steve cummins transworld group - understanding venture financing
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LAUNCHING YOUR STARTUPUnderstanding Venture Financing
Steve Cummins, Transworld Group
Launching Your StartupLaunching 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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
My BackgroundMy 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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Impact of U.S. Small Impact of U.S. Small BusinessesBusinesses
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)
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Impact of Venture-Backed Impact of Venture-Backed CompaniesCompanies
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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Impact of U.S. UniversitiesImpact of U.S. Universities
Established > 4,100 new companies since 1980, 2/3 of which were still operating
Executed > 30,000 active technology transfer licenses (including > 4,500 in 2003), generating > $1.3 billion in license income
Launched > 2,200 new commercial products between 1998-2003
Performed > $30 billion of R&D in 2001 Filed 8,000 U.S. patent applications in
2003Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
What is Venture Capital?What is Venture Capital?
A cash investment made by professional, institutionally backed investors to emerging growth businesses
Generally made as cash in exchange for equity (ownership) in the investee company
Usually high risk, but with the potential for above-average returns
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
U.S. Venture Capital MarketU.S. Venture Capital Market
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
European Venture Capital MarketEuropean Venture Capital Market
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Types of Venture CapitalTypes of Venture Capital
Private
Professionally managed
Return on investment focused
May bring network, business advice, credibility, etc.
Corporate
Manage risk
Distribution networks
Product R&D
Operational skills
Spin-outs
Academic
Intellectual property Spin-outs
Government
Create new jobs and grow economy
Offer cash, tax incentives, in-kind
Stem brain-drain Angels
Network, business advice, credibility, etc.
Live vicariously The 3Fs
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Venture Capital Investment Venture Capital Investment CriteriaCriteria
Management Team Track record
Relevancy
Bet on the jockey, not the horse!
Concept Solves real problem
Favorable market dynamics
Disruptive
Unfair advantages & sustainable competitive advantages
Proper capitalization
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
The Venture Capital Numbers The Venture Capital Numbers GameGame
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.g., 10x, 100x, 1000x!)
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
How Venture Capital Funds How Venture Capital Funds WorkWork
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, GPs
get a portion of the profits LPs get the remaining profits
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Venture Capital EconomicsVenture Capital Economics
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
VC Fund IX, L.P.
LP 1 GPLP 2
LP 3
PortfolioCompany 1
PortfolioCompany 2
PortfolioCompany 3
PortfolioCompany 4
PortfolioCompany 5
LP 4
$100 Management
$10 PortfolioCompany 10
PortfolioCompany 9
PortfolioCompany 8
PortfolioCompany 7
PortfolioCompany 6
$10
$10
$10$10 $10
$10
$10
$10
$10
2%
Venture Capital EconomicsVenture Capital Economics
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
VC Fund IX, L.P.
LP 1 GPLP 2
LP 3
PortfolioCompany 1
PortfolioCompany 2
PortfolioCompany 3
PortfolioCompany 4
PortfolioCompany 5
LP 4
PortfolioCompany 10
PortfolioCompany 9
PortfolioCompany 8
PortfolioCompany 7
PortfolioCompany 6
$180 $20
$100
$25$40
$35
Financing Your VentureFinancing 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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Financing OptionsFinancing OptionsNon-Equity Personal funds
Personal debt
Grants and awards
Customer pre-sales
Venture leasing
Receivables financing
Business loans
In-kind contributions
Joint ventures
Equity Venture capital
Angels
The “3Fs” – Friends, Family and Fools
Corporate direct investment
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Equity is the most expensive form of capital!
Major Financing QuestionsMajor Financing Questions
How much?
When?
From where / whom?
What terms?
