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LAUNCHING YOUR STARTUP

Understanding Venture Financing

Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008

Launching Your Startup

Understanding Venture Financing
A Primer on Venture Capital
Financing Your Venture
Other Startup Considerations

Raising Venture Capital
The Transition from Idea to Execution
Business Planning

Peace and Prosperity Through Science and Collaboration www.crdf.org

My Background

28 years in technology-related ventures in all
capacities
Founder / CEO, venture capital firm
Founder / CEO, early Internet company
Corporate finance / M&A, global investment bank
Technology marketing
Programmer / engineer

Owner / inventor of 14 issued and pending
patents worldwide
Education
Bachelor of Industrial and Systems Engineering,
Georgia Institute of Technology
Master of Business Administration,
Amos Tuck School at Dartmouth College

Peace and Prosperity Through Science and Collaboration www.crdf.org

Impact of U.S. Small Businesses

25.8 million U.S. businesses
“Small” businesses represent:
99.9% of total businesses
50% of the private work force
41% of high tech jobs
75% of net new jobs
41% of private sales
52% of private sector output
97% of all U.S. exporters with 29% of export value

Produce 13-14x patents per employee (and
2x likely to be among the 1% most cited)

Peace and Prosperity Through Science and Collaboration www.crdf.org

Impact of Venture-Backed Companies

In the U.S.:
$1.8 trillion in revenue in 2003 (9.6% of all sales)
10.1 million jobs in 2003 (9.4% of employment)
600,000 new net jobs from 2000-2003

In Europe:
1.0 million jobs in 2004
630,000 new net jobs created from 2000-2004
Highest growth rates in biotech, health care and
medical devices
Largest absolute growth in university spin-offs

Peace and Prosperity Through Science and Collaboration www.crdf.org

generating > $1.crdf. Universities Established > 4.3 billion in license income Launched > 2.Impact of U. patent applications in 2003 Peace and Prosperity Through Science and Collaboration www.000 U.100 new companies since 1980.200 new commercial products between 1998-2003 Performed > $30 billion of R&D in 2001 Filed 8.000 active technology transfer licenses (including > 4.S.org .S. 2/3 of which were still operating Executed > 30.500 in 2003).

institutionally backed investors to emerging growth businesses Generally made as cash in exchange for equity (ownership) in the investee company Usually high risk.crdf.org . but with the potential for above-average returns Peace and Prosperity Through Science and Collaboration www.What is Venture Capital? A cash investment made by professional.

U.crdf. Venture Capital Market Peace and Prosperity Through Science and Collaboration www.S.org .

crdf.European Venture Capital Market Peace and Prosperity Through Science and Collaboration www.org .

Types of Venture Capital Private Academic Professionally Intellectual property managed Spin-outs Return on investment Government focused Create new jobs and May bring network.org . in-kind Stem brain-drain Corporate Manage risk Angels Distribution networks Network. etc. Offer cash. grow economy business advice. etc. credibility. tax credibility. business advice. Product R&D Live vicariously Operational skills Spin-outs The 3Fs Peace and Prosperity Through Science and Collaboration www. incentives.crdf.

crdf.org . not the horse! Concept Solves real problem Favorable market dynamics Disruptive Unfair advantages & sustainable competitive advantages Proper capitalization Peace and Prosperity Through Science and Collaboration www.Venture Capital Investment Criteria Management Team Track record Relevancy Bet on the jockey.

.org .crdf. 10x.The Venture Capital Numbers Game Receive 1000s of business plans each year Read 100s of plans Meet with dozens of companies Fund a handful Portfolio expectations: 60% die or go nowhere (living dead) 30% yield 2-4x in 4-7 years 10% (hopefully 20%) are tremendous successes (e. 1000x!) Peace and Prosperity Through Science and Collaboration www.g. 100x.

org . GPs get a portion of the profits LPs get the remaining profits Peace and Prosperity Through Science and Collaboration www.crdf.How Venture Capital Funds Work General partners (GPs) manage the fund Capital comes from institutional “limited partners” (LPs) Singularly focused: ROI GPs get an annual fee Once LPs get investment back.

crdf.org .Venture Capital Economics LP 3 GP LP 1 2% LP 4 LP 2 $100 Management VC Fund IX.P. Portfolio $10 $10 Portfolio Company 1 Company 10 Portfolio $10 $10 Portfolio Company 2 Company 9 $10 $10 Portfolio Portfolio Company 3 Company 8 $10 $10 Portfolio $10 $10 Portfolio Company 4 Company 7 Portfolio Portfolio Company 5 Company 6 Peace and Prosperity Through Science and Collaboration www. L.

