Professional Documents
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Venture Capital
I was seldom able to see an opportunity until it had ceased to be one
Mark Twain
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V E N T U R E P A R T N E R S
Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
Industry Snapshot
400+ institutional VC firms in the U.S. Geographically concentrated Stage/Industry focused General partners/Limited partners 10 year investment horizon Co-investment with other VCs common
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3 to 4 investment professionals Review 1000+ business plans a year Manage $50 to $200 million in capital Buy equity (preferred stock) - rarely make loans Investment horizon - 3 to 6 years Sources of capital: - Pension funds - Corporations - College endowments - Wealthy individuals
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Investment Stages
Most VCs have a preference for a particular investment stage. Five Stages:
Seed Start-up Early Expansion Mezzanine/Bridge
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Stage/Characteristic
Stage
Seed
Investment
$50-500K
Characteristics
- Founder(s) only - No product - No customers - Primary risk: R&D - Mgmt. team incomplete - Prototype or beta product - No revenues - Limited customer interest - Some capital invested - Primary risk: market accept.
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Start-Up
$500K to $1MM
Stage/Characteristic
Stage
Early
Investment
$1MM - $3MM
Characteristics
- Most of team in place - Limited revenues - Not profitable - Primary risk:execution - Meaningful revenues - Achieving profitability - Growing customer base - Primary risk: competition
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Stage/Characteristic
Stage Investment Characteristics
Mezzanine/ $10MM - $20MM - Significant revenues Bridge - Profitable
- Industry player - IPO in 6-12 months - Risk much lower
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Board involvement Management recruitment Future capital raising Access to business network Strategy development Patience!
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Targeted Industries
Most of the $10 billion invested by VCs in 1997 was concentrated in five industries. Why these? Information Technology Medical Services/Devices Communications Biotechnology Some Retail
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5% 95%
Mgmt. Fee
Investment Gains
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Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
Management
The most important question: Has the team had experience and success in the same industry? VC Focus:
DIRECT sales experience? Prior P/L responsibility? Personal financial stake? Willingness to share equity Fire in the belly? Functional areas covered?
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Market
Can management demonstrate a thorough understanding of the marketplace dynamics? VC Focus:
Market size and growth rate? Market drivers? Customer involvement in the R&D process? Number of competitors?
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Competition
Does management have a clear understanding of the competitive landscape? VC Focus:
Why are competitors successful? What is the prevailing business model? Barriers to entry?
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Business Economics
Does management have a deep understanding of the financial dynamics of the business and industry? VC Focus:
Margins comparable to industry norm? Break-even < 2 years ? Appropriate sales model? Moderate capital intensity?
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Risk
Does management recognize, accept, and have strategies to deal with key risks? VC Focus:
Reasonable financial projections? New technology adoption rate? Length of sales cycle? Best and worst case scenarios explored? Regulatory hurdles?
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V E N T U R E P A R T N E R S
Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
Business Plan First Meeting Second Meeting Term Sheet Due Diligence Negotiations
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Business Plan
Madam, enclosed please find the novel you commissioned. It is in two volumes. If I had had more time I could have written it in one.
Voltaire
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Business Plan
#1 objective of the the business plan: Get the VC interested in hearing more about the opportunity. Business Plan Basics:
Written by the entrepreneur Keep it short Financials (3-5 year proj.) Income statement Balance sheet Cash flow What-ifs helpful
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Business Plan
Magic Numbers?
i
i i
50 5 10
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Business Plan
Business plan phrases that spook VCs...
We have no competition. We conservatively project.. We only need a 10% market share. We will offer the most features at the lowest price. We valued our Internet start-up using multiples of comparable companieslike Netscape, Cisco, Microsoft.
