VENTURE CAPITAL

Brittany SeigneurHarrisRebecca GoudyLaura NedorezovJonathan Fox

VENTURE CAPITAL

THE HISTORY OF VENTURE CAPITAL

NEED FOR FUNDING

ADVANTAGES AND DISADVATANGES

SOURCES OF FUNDING

ALTERNATIVE PATHWAYS

VENTURE CAPITAL

WHAT IS VENTURE CAPITAL?Way to obtain money and experience for a business via

the private equity of Venture Capitalists Venture Capitalists: individuals willing to invest in a

start upIf money is not obtained through VC, it will have to be

obtained from one of the following:Bank Loans, personal savings, or boot legging (Use of

company’s profits early-on to grow)

VENTURE CAPITAL

THE HISTORY OF VENTURE CAPITALSome of the first Venture Capitalist include the following:

Vanderbilts-Railroads Whitneys- Thoroughbred horseracing Rockefellers-Oil business Warburgs-physics, arts, pharmacology, physiology, finance, private

equity, and philanthropyVC in the first half of the 20th century was the domain of wealthy

individuals and familiesThe Small Business Investment Act of 1958 was the first step

toward a professionally-managed venture capital industry Officially allowed for the Small Business Administration (U.S.

govt agency) to license private "Small Business Investment Companies”

Allowed for creation of venture capital firms

VENTURE CAPITALTHE HISTORY OF VENTURE CAPITALIn 1960s and 1970s, VC firms focused their investment

on starting and expanding companiesCompanies were primarily exploiting breakthroughs in

electronic, medical, or data-processing technologyIn the 1980s, the industry was hampered by sharply

declining returns and certain venture firms began posting losses for the first time

The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987

VENTURE CAPITALTHE HISTORY OF VENTURE CAPITALThe late 1990s were a boom time for VC

Benefited from a surge of interest in the Internet and computer technologies

Initial public offerings of stock for technology and other growth companies were in abundance and venture firms were reaping large returns

In the 2000s VC funding had spread widely through the medical field Many start-ups have become centered

around early disease detection and prevention

NASDAQ Composite Index

2010 Investments in Industry In Millions of Dollars

VENTURE CAPITAL

Other

Healthcare Services

Electronic/Instrumentation

Consumer Products and Service

Networking and Equipment

Semiconductors

IT services

Software

Biotechnology

0 200 400 600 800 1000 1200 140011.337.945.3

93.8133141.4152.4171.1175.2

205.7245.8

321.3413.9

755.41034.6

1282.21296.1

[1]

VENTURE CAPITAL

WHY DO YOU NEED VENTURE CAPITAL?New companies are often too small and lacking in

experience to raise the money needed to produce a new product Examples of Startup Costs:

Continuation of R&DEmployee Salaries and BenefitsManufacturing and Production CostsPatent FeesVenture capitalists bring much needed capital to

the companies but also bring often needed financial expertise

VENTURE CAPITAL

WHY VENTURE CAPITAL OVER BANK LOAN?Availability

Banks usually do not offer loans to startups without strict provisions to reduce the risk

Venture capital is usually generated from a pool of investors, which reduces the overall risk of the investment

SOURCES

Friends & Family

Angels

Venture Capital

Government Grants

Banks

VENTURE CAPITAL

Corporate Investment

Public Investors

Customers

• Members of your personal network

• Have adequate means to make an investment

Friends & Family Angels

Venture Capital Corporate

VENTURE CAPITAL

• Experienced investors using own wealth

• Professional investment managers

• Corporations make the investment

Banks Gov Grants

Public Investors Customers

VENTURE CAPITAL

• Commericial/State institutes providing financial services

• Loans and such

• May be awarded to companies that meet the size standards established by the Small Business Administration (SBA)

• General public can invest by buying shares of the company

• For established companies

• Customers make direct investment in the R&D of new products or services

Venture Capitalist• Invest in companies with

potential for high return• Raise money and put into

funds• Funds vary in size • Also provide

management expertise and often have extensive networks of contacts

• VC investments are risky; 40% of companies fail, 40% return modest amount of $, <20% produce high returns

Corporate Investment • Made by large companies

for strategic & financial reasons

• Two ways to provide funds:

• Purchase equity in support of R&D or licensing agreement

• Traditional venture investments

VENTURE CAPITAL

Government Grants• $2+ billion available each

year to fund R&D at small companies (<500 employees)

• Higher rate of success for receiving funding (9-12%)