Venture Capital Economics LP 3 GP LP 1 LP 4 LP 2 $180 $20 VC Fund IX.crdf.P. Portfolio Portfolio Company 1 Company 10 Portfolio $100 $35 Portfolio Company 2 Company 9 Portfolio Portfolio Company 8 Company 3 $40 Portfolio $25 Portfolio Company 4 Company 7 Portfolio Portfolio Company 5 Company 6 Peace and Prosperity Through Science and Collaboration www.org . L.

Financing Your Venture Not all startups require external funding Cash flow comes ultimately and most importantly from customers. NOT from investors Benefits of external funding Cash – Faster growth – Staying power – Competitive positioning – Credibility Value-add investors – Credibility – Customer/partner introductions (“Keiretsu” effect) – Management expertise Peace and Prosperity Through Science and Collaboration www.crdf.org .

Financing Options Non-Equity Equity Personal funds Venture capital Personal debt Angels Grants and awards The “3Fs” – Customer pre-sales Friends.crdf. Family and Venture leasing Fools Receivables Corporate direct financing investment Business loans In-kind contributions Equity is the most Joint ventures expensive form of capital! Peace and Prosperity Through Science and Collaboration www.org .

crdf.org .Major Financing Questions How much? When? From where / whom? What terms? Security Valuation Control Timing Peace and Prosperity Through Science and Collaboration www.

prepare for peace”) Have a call to action Peace and Prosperity Through Science and Collaboration www.org .Raise Money from a Position of Strength Have cash in the bank Prepare to build your company without any outside investment (bootstrap) Seek to secure multiple competing offers Raise money when you can. not when you have to (Sun Tzu – “In times of war.crdf.

org .crdf.Seek True Value-Added Investors Understand your business Operating experience Domain and/or geographic experience Rolodex / network Relevant portfolio Relevant limited partners (in your space) Deep pockets / courage to stay the course Peace and Prosperity Through Science and Collaboration www.

crdf. or more Peace and Prosperity Through Science and Collaboration www.Fundraising Process Investor Final Presentations Documentation 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Business Plan Term Sheet Funding Submissions Negotiations Budget 4-5 months.org .

September 2008 .LAUNCHING YOUR STARTUP Understanding Venture Financing Jim Butterworth Idea to Market Workshop Ukraine.

September 2008 .LAUNCHING YOUR STARTUP Raising Venture Capital Jim Butterworth Idea to Market Workshop Ukraine.

crdf.Launching Your Startup Understanding Venture Financing A Primer on Venture Capital Financing Your Venture Other Startup Considerations Raising Venture Capital The Transition from Idea to Execution Business Planning Peace and Prosperity Through Science and Collaboration www.org .

org .crdf.Lifecycle of a Startup Conception / Launch Invention Growth Stage Seed Stage Expansion Phase Formation / incorporation Exit Market research Product research Post-Exit Early Stage Product development Team formation Infrastructure build-out Peace and Prosperity Through Science and Collaboration www.

crdf.Lifecycle of a Startup Conception / Launch Invention Growth Stage Seed Stage Expansion Phase Formation / incorporation Exit Market research Product research Post-Exit Early Stage Product development Team formation Infrastructure build-out Peace and Prosperity Through Science and Collaboration www.org .

org .Startup Fundamentals Solid foundation = best chance of funding your venture Peace and Prosperity Through Science and Collaboration www.crdf.

board. advisors. kick-start the business Spin-out / acquisition Key customer Peace and Prosperity Through Science and Collaboration www.crdf.Pour a Solid Foundation Market-driven concept Talk to prospective customers Assess market and competition Resolve legal issues upfront Satisfy prior employment obligations Incorporate properly Check intellectual property rights Spin-out cleanly Form a solid team Management. professionals Teamwork begets success If possible.org .

org .Be Market-Driven! Purchase decisions are based on relationships – understand your customers Understand and model your customers’ economic benefit: How are they currently solving the problem? How will their work processes change by using your product? What is their economic benefit / ROI? Your product / service must be better. faster and cheaper Peace and Prosperity Through Science and Collaboration www.crdf.

Protect Your Assets! Peace and Prosperity Through Science and Collaboration www.crdf.org .

crdf.org .Cash Flow is Your Life Blood! CFIMITYM Cash flow comes ultimately and most importantly from customers. not from investors Profit is not cash flow Capitalize properly Peace and Prosperity Through Science and Collaboration www.

and the risks involved A business plan is an output of the business planning process Peace and Prosperity Through Science and Collaboration www. it’s the planning that’s important. Eisenhower.crdf.Business Planning “The plan is useless. on the success of his D-Day invasion plan The process of uncovering and identifying what creates and drives value in your business.org .” General Dwight D.

