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Raising Venture Capital

Raising Venture Capital. May 17, 2011 Vinit Nijhawan Executive-in-Residence vinit@bu.edu. Startup Ecosystem. People. Capital. OECD. Sources of Capital. Venture Capital Angel Institutional VCs Government SBIR (<500 people, $5B)

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Raising Venture Capital

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  1. Raising Venture Capital May 17, 2011 Vinit Nijhawan Executive-in-Residence vinit@bu.edu

  2. Startup Ecosystem People Capital OECD

  3. Sources of Capital • Venture Capital • Angel • Institutional VCs • Government • SBIR (<500 people, $5B) • Eleven departments participate: NIH, NSF, DoD, DoE, etc. • Two phases: $100K, $750K • STTR (<500 people, $900M) • Five departments participate: NIH, NSF, DoD, DoE, NASA • Collaboration with universities, government labs • Two phases: $100K, $750K • Massachusetts • Mass Life Sciences • MTDC • Mass Energy

  4. What is Venture Capital? Definition…. Venture capital is one type of private equity investing and typically refers to equity investments made in young companies during their launch, early development or expansion. It is not new…. Johannes Gutenberg, a goldsmith, had the idea of producing small, regular blocks of steel with letters on them to be used as mould to mass-produce letter blocks. However, it took many years before he convinced a businessman, Johann Fust, in 1450 to back his invention and loan him 1600 guilders. Source: The Economist, 31 December 1999. Launch velocity…. Began in US after WWII and took off in the 1980s driven by ICT. Then took off in Europe and Israel in 1990s and now is taking off in India and China.

  5. US Venture Capital Invested US - 2006 – $25.7bn – 1446 transactions – $10.5m average investment Europe - 2006 – €4.1bn – 867 transactions – €14m average investment NVCA

  6. Investment on Track to Match Last YearDeal Flow and Equity into Venture-Backed Companies Amount Invested ($B) Number of Deals Source: Dow Jones VentureSource

  7. Healthcare Deal Flow Allocation Down Slightly in 2011 Deal Flow Allocation by Selected Groups (Annual) % Deal Flow Allocation Source: Dow Jones VentureSource

  8. Northern California Companies Continue to Garner Most InvestmentRegional Investment Dollars in the United States 1Q’ 11 Source: Dow Jones VentureSource

  9. US Venture Capital Returns

  10. Working with Angels, VCs, Both? • Individual “Angel” or “Private” Investor • Invests own money, gets full return • Typically industry veterans • Venture Capitalists • Compensated on fees, profit share • Dedicated, institutional investor • Angel Groups • Large networks of industry experts • Usually 2-3 with greatest skills lead + “bench” • Organized, institutional structure

  11. Stage Pre-Seed Seed/Start-Up Funding Gap between $500,000 and $5,000,000, targeting average M&A and up Early Later Source Founders, Friends and Family Individual Angels Venture Funds Investment $25,000 to $100,000 $100,000 to $500,000 $5,000,000 and up (initial capital may be smaller, but exit targets higher) Angel Groups Addressing Void Left by VC

  12. VC Firm Incentives • >$250M in Fund • >$40M/Partner • >$10M/Investment • >$50M Liquidity/Deal, Exits >$500M • Institutional LPs • Meticulously measure IRR • Next fund depends on top quartile performance • From Company’s Perspective • Pro/con: 800lb Gorilla as your friend • Technical risk OK ($ can fix that); Can’t Bring Market Risk (exit too small) • Return needs to justify $30-40M+ from syndication, multiple rounds • “We Fund BIG Ideas….”

  13. Angel Investor Incentives • <$100M in Fund/Network • $10M/Partner or less • $500K-$3M Investment • $5M-20M Liquidity/Deal, Exits $50M-100M • Institutional LPs, SBIC, Individuals • Maybe more flexibility in performance (non-ERISA $) • Maybe less, eg., SBIC program…. • From Company’s Perspective • Pro/con: good returns on average M&A transaction • Market risk OK; technical risk bad (can be bottomless pit) • Shallower pockets may be disincentive to pile on risk • “Who is going to buy you?...”

  14. Submissions (~30 Plans Per Month) Diligence & Term Sheet Negotiations (Coordinated by Managing Director & Deal Lead) Screening Team Review (5 – 10 Plans Per Month) General Meeting Presentations (1 – 3 Plans Per Month) Manage Investment ENTER EXIT Screening team votes on which companies to invite to general meeting. Managing Director polls members for level of investment interest in deals, recruits diligence team, and facilitates selection of deal lead to begin term sheet negotiations. Managing Director pre-screens emailed submissions. Deal lead closes transaction and the sidecar fund invests in companies that attract at least $250K in investment from at least 5 members. Board member represents member interests and seeks an attractive exit. Typical Deal Process (Angel) 1-2 months 1 month 1-2 months 3-5 years

  15. Submissions (~100 Plans Per Month) Associate Review (20 – 30 Plans Per Month); Lead & Secondary Partner Review (3-5 per month) General Meeting Presentations (1 – 2 Plans Per Month) Diligence & Investment Term Negotiations Manage Investment ENTER EXIT Lead partner decides to invite to general meeting. Partnership agrees to submit term sheet to begin exclusive due diligence. Negotiate term sheet Associate pre-screens emailed submissions. Negotiate deal documents and close Board member represents member interests and seeks an attractive exit. Typical Deal Process (VC) 2-3 months 1 month 2-3 months 3-5 years

  16. Preferred Stock Deal Terms • Liquidation Preferences • Participating Preferred • Cumulative Dividends • Cash-Out Election on Sale • Anti-Dilution Protection • Class Voting/Veto Rights • Board Composition

  17. Preferred Stock Deal Terms • Basket (the “Pool”) for Management Shares • Noncompetition & Nonsolicitation Agreements for Management • Employment/Severance Agreements for Founders and Management • Vesting, Buy-Back of Founders’ Stock • Co-Sale & Rights of First Refusal on Management, Founders’ Shares

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