kbs+ ventures fellows #6: raising capital part 2 - vc math

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FELLOWS CLASS #6: RAISING CAPITAL PART 2JANUARY 8TH, 2015

Thursday, January 8, 15

• THIS WEEK’S READING / VIDEO• UPCOMING CLASS ANNOUNCEMENTS• INTRODUCTION TO VC MATH / DEAL STRUCTURING• VC MATH EXERCISE!• QUESTIONS• HOMEWORK ASSIGNMENT #3 QUESTIONS • DON’T FORGET TO SEND ME YOUR “TWEETABLE TRUTHS!”

IN TODAY’S CLASS...2


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UPCOMING CLASSES:

*FRIDAY, JANUARY 16TH: 12-130P•BRIAN COHEN, GUEST SPEAKER•PART 3: PITCHING INVESTORS•**HOMEWORK #3 PRESENTATIONS!!**

*THURSDAY, JANUARY 22ND: 12-1P

*WEDNESDAY, JANUARY 28TH: 12-1P

• REFLECTION AND DISCUSSION• REQUIRED READINGS & INDUSTRY TRENDS

• BUSINESS ACCELERATION, EXITS, IPOS• REAL WORLD PERSPECTIVE: TIM VARNER


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UPCOMING CLASSES:

FEBRUARY 5TH: 12-130P - HYDE SPACE• “PERFECTING YOUR PITCH”• DEMO DAY DRY RUN• HERE PITCHES FROM THE PROS... OUR KBS+ VENTURES FOUNDERS!• BREAKOUT WORKING SESSIONS WITH VENTURES PORTFOLIO FOUNDERS


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UPCOMING CLASSES:

DEMO DAY: FEBRUARY 19TH, 12-230P IN THE HYDE SPACE• 8 MINUTES TO PITCH• 7 MINUTES OF Q&A FROM THE JUDGING PANEL• AUDIENCE OF SENIOR KBS+ AND MDC MANAGEMENT, FELLOWS ALUMNI

• NOT EVERY COMPANY IS GUARANTEED TO PITCH.... STEP IT UP.

BARRY LOWENTHALPRESIDENT, TMK

ED BROJERDICEO, KBS+

AJ PLOTKINPARTNER, FF CAPITAL

MATT POWELLCO-PRESIDENT, KBS+


RAISING CAPITAL: PART 26

PART 1: PART 2: PART 3:

FUNDRAISING OVERVIEW

VC MATH / DEAL

STRUCTURINGPITCHING INVESTORS


LET’S DO A QUICK REFRESHER....

QUICK REVIEW...7


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FUNDRAISING REVIEW

...<1% GET VENTURE FUNDING

http://www.entrepreneur.com/dbimages/article/where-startup-funding-really-comes-from-infographic.jpg

ACCORDING TO THE SMALL BUSINESS ADMINISTRATION, ~565,000 STARTUPS ARE LAUNCHED IN THE US EACH MONTH...

6.7M LAUNCHED IN THE US PER YEAR




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FUNDRAISING REVIEW


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~57% OF STARTUPS

~38% OF STARTUPS

~0.91% OF STARTUPS

~0.25%OF STARTUPS

~0.05%OF STARTUPS

~$0-$25K ~$25-$150K ~$150-$1M ~$1M-$10M ~$10M+

BOOTSTRAPPED FAMILY & FRIENDS ANGELS EARLY STAGE VC LATE STAGE VC

IT’S TOUGH OUT THERE:


FUNDRAISING REVIEW




FUNDING ROUNDS11

EARLY LATE

BOOTSTRAP

FAMILY & FRIENDS

ANGEL

ACCELERATORS

SEED

SERIES A

SERIES B

GROWTH EQUITY (SERIES C AND BEYOND)

PRIVATE EQUITY

RAISING< $2M

RAISING~$2-10M

RAISING~$10-20M

RAISING~$20M+

FUNDRAISING REVIEW


TYPICAL STRUCTURE OF A VC FIRM12

VC FIRM(GENERAL PARTNERS)

LIMITED PARTNERS (“LPs”)• Public/Corporate pension funds• High net worth individuals, Family offices• Endowments, foundations, insurance companies

VC FUND (LIMITED PARTNERSHIPS)2% MANAGEMENT FEE + 20% OF PROFITS

$$ FUND MANAGEMENT

$$ FUND OWNERSHIP

INVESTMENT(OWNERSHIP %)



$$ $$ $$


13REASONS TO BE A VC

• YOU TRULY LIKE WORKING WITH STARTUPS & TECHNOLOGY • YOU ARE OPEN AND CURIOUS • YOU ARE ABLE TO RESIST GROUPTHINK• YOU ARE ABLE, AND WANT TO TO MENTOR YOUNG CEOS• YOU ARE A CONNECTOR

• YOU WANT BE PART OF AN EXCLUSIVE CLUB• YOU THINK YOU’LL GET RICH QUICK• YOU ARE GOOD AT PICKING STOCKS, SO WHY NOT• IT JUST SOUNDS PRETTY COOL

GOOD REASONS:

BAD REASONS:


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WHAT DOES THE IDEAL INVESTMENT LOOK LIKE?