Output of the Business Planning Process Business plan (narrative) Pro forma financial statements PowerPoint pitch (12-13 pages) Elevator pitch (1-2 minutes) Peace and Prosperity Through Science and Collaboration www.crdf.org .

A Business Plan… Describes all the critical internal and external elements and strategies for guiding the direction of your company Communicates how you will create sustainable value Identifies risks and uncertainties and communicates how you will manage them Describes the company’s structure.crdf. objectives and future plans Peace and Prosperity Through Science and Collaboration www.org .

crdf.Uses of a Business Plan (Internal) Refining your product Motivating and / service strategy focusing employees Identifying key Analyzing capital customers budgeting decisions Identifying Facilitating new milestones and product development timelines Integrating new Helping set acquisitions objectives & Facilitating restarts. performance metrics restructuring and Managing risk and turnarounds uncertainty Peace and Prosperity Through Science and Collaboration www.org .

org .Uses of a Business Plan (External) Attracting key employees Educating potential investors Arranging strategic alliances Obtaining large contracts with strategic customers Facilitating mergers and acquisitions Peace and Prosperity Through Science and Collaboration www.crdf.

Summary (1) Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e..The 12-13 Page PowerPoint Pitch 1.org .crdf.g. $) Peace and Prosperity Through Science and Collaboration www.

crdf.org .The Mission Statement To create [value/EVA] by [product/service] for/to [customer(s)] by… Strategic Strategic Strategic Objective 1 Objective 2 Objective 3 Peace and Prosperity Through Science and Collaboration www.

org .crdf.The Mission Statement Peace and Prosperity Through Science and Collaboration www.

Peace and Prosperity Through Science and Collaboration www.crdf. and Building a world-class team of research & development scientists and engineers.org . Creating proprietary manufacturing methods for the highest yield of A-class widgets.Mission Statement Example To be Ukraine’s leading producer of “A- class” widgets to the _______ sector by: Securing exclusive purchase contracts with 3 of the top 10 customers of A-class widgets in Ukraine.

crdf. Summary (1) Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.) Markey validation Identification of prospective customers Peace and Prosperity Through Science and Collaboration www.. etc.The 12-13 Page PowerPoint Pitch 1. $) 2.org . Market Overview (2) Substantiation of need The opportunity (size.g. trends.

crdf.Major Pain Points What is the major pain your customers face currently and/or in the future? Cost Convenience Growth Focus Time-to-market Regulatory compliance Why are alternative products/services not addressing the pain (fully)? Why won’t this change? Peace and Prosperity Through Science and Collaboration www.org .

org .crdf.Favorable Market Dynamics The market is large for our product/service: Size stat 1 Size stat 2 Size stat 3 The market is growing for our product / service: Growth stat 1 Growth stat 2 Growth stat 3 Market trends favor us: Trend 1 Trend 2 Trend 3 Peace and Prosperity Through Science and Collaboration www.

The 12-13 Page PowerPoint Pitch 1.g.crdf. etc.. Specific value $) proposition (including qualitative & 2. including high- Timeline / milestones level technology Expected results description Specific request (e. Description of Mission statement Product / Service What is the idea? (2) How will it create Overview of product / value? service. Market Overview (2) quantitative customer Substantiation of need benefits) The opportunity (size. Correlate product / trends.) service features & Markey validation benefits with market Identification of needs prospective customers Value chain dynamics Peace and Prosperity Through Science and Collaboration www.org . Summary (1) 3.

crdf. Competitive Environment (2) Sustainable competitive advantages Alternatives Competition (existing and potential Peace and Prosperity Through Science and Collaboration www.org .The 12-13 Page PowerPoint Pitch 4. Operating Plan (2) Production / manufacturing Marketing / distribution Sales & marketing plan 5.

crdf. scope and/or focus Team with unique expertise and/or access First mover advantage Distinguish between momentary and sustainable Must correlate to strategic objectives Peace and Prosperity Through Science and Collaboration www.org .What’s Proprietary About Your Idea? Competitive Advantages Proprietary IPR Exclusive distribution Exclusive content / sources Proprietary manufacturing Proprietary integration Installed base / customer contracts Unparalleled capital structure Unparalleled scale.