Security
Valuation
Control
Timing
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Raise Money from a Position Raise Money from a Position of Strengthof 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, prepare for peace”)
Have a call to action
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Seek True Value-Added Seek True Value-Added InvestorsInvestors
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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Fundraising ProcessFundraising Process
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Business Plan Submissions
Investor Presentations
Term Sheet Negotiations
Final Documentation
Funding
Budget 4-5 months, or more
LAUNCHING YOUR STARTUPUnderstanding Venture Financing
Jim ButterworthIdea to Market WorkshopUkraine, September 2008
LAUNCHING YOUR STARTUPRaising Venture Capital
Jim ButterworthIdea to Market WorkshopUkraine, September 2008
Launching Your StartupLaunching 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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Lifecycle of a StartupLifecycle of a Startup
Conception / Invention Seed Stage
Formation / incorporation
Market research Product research
Early Stage
Product development
Team formation Infrastructure build-
out
Launch Growth Stage Expansion Phase Exit Post-Exit
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Lifecycle of a StartupLifecycle of a Startup Conception / Invention
Seed Stage
Formation / incorporation
Market research
Product research
Early Stage
Product development
Team formation
Infrastructure build-out
Launch
Growth Stage
Expansion Phase
Exit
Post-Exit
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Startup FundamentalsStartup Fundamentals
Solid foundation = best chance of funding your venture
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Pour a Solid FoundationPour 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, board, advisors, professionals
Teamwork begets success If possible, kick-start the business
Spin-out / acquisition
Key customerSteve Cummins, Transworld Group
Steve Cummins, Transworld Group
Be Market-Driven!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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Protect Your Assets!Protect Your Assets!
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Cash Flow is Your Life Blood!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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Business PlanningBusiness Planning
“The plan is useless; it’s the planning that’s important.”
General Dwight D. Eisenhower,on the success of his D-Day invasion plan
The process of uncovering and identifying what creates and drives value in your business, and the risks involved
A business plan is an output of the business planning process
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Output of the Business Output of the Business Planning ProcessPlanning Process
Business plan (narrative)
Pro forma financial statements
PowerPoint pitch (12-13 pages)
Elevator pitch (1-2 minutes)
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
A Business Plan…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, objectives and future plans
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Uses of a Business Plan Uses of a Business Plan (Internal)(Internal)
Refining your product / service strategy
Identifying key customers
Identifying milestones and timelines
Helping set objectives & performance metrics
Managing risk and uncertainty
Motivating and focusing employees
Analyzing capital budgeting decisions
Facilitating new product development
Integrating new acquisitions
Facilitating restarts, restructuring and turnarounds
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Uses of a Business Plan Uses of a Business Plan (External)(External)
Attracting key employees
Educating potential investors
Arranging strategic alliances
Obtaining large contracts with strategic customers
Facilitating mergers and acquisitions
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
1. Summary (1)
Mission statement
What is the idea?
How will it create value?
Timeline / milestones
Expected results Specific request
(e.g., $)
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
The Mission StatementThe Mission StatementTo create [value/EVA]
by [product/service] for/to [customer(s)] by…
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Strategic Objective 1
Strategic Objective 2
Strategic Objective 3
The Mission StatementThe Mission Statement
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Mission Statement ExampleMission 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;
Creating proprietary manufacturing methods for the highest yield of A-class widgets; and
Building a world-class team of research & development scientists and engineers.
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
1. Summary (1)
Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $)
1. Market Overview (2)
Substantiation of need The opportunity (size,
trends, etc.) Markey validation Identification of
prospective customers
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Major Pain PointsMajor 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?
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Favorable Market DynamicsFavorable 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
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
1. Summary (1)
Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $)
1. Market Overview (2)
Substantiation of need The opportunity (size,
trends, etc.) Markey validation Identification of
prospective customers
3. Description of Product / Service (2)
Overview of product / service, including high-level technology description
Specific value proposition (including qualitative & quantitative customer benefits)
Correlate product / service features & benefits with market needs
Value chain dynamics
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
4. Operating Plan (2)
Production / manufacturing
Marketing / distribution
Sales & marketing plan
4. Competitive Environment (2)
Sustainable competitive advantages
Alternatives
Competition (existing and potential
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
What’s Proprietary About What’s Proprietary About Your Idea?Your Idea?
