powerful, to the point speech that will hook them; make them want to hear more. • This speech is called an “Elevator Pitch” (Explained More in Later Slides) • Once you get a meeting with a VC or a VC firm you need to convince them to invest money into your idea or firm. • Business Plan • Shows the VC’s you have done your homework • How much money do you plan to make? • How big is the market? • Where do you plan on manufacturing the product and what are your cost of production? • All of the above are just some of the questions VC’s want answered before they give you money
What not to do while pitching to a VC !!! • www.youtube.com/watch?v=azRzqI3BJ2A
The Elevator Pitch • The elevator pitch is a brief but meaningful overview of your idea. • The reason it is called an elevator pitch is because it should be delivered in the amount of time you would spend in the elevator with someone (30 seconds) • What makes a good elevator pitch? • Hard numbers, no “I think” analysis • Know who you are talking to • Try to avoid words that are uncommon to many people • Tailor presentation to the audience • Make sure the person understands the “why” of what you are doing • What need are you fulfilling? • Why is it better than what is already on the market? • Explain how investor will obtain a return on his investment, and how much funding you need
The Elevator Pitch • Useful websites for developing an elevator pitch: • Tech Crunch Elevator Pitches (http://pitches.techcrunch.com) • Submit videos of elevator pitches, which are voted and commented on by viewers • Start-Up Nation • Elevator Pitch Competition • http://www.statupnation.com/elevator-pitch-2009 • Twitpitch(www.stoweboyd.com/message/2008/04/twitpitch-is-th.html) • New idea that elevator pitch should be further shortened to a 10-second “escalator” pitch, consisting of 140 characters (the length of a Twitter post)
Helpful Links : • University of Berkley :Lester center for innovation and entrepreneurship:http://entrepreneurship.berkeley.edu/main/index.html • Most famous Super angels companies: • http://www.chubbybrain.com/blog/a-guide-to-super-angel-investors-who-are-they-what-do-they-invest-in/