The Team (1) Production / Management expertise manufacturing & relevance Board.The 12-13 Page PowerPoint Pitch 4. Operating Plan (2) 6. Competitive Environment (2) 7.org . Financials (1-2) Sustainable Pro forma snapshot competitive advantages Key metrics / drivers Funding requirements Alternatives (optional) Competition (existing and potential Peace and Prosperity Through Science and Collaboration www. advisors. Marketing / distribution professionals & others Sales & marketing plan Identify key hiring needs 5.crdf.

crdf.org .Financial Projections (in thousands) 2007 2008 2009 2010 Revenue driver 1 (1) Key is to understand Revenue driver 2 (2) drivers and Cost driver 1 (3) assumptions since… Net Revenue – Cost of Sales (4) Numbers will = Gross Profit prove wrong! – SG&A (5) = Pre-tax Income (Loss) Notes (1) Assumption 1 (2) Assumption 2 (3) Assumption 3 (4) Assumption 4 (5) Assumption 5 Peace and Prosperity Through Science and Collaboration www.

000 Reserve (net of cash on hand) 100.000 Peace and Prosperity Through Science and Collaboration www.000 Total $750.000 Equipment & facilities 200. Capital structure considerations Options plans. operations.: Staff $200. etc.000 Other legal. 100. Position vis-à-vis in-kind contributions Use of proceeds. etc. debt. e.000 Technology & IPR development 150.crdf.org .Funding Requirements Does your venture need external financing? How much & when? Venture capital. SG&A and misc.g.

The Team (1) Production / Management expertise manufacturing & relevance Board. Road Map (1) Major accomplishments 90-day plan Horizon Peace and Prosperity Through Science and Collaboration www.org . Marketing / distribution professionals & others Sales & marketing plan Identify key hiring needs 5. Operating Plan (2) 6.The 12-13 Page PowerPoint Pitch 4. Financials (1-2) Sustainable Pro forma snapshot competitive advantages Key metrics / drivers Funding requirements Alternatives (optional) Competition (existing and potential 8. Competitive Environment (2) 7.crdf. advisors.

org .. Appendix (as long as you want) Market details (e.g.crdf.The 12-13 Page PowerPoint Pitch 9. surveys) Product details Operating & financial details Résumés (CVs) Articles / research reports Patents & IPRs Key contracts Brochures Peace and Prosperity Through Science and Collaboration www.

org .The Elevator Pitch One of the most important “outputs” of business planning Convinces the “target person” to schedule a longer meeting with you Empowers and enables the “target person” to convince other appropriate people to become interested in your idea Resonates. demonstrates sincerity Communicates a sense of value. empathy and urgency No more than 1-2 minutes! Peace and Prosperity Through Science and Collaboration www.crdf.

crdf. not bottom-up product-driven Peace and Prosperity Through Science and Collaboration www.Part I Summary Pour a solid foundation Protect your strategic assets (like IPRs) Value is in the business planning. not the business plan Be concise and to the point with pitch materials Be top-down customer-driven.org .

Fundraising Lessons Network to gains access to VCs Don’t get hung-up on confidentiality Be persistent Be humble yet confident.org .crdf. and always courteous and professional Embrace and learn from rejection Be greedy in the long-run (any % of something > 100% of nothing!) Peace and Prosperity Through Science and Collaboration www.

founder of XEROX “There’s never going to be a market for the telephone.” Chairman of Western Union.. as told in 1940 to Chester Carlson.” David Sarnoff Associates.” Decca Recording Co. in its annual report from the late 1800s Peace and Prosperity Through Science and Collaboration www. and guitar music is on the way out. rejecting the Beatles in 1962 “The wireless music box has no imaginable commercial value.org .crdf. and therefore we have declined the offer to take a license.Believe In Your Idea! “We don't like their sound. in rejecting a proposal for investment in the radio in the 1920s “Who the hell wants to copy a document on plain paper?” National Inventors Council.

Attributes of a Successful Entrepreneur Problem solver High integrity Decisive Critical path doer Leader & motivator Impatient / bias Humble toward action (with analysis) Passionate Rejoices in others’ Persistent victories Optimistic Focused on the Professional long-term goal Peace and Prosperity Through Science and Collaboration www.org .crdf.

org .and … Just Do It! Peace and Prosperity Through Science and Collaboration www.crdf.

org .crdf. have fun! Peace and Prosperity Through Science and Collaboration www.Closing thoughts… Focus on the long-run What goes around comes around Friendships last longer than jobs Don’t let greed blind the objective Make the most of the experience Listen & learn Failure or rejection is what you make of it Entrepreneurship is a lifestyle choice Balance your risk & return Seize opportunities Life’s short.

September 2008 .LAUNCHING YOUR STARTUP Raising Venture Capital Jim Butterworth Idea to Market Workshop Ukraine.