Venture Capital

1. Venture Capital How to Sell Your Soul for a Buck

2. VC Characteristics • Usually early-stage equity or equity-linked financing • Involves high risk • Lacks liquidity or marketability • Returns are primarily from capital gains • Provided by patient investors - who may give value-added advice

3. 9 Years of VC Funding Source: National Venture Capital Association

4. Venture-Backed IPOsPerformance http://www.ventureeconomics.com/vec/news_ve/2005VEpress/VEpress01_04_06.pdf

5. What do VC’s Want? “VCs simply want to believe that the valuation of a company – either public stock price or private valuation – will grow high and stay high long enough for them to sell their interest.” Source: Cliff Conneighton; Venture Management Handbook: An Entrepreneur’s Guide to Stock, Finance, and Contracts - pg 99

6. What do VC’s Want? • 5X or better capital growth in 5 - 10 yrs. • 25% annual capital gains at a minimum • Eventual liquidity (3 - 5 years) • Excitement!

7. What do VC’s Get? Actual performance of venture capital and private equity funds http://www.nvca.org/pdf/Performanceq32005final.pdf

8. What Kind of Company? • At least $10M Revenue in 5 years • At least 20%/Yr Revenue Growth • At least 15% pretax profit margin

9. Four Essential Questions for the Business Plan • Does any large, definable, and identifiable group of people really need your product or service? • Are they willing to pay someone (you or a competitor) considerably more than, perhaps twice, what it costs you to produce and deliver it? If the answer depends on volume, do you know what the volume/cost curve looks like? • Is there some sustainable advantage you will have, in proprietary technology, cost, capability or marketing, over others who do or would compete in this market? • Do you have the management team that can execute the plan successfully? Conneighton Pg. 100

10. Types of Ventures • Life-Style Ventures • 5 Yr Revenue projections < $10 M • Started by people with life-style motives • 90% of all startups • Zero interest to venture capitalists

11. Types of Ventures • Middle Market Ventures • 5 Yr Revenue projections $10 - $50M • Offer cash-out and capital gains opportunities • The backbone of the entrepreneurial economy • Rely heavily on bootstrap and individual financing • About 10% of startups

12. Types of Ventures • High Potential Ventures • 5 Yr Revenue projections > $50 M • Potential BIG winners • May require many rounds of financing of several million dollars • Expect to go public within 5 years • Less than 1% of startups

13. Types of Ventures • Proprietary Technology • You own something way cool • VC’s are very interested • Execution Play • You are trying to do something better than anyone else. • VC’s are not very interested

14. Types of VC’s • Venture Capital Funds • Over 1750 US venture capital and private equiy partnerships • $585 Billion capitalization • Fund about 500 companies/year • 100 to 1 odds (at best) • Typically later-stage deal in excess of $3M

15. Types of VC’s • Business Angels • The “invisible” capital market • Unknown number of individuals (low profile) • 3 to 1 odds of finding one • Typically early-stage deal of $100-500K involving multiple investors • Find one and you’ve found 5 or 10

16. How to Find an Angel • Look close to home • Check civic and charitable organizations • Check for private pilots • Check for expensive hot cars • Use gatekeepers (lawyers, accountants) • Check other startups

17. How to Court an Angel • Show them a great business plan • Kiss their %!! • Ask them for advice (Beware of Micromanagers) • Act like you have done your homework • Don’t act like you know everything • Act EXCITED!

18. Types of Financing • Bootstrap Financing • Personal savings • Family and friends • Credit cards • Second mortgages • Customer advances • Extended terms from vendors/suppliers 80% of the Inc. 500 fastest growing private companies were financed solely by these methods.

19. Types of Financing • Early-Stage Financing • Seed financing: A small amount of capital to prove a concept or qualify for startup capital • Startup financing: for completing product development and initial marketing to get ready to do business • First-stage financing: funds required to begin full-scale operation

20. Types of Financing • Expansion Financing • Second-stage financing: provides working capital for initial expansion • Third-stage or mezzanine financing: provides funds for a major expansion after the company has become profitable

21. Types of Financing • Bridge Financing • May be needed between stages • Usually used before going public • Meant to be repaid from the next round of financing

22. Cost of Venture Capital

23. Capital Gain/ROI Conversion A 7-fold increase in the value of the investment in 5 years is a 48% annualized rate of return on equity.

24. Reasons for Rejection • Lack of confidence in management • Unsatisfactory risk/reward ratio • Absence of a well-defined business plan • Unfamiliarity with products or markets • Too much wishful thinking

25. Too Much Wishful Thinking… • Investors expect to bear risk. • Investors expect YOU to know how much risk they will bear and to TELL them. • They need to believe that YOU understand the risk and will be able to MANAGE it.

26. Don’t Forget Partnering • Companies cooperate for common goals • Usually involves cost/revenue sharing • May involve equity stake • May lead to eventual buyout

27. Sources of Information • Garage.com • www.garage.com • Pairs high-tech entrepreneurs with seed financing sources.

28. Sources of Information • vFinance.com • www.vfinance.com • List of 1800 VC firms, database of 23,000 angel investors • National Venture Capital Association • www.nvca.org • Lots of info for and about VCs