Competitive Advantages Proprietary IPR Exclusive distribution Exclusive content / sources Proprietary manufacturing Proprietary integration Installed base / customer contracts Unparalleled capital structure Unparalleled scale, scope and/or focus Team with unique expertise and/or access First mover advantage
Distinguish between momentary and sustainable Must correlate to strategic objectivesSteve Cummins, Transworld Group
Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
4. Operating Plan (2)
Production / manufacturing
Marketing / distribution
Sales & marketing plan
4. Competitive Environment (2)
Sustainable competitive advantages
Alternatives
Competition (existing and potential
6. The Team (1)
Management expertise & relevance
Board, advisors, professionals & others
Identify key hiring needs6. Financials (1-2)
Pro forma snapshot Key metrics / drivers Funding requirements
(optional)
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Financial ProjectionsFinancial Projections
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
(in thousands) 2007 2008 2009 2010
Revenue driver 1 (1)
Revenue driver 2 (2)
Cost driver 1 (3)
Net Revenue
– Cost of Sales (4)
= Gross Profit
– SG&A (5)
= Pre-tax Income (Loss)
Notes(1) Assumption 1(2) Assumption 2(3) Assumption 3(4) Assumption 4(5) Assumption 5
Numbers will prove wrong!
Key is to understand drivers and assumptions since…
Funding RequirementsFunding Requirements
Does your venture need external financing? How much & when? Venture capital, debt, etc.
Capital structure considerations Options plans, etc. Position vis-à-vis in-kind contributions
Use of proceeds; e.g.:
Staff $200,000
Technology & IPR development 150,000
Equipment & facilities 200,000
Other legal, operations, SG&A and misc. 100,000
Reserve (net of cash on hand) 100,000
Total $750,000
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
4. Operating Plan (2)
Production / manufacturing
Marketing / distribution
Sales & marketing plan
4. Competitive Environment (2)
Sustainable competitive advantages
Alternatives
Competition (existing and potential
6. The Team (1)
Management expertise & relevance
Board, advisors, professionals & others
Identify key hiring needs6. Financials (1-2)
Pro forma snapshot Key metrics / drivers Funding requirements
(optional)6. Road Map (1)
Major accomplishments 90-day plan Horizon
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
The 12-13 Page PowerPoint The 12-13 Page PowerPoint PitchPitch
9. Appendix (as long as you want)
Market details (e.g., surveys)
Product details
Operating & financial details
Résumés (CVs)
Articles / research reports
Patents & IPRs
Key contracts
Brochures
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
The Elevator PitchThe 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!
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Part I SummaryPart 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, not bottom-up product-driven
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Fundraising LessonsFundraising Lessons
Network to gains access to VCs
Don’t get hung-up on confidentiality
Be persistent
Be humble yet confident, and always courteous and professional
Embrace and learn from rejection
Be greedy in the long-run (any % of something > 100% of nothing!)
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
Believe In Your Idea!Believe In Your Idea!
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
“The wireless music box has no imaginable commercial value.”
David Sarnoff Associates, in rejecting a proposal for investment in the radio in the 1920s
“We don't like their sound, and guitar music is on the way out.”Decca Recording Co., rejecting the Beatles in 1962
“There’s never going to be a market for the telephone, and therefore we have declined the offer to take a license.”
Chairman of Western Union, in its annual report from the late 1800s
“Who the hell wants to copy a document on plain paper?”
National Inventors Council, as told in 1940 to Chester Carlson, founder of XEROX
Attributes of a Successful Attributes of a Successful EntrepreneurEntrepreneur
Problem solver
Decisive
Leader & motivator
Humble
Passionate
Persistent
Optimistic
Professional
High integrity
Critical path doer
Impatient / bias toward action (with analysis)
Rejoices in others’ victories
Focused on the long-term goal
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
and … and … Just Do It!Just Do It!
Steve Cummins, Transworld Group Steve Cummins, Transworld Group
Closing thoughts…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, have fun!
Steve Cummins, Transworld Group
Steve Cummins, Transworld Group
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