THE SEVEN QUESTIONS EVERY BUSINESS MUST ANSWER:

THE ENGINEERING QUESTIONTHE TIMING QUESTION

THE MONOPOLY QUESTIONTHE PEOPLE QUESTION

THE DISTRIBUTION QUESTIONTHE DURABILITY QUESTION

THE SECRET QUESTION


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THE ENGINEERING QUESTIONCAN YOU CREATE BREAKTHROUGH TECHNOLOGY, RATHER THAN INCREMENTAL IMPROVEMENTS?

THE TIMING QUESTIONIS NOW THE RIGHT TIME TO START YOUR PARTICULAR BUSINESS?

THE MONOPOLY QUESTIONARE YOU STARTING WITH A BIG SHARE OF A SMALL MARKET?


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THE PEOPLE QUESTIONDO YOU HAVE THE RIGHT TEAM?

THE DISTRIBUTION QUESTIONDO YOU HAVE A WAY TO NOT JUST CREATE, BUT DELIVER YOUR PRODUCT?

THE DURABILITY QUESTIONWILL YOUR MARKET POSITION BE DEFENSIBLE 10, OR 20 YEARS FROM NOW?

THE SECRET QUESTIONHAVE YOU IDENTIFIED A UNIQUE OPPORTUNITY THAT OTHERS DON’T SEE?


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EXAMPLE OF A COMPANY THAT NAILS ALL 7

• TECH - SO GOOD OTHER CAR COMPANIES RELY ON IT• TIMING - JAN 2010, SECURED $465 MM LOAN FROM US GOV’T• MONOPOLY - STARTED WITH A TINY SUBMARKET THEY COULD DOMINATE• TEAM - CEO IS A CONSUMMATE ENGINEER AND SALESMAN• DISTRIBUTION - OWN ENTIRE DISTRIBUTION CHAIN. NO DEALERSHIPS.• DURABILITY - COVETED BRAND AND A BIG HEAD START• SECRETS - KNEW THAT FASHION DROVE INTEREST IN CLEAN TECH


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OK! LET’S DO THE DEAL!

TYPICAL VC DEAL TYPES:• PREFERRED STOCK (EQUITY - AKA “PRICED ROUND”)• CONVERTIBLE NOTE (DEBT)

EQUITY (PRICED) ROUND:✓ PRE-MONEY VALUATION✓ POST-MONEY VALUATION✓ DEFINED OWNERSHIP %

(OFF THE POST)

DEBT ROUND:✓ VALUATION CAP✓ DISCOUNT (~20%)✓ INTEREST (~8%)


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PREFERRED STOCK

WHAT IS PREFERRED STOCK? (EQUITY)• A CLASS OF STOCK THAT CONFERS CERTAIN RIGHTS• A SUPERIOR SECURITY COMPARED TO COMMON STOCK• “PREFERRED” TAKES ITS NAME FROM THE LIQUIDATION PREFERENCE• DEFINES A STOCK PRICE, VALUE, AND OWNERSHIP % TO THE

INVESTMENT

THE LIQUIDATION PREFERENCE IS A KIND OF DOWNSIDE PROTECTION


TITLE / HEADER20

CALCULATING OWNERSHIP %:

SCENARIO #1: YOU INVESTED $500,000 IN A $3MM POST MONEY VALUATION. HOW MUCH DO YOU OWN?

ANSWER = $500,000 / $3MM = 16.7% OWNERSHIP

SCENARIO #2: YOU INVESTED $250,000 IN A $5MM PRE MONEY VALUATION. HOW MUCH DO YOU OWN?

ANSWER = $250,000 / $5.25MM = 4.8% OWNERSHIP

SCENARIO #3: YOU WANT TO OWN 10% OF A COMPANY, THEY ARE RAISING $1.5MM AND HAVE A $5MM POST MONEY VALUATION. HOW MUCH DO YOU NEED TO INVEST?

ANSWER = $5MM * .1 = $500,000 INVESTMENT REQUIRED (33% OF THE ROUND)


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THE OTHER DEAL TYPE: THE CONVERTIBLE NOTE

WHAT IS A CONVERTIBLE NOTE?

• IT’S NOT EQUITY, IT’S DEBT!• COMPANY BORROWS MONEY FROM INVESTORS, WITH THE INTENTION

OF CONVERTING THE DEBT INTO EQUITY AT A LATER DATE• DEFERS THE PRICE OF THE ROUND TO A LATER DATE (SERIES A)• FASTER, CHEAPER FUNDRAISING APPROACH FOR THE ENTREPRENEUR

(EASIER PAPERWORK = LOWER LEGAL FEES)• VALUATION “CAP” REWARDS INVESTORS WITH A MAXIMUM PRICE


TITLE / HEADER22

CALCULATING A NOTE CONVERSION:

*HOW DOES THAT CONVERT INTO EQUITY?

($1MM / .8) = $1.25MM

INVESTMENT 20% DISCOUNT EQUITY AT A

KBS+ VENTURES INVESTED $1MM NOTE WITH 8% INTEREST FOR FABCO. THE TERMS WERE A $8MM CAP, 20% DISCOUNT.