• Two programs: SBIR and STTR SBIR

• Small Business Innovation Research

• Funding given to small technology companies or individual innovators who form a company

VENTURE CAPITAL

STTR• Small Business

Technology Transfer• Funding given to small

companies working in collaboration with a non-profit research institution (ie. university)

GET STARTED

VENTURE CAPITAL

Be a people person

Know your capital investors

Be active about your managerial decisions

- Tips on raising money: http://www.youtube.com/watch?v=151xSrGdEqo&NR=1&feature=fvwp

[2]

VENTURE CAPITAL

HOW TO OBTAIN VC? Ensure the investors your company/idea fits their

investment profile Research & find your target

Which partner of the firm should you speak to about your idea

Who has a history of supporting ideas or companies similar to yours

Do: NOT send a “cold” email Have someone introduce you (e.g. LinkedIn) Set up a meeting with the investors

ConciseKnow

Who

Retu

rn Why

$$ Needs

ELEVATOR PITCH

Potential RewardsHow do investors get their reward?

Tailor speechWho are you speaking to? Know your audience.

30 secMake them want to hear more.

BetterWhat does your idea/product fulfill?

How muchHow much capital do you need?

BUSINESS PLAN

VENTURE CAPITAL

Once Elevator Pitch worked, business plan is used to provide the detailed plan

-How much do you plan to make?-Where do you plan to make the products?-What is the cost of production?-What is already in the market & how do you compare?

Answer all the questions VCs have before an investment is made

[2]

VENTURE CAPITAL

Angels

Venture capitalists

Corporate investment

SOURCE OF FUNDS

• Valuable experience to share with innovators

• Provide access to vast network of contacts• Ablility to take on considerable risk• Participate in multiple rounds of funding

DISADVANATGESADVANTAGES

Family and friends• Least expensive funding source• Flexible alternative for early-stage

funding

• Moderately priced, early-stage funding source

• Take on considerable risk• Exercise less control than venture capitalists

and corporate money• Act more quickly than venture capitalists

• Lead to meaningful product/project synergies

• Provide accesss to valuable resources• Less expensive than venture capitalists

funding• Lend to young company’s credibility• Provide company with a “built-in” exit

strategy

• Limited expertise• Do not understand level of inherent risk• Not able to participate in subsequent

rounds of funding

• Limited expertise• Not able to invest in subsequent rounds• Negatively affect terms and level of control

by company’s perspective• Multiple angels to meet funding needs

• Exercise considerable control over venture’s direction, management, and exit

• Require considerable share of ownership in exchange for investment

• Expect high returns or other terms not favorable to company

• Limited value in return for building business• Conflicts with corporate investors• Issues with intellectual property ownership• Limit value realized from exit stragety if

corporate investor has “right of first refusal”

[2]

VENTURE CAPITAL

Government grants

Banks

SOURCE OF FUNDS

• Access to funds usually does not require the company to share ownership

• No influence over any business decisions• Interest payments are tax deductibles• Secured relatively quickly and used to help

bridge short-term financing gaps

DISADVANATGESADVANTAGES

Customers

• Extremely inexpensive funding• Potential for young company’s credibility• Provide valuable market-based insights

revelant to product development

• Inexpensive funding • Founders not require to part with any equity

in the company• No influence over any business decisions• Strengthen a young company’s credibility

• Lead to conflicts if company seeks to sell the innovation to customer’s competitor

• Customer seeks to limit way in which innovation is marketed to match its best interest

• Highly competitive• High expectations based on rigorousness of

research performed• Lengthy funding review cycles• Funding capped at $850,000 per project

• Business assets can be used as collateral• Affect cash flow as regular payments of

principal and interest must be made• Start-ups pay a premium on their loans• Start-ups may have difficuilty getting loans if

no revenue or tradeable assests

[2]

ALTERNATIVE PATHWAYS

VENTURE CAPITAL

PartneringTwo entities share responsibility for the development or commercialization of an idea or invention LicensingTransfer of an idea or invention from the innovator to a licensee in exchange for ongoing royalties and/or other payments Sale/AcquisitionInnovator chooses to sell an idea outright, completely relinquishing control to acquirer

[2]

VENTURE CAPITAL

[2] Zenios, Makower, and Yock. Biodesign: The Processing of Innovating Medical Technologies. Ann Arbor, Michigan: Edwards Brothers Inc., 2010.

REFERENCES[1] Berkeley Entrepreneurs Forum Shaking the MoneyTree presentation: http://entrepreneurship.berkeley.edu/main/index.html

THANK YOU!!!