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First Meeting
Skepticism might best describe the venture firms attitude in the first meeting. Dont be alarmed by this. The Details:
Location: VCs office Duration: 2-3 hours Attendees: 1 to 2 VCs Format: Formal presentation with Q/A
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Second Meeting
Getting to the second meeting is an important milestone. The team will now make its case to the entire partnership. Focus On :
Business opportunity - not the technology Addressing concerns of the skeptics - THIS IS CRITICAL! Next steps
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The greatest gift that God hath given us is to see ourselves as others see us.
Scottish Proverb
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Term Sheet
After the second meeting, the VC typically provides a term sheet to the entrepreneur. Term Sheet - Common questions:
Is it a legally binding document? Whats covered? What is it designed to do? Why participating preferred stock?
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Board representation Additions to management team, if any Monitoring covenants, Restrictive covenants Other deal specific issues
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Due Diligence
The heavy lifting for the venture capitalist starts with the due diligence process. Due Diligence Overview:
Length: 6-12 weeks Will perform up to 100 reference calls Interview customers, former employees, competitors, industry experts Intense legal, financial work
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Negotiations
Negotiations take place throughout the due diligence process. What is negotiable? Some flexibility in:
Valuation Total investment Vesting periods Size of option pool
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Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
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Executive Summary
What should the executive summary address? Mission statement Brief company history Description of investment opportunity Market overview Management team Product & technology Customers Strategy Competition Capital requirements
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Main Body
Management
Key Questions to Address:
Who are the key people in the company? Where did they come from, and why are they the right people to run the company? Have they had previous experience and success in growth companies?
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Main Body
Product/Technology/Service
Key Questions to Address:
What does the customer have access to today? How does it differ from competing offerings What is the superior value proposition to the customer?
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Main Body
Marketplace
Key Questions to Address:
What is happening in the marketplace? Is it growing, if so, why and at what rate? What is lacking from the market leaders that this product/tech/service will provide? Which customers have been involved in the development of the product and are likely to purchase it? CLEAR STO NE
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Main Body
Strategy
Key Questions to Address:
Why will the customer be compelled to purchase the product? How will the company maintain its competitive differentiation? What barriers exist/will be created to curtail new entrants?
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Appendix
Not all business plans require an Appendix section, but it can be useful. What to include?
Relevant industry articles to bolster management claims Major customer testimonials Other information likely to impress those not familiar with the market
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V E N T U R E P A R T N E R S
Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
Valuation
Stage Seed Criteria
- Mgmt. track record - Market size/growth - Competition - Investment to date - Market size/growth - Working prototype? - Team complete?
Methodology
Range
Start-up
Comparables
$750K to $2.0MM
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Valuation
Stage Early Criteria
- Market size/growth - Revenue run rate - Gross margin % - Performance to date
Methodology
Comparables
Range
$1.5 to $5.0MM
Varies
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Valuation
Stage Criteria Methodology
Multiples of proxy companies
Range
Varies
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Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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Exit Strategies
Sale or Merger
Most likely exit
Redemption
Least attractive
Management buy-out
Generally not possible
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Secrets of Success?
The Eight Commandments
CEO carried a bag Called on same customer base Gross margin > 50% Some degree of technology Cash flow break-even < $5M Sourced the deal 25% ownership or greater First institutional investor
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Likelihood of Occurring
- 1 in 15 - 6 in 10 - 7 in 10
conclude it makes sense 2. Meet the team and like them 3. Be attracted to the market opportunity and the company strategy 4. Introduce team to the other partners and get their buy-in
- 7 in 10
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Likelihood of Occurring
- 7 in 10
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CLEAR STO NE
V E N T U R E P A R T N E R S
Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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V E N T U R E P A R T N E R S
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Local Resources
The Michael Dingman Center at U of MD. The Morino Institute - Netpreneur Program Baltimore/Washington Venture Group NVTC - Emerging Business Network functions Silicon Valley Bank, other community banks Private Investors Network, Grubstakes (networks of angel investors) Pratts Guide to Venture Capital
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V E N T U R E P A R T N E R S
Venture Capital
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