*INTEREST TBD BASED ON TIME DURATION


TITLE / HEADER23

CALCULATING A NOTE CONVERSION:

KBS+ VENTURES INVESTED $1MM NOTE WITH 8% INTEREST FOR FABCO. THE TERMS WERE A $8MM CAP, 20% DISCOUNT.

WHAT IF 1 YEAR LATER, FABCO RAISES $4MM SERIES A AT A $12MM (PRE) VALUATION?

CAP KICKS IN!

•DIVIDE THE CAP BY THE A VALUATION TO GET THE DISCOUNT

($8MM / $16MM) = 0.5

•$1MM / 0.5 = $2MM. IN OTHER WORDS, THE $1MM LOAN IS NOW WORTH $2MM IN EQUITY


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OK! LET’S DO THE DEAL!

VCS WILL ALWAYS ASK FOR THE FOLLOWING:• LIQUIDATION PREFERENCE • PRO-RATA RIGHTS• BOARD SEAT (OR AT LEAST OBSERVER SEAT)


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LIQUIDATION PREFERENCE

WTF IS A LIQUIDATION PREFERENCE? • LIQUIDITY EVENT IS EITHER AN ACQUISITION (EXIT) OR IPO• A TYPE OF SECURITIZATION• PROTECTS THE INVESTOR, GIVES THE OPTION OF EITHER:

1. GETTING THEIR INITIAL INVESTMENT BACK (BREAK EVEN)2. GETTING THE % OWNERSHIP RETURN


SCENARIO #2: AWESOME.CO EXITS FOR $3MM, 40% LOWER THAN THE LAST ROUND VALUATION ($5MM)

• YOU GET YOUR $500K BACK ---> BREAK EVEN• THE OTHER PREFERRED INVESTORS GET THEIR $2MM BACK --> BREAK EVEN• THE COMMON SHAREHOLDERS SPLIT THE REMAINING $500K, WHICH WAS ONCE WORTH $2.5MM 80% LOSS

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PREFERRED STOCKLIQUIDATION PREFERENCE: EXAMPLE

YOU INVEST $500K AND OWN 10% OF AWESOME.CO, AWESOME.CO IS VALUED AT $5MM

•40% OF AWESOME.CO IS OWNED BY OTHER PREFERRED EQUITY HOLDERS (VCS LIKE YOU) = $2MM VALUE•REMAINING 50% IS HELD BY COMMON SHAREHOLDERS (FOUNDERS, EMPLOYEES, ADVISORS) = $2.5MM

SCENARIO #1: AWESOME.CO EXITS FOR $40MM. YAY! YOUR $500K INVESTMENT IS WORTH $4MM, 7X RETURN

• THE OTHER PREFERRED SHAREHOLDERS GET $16MM TOTAL• COMMON SHAREHOLDERS GET $20MM TOTAL• EVERYONE IS REALLY HAPPY AND YOU HAVE A HUGE PARTY WITH RIHANNA AND TIESTO! #CRUSHIT


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PRO-RATA RIGHTS

WHAT ARE “PRO-RATA” RIGHTS? WHY ARE YOU SPEAKING LATIN?• THE RIGHT TO PARTICIPATE IN FUTURE FINANCINGS• MAINTAIN YOUR EQUITY STAKE• AVOID DILUTION


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CALCULATING PRORATA RIGHTS: EXAMPLE

KBS+ VENTURES OWNS 2% AFTER INVESTING $100K IN THE SEED ROUND. THE STARTUP IS NOW RAISING $4MM AT A $8MM PRE-MONEY VALUATION.

STEP 1: CALCULATE THE POST MONEY VALUATION $4MM + $8MM = $12MM

STEP 2: CALCULATE THE TOTAL AMOUNT NEEDED TO MAINTAIN 2% OWNERSHIP$12MM * .02% = $240,000

STEP 3: SUBTRACT THE INITIAL INVESTMENT FROM THE TOTAL AMOUNT$240,000 - $100,000 = $140,000 PRORATA REQUIRED

WHERE DO YOU START?


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THE BOARD OF DIRECTORS

OWNERSHIP, POSSESSION AND CONTROL• OWNERSHIP: EQUITY HOLDERS IN THE COMPANY• POSSESSION: THE MANAGERS OF THE COMPANY• CONTROL: THE BOARD OF DIRECTORS

CHARACTERISTICS OF AN EFFECTIVE BOARD:• SMALL (UNLESS PUBLICLY HELD) • ACTIVE & ENGAGED• ALIGNED IN TERMS OF DESIRED OUTCOME


LET’S TRY IT!30


• OFFICE HOURS: MONDAY MORNING• NEXT CLASS: FRIDAY JANUARY 16TH, 12-130P• HOMEWORK #3 DUE!• SEND ME YOUR TWEETABLE TRUTHS• DON’T FORGET TO FINISH YOUR READINGS...

NEXT WEEK...31


CONTACT:

JESSICA PELTZ, INVESTMENT [email protected]

JOSH ENGROFF, MANAGING [email protected]

QUESTIONS?32


mailto:[email protected]




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