tiecon delhi oct 2011 - canaan workshop

Raising Venture Funding: Demystifying the Journey

Rahul Khanna

October 2011 TiEcon Delhi

© Copyright 2008 Canaan Partners 2

About Canaan Partners

» Global early stage venture fund with $3Bn under management

»  Invest in technology and tech enabled services

›  iYogi, UnitedLex, Naaptol, Cellcast, Mcarbon

»  Typical first cheque : $2Mn - $7Mn

»  Selective seed and growth stage investments ›  Motorexchange, Equitas


Agenda

»  Lifecycle of a Business and Need for Capital »  Venture Fund Economics » What Do Venture Funds Look For ? » When To approach a VC ?

Lifecycle of a Business


Concept Stage: Ideation -  Initial market

feedback -  Market Sizing

Feasibility Stage: Product Development, Value Proposition -  Early Customer

Feedback -  Select hires

Market Validation Stage: BD, Fine Tune Biz Model, Partnerships -  Product/Service live -  Early revenue model -  Customer feedback -  Team build out

Growth Stage: Scalability, Teams, Process, Profitability -  Market Validated -  Biz model validated -  Product diversification

Maturity

Time

IPO Self/Angel Seed VC PE Bank Financing

Source of Funds

Mature Stage -  Focus Execution -  Financial predictability -  Risk management


Agenda

»  Lifecycle of a Business and Need for Capital »  Venture Fund Economics » What Do Venture Funds Look For ? » When to Approach a VC ?


Know Venture Economics ?

Look at things from a VC’s perspective. Why ? »  To minimize your fund raising duration

›  You don’t want to run out of money during fund raise ›  Minimize the diversion and get back to running the business ›  Know what kind of investors to approach


Early Stage Venture Economics

»  Venture fund invests capital over 3-4 years »  Money returned to investors (LPs) 7- 10 years »  Typical return 2.5x – 3.5X (IRR 18% – 25%) »  Few super hits, few write-offs

»  Early stage investments require more time/involvement »  Each investment professional may manage $50M - $60M & can only

deal with 6-8 companies

§  Return expectation of 5X – 7X + (High risk, longer duration) §  Model works with Large Exits ($$$) §  Model works with Significant Ownership (25% - 35%+)


Types of Venture Funds / Which VC to Pick »  Types of VCs

›  Stage of Investment (Early, Growth, Late) ›  Sector Focus (Tech, Healthcare, Infrastructure, Real Estate) ›  Corporate VCs

»  Picking a VC ›  Sector, Stage ›  Compatibility of thought/chemistry ›  Non-monetary contribution – domain knowledge,

relationships ›  Ability to provide reserves for future investment ›  Investment cycle of fund


What Can You Expect From a Venture Fund »  Other than money

›  Assistance/sounding board for strategy ›  Large network of customer contacts, advisors ›  Active assistance in hiring senior members of team ›  Appointment of Board, Advisors ›  Corporate governance ›  Enhanced credibility Most of above – varies by stage of investor.

»  What are the trade-offs ›  Higher Accountability / Governance (spending, reporting) ›  Decisions being made by a balanced board rather than founder ›  Lower equity holding (but potentially much higher value)


Agenda

»  Lifecycle of a Business and Need for Capital »  Venture Fund Economics » What do Venture Funds Look For ? » When to Approach a VC ?


»  How large depends on size, stage, VC model. •  If investing $10M per company, want to get at least $50M+ back •  What does this mean for the valuation of the company ? •  What does that mean for VC stake in the company ?

Large Ownership Large Multiple

Large $$$

Implications •  Revenues/Profits have to be of scale •  Exit multiples should be attractive •  Business should have potential strategic exit options

Can this opportunity generate a large exit for us in 5-6 years ?

The most important question for a VC


Early Stage: DNA of VC fundable businesses »  Team

›  Early stage – risky so lots of emphasis on founders

»  Large Market ›  Nascent market but rapidly growing and potential to be large ›  Large existing market with a disruptive play or discontinuity

»  Strong Value Proposition ›  Why you will win

»  Scalable ›  Build the business rapidly, with capital efficiency/operating leverage

»  Defensible ›  Intellectual Property ›  First mover advantage ›  Network effects

»  Exit Prospects ›  IPO, Trade Sale


Team »  Passion

›  strong belief ›  risk taking appetite ›  Ambition

»  Relevant experience ›  Domain / Market understanding ›  Functional Skills

»  Ability to sell, hire, evangelize, motivate

»  Execution capability ›  Business and operational experience

Team Market Value Proposition

Scalable Defensible


Market

»  Very critical component of VC decision making ›  Big is important, but markets dynamics are also key ›  India vs. International markets

»  Small, fast growing markets are fine (ecommerce in India!)

»  Large mature markets can be very competitive. Need a disruptive play ›  Breakthrough Technology ›  Business model

»  How do you calculate market size ?


Scalable Defensible


Market: Case Study

$ 400MN

# of urban HH = 100MN

Annual Spent= 200/-

Market Size = 200*100 = 20 bn INR = $ 400MN

$ 80 MN

# of digi cams in India = 20MN Market Size = 20*200 = 4 bn INR = $80MN

$ 60 MN

Internet Penetration = 75% Market Size = 0.75*80 = $60MN

?

Subscription Services Photo Storage Platform 100/- per HH per annum Mobiles with Cameras Easy Storage. How many of us print Photos today?

»  Competition »  Degree of fragmentation, network effects »  Compare growth rates, adoption rates from international markets »  Additional revenue opportunities

+

Online Photo Printing


Scalable Defensible


Value Proposition Team Market Value Proposition

Scalable Defensible

»  Is there a genuine need for the product / service?

»  How is it being addressed today ? Why NOW ?

»  Who is best positioned to fulfill this need ? Why YOU ?

»  Why will the customer select you, continue to use your service/product ? »  Cheaper, Better, Faster

Scalability: Business Model


Enterprise Software: Scalability Barriers ›  Small Ticket Price ›  Fragmented market, Competition ›  Technical sale , Long Sales Cycle ›  Demanding Customer, Customization

»  What would be interesting: ›  Large ticket Price ›  Channel / distribution ›  Upsell / Cross Sell; Recurring revenues ›  Strong demand (regulation, compliance)


Scalable Defensible

Discontinuity: SaaS

Cloud Offerings


Scalability : Capital Team Market

Scalable Defensible

Input: Effort, Capital

Output: Revenue, Profits

Technology Facilitates Capital Efficiency

Product Companies (Software)

Online marketing/ distribution/ sales

(Digital Media)

Defensibility


»  Intellectual Property »  Installed Base – Platform Play »  Installed Base – deep entrenchment, hard to remove »  First to Market - if Network effect »  Specialized knowledge / Resources »  Capital

»  NOT PRICE (unless sustainable cost advantage)


Scalable Defensible


Defensibility : Installed Base Play/ Capital

» Out of Home industry – Network of digital screens »  Financing requirements

›  Critical mass on screens required, often financed by the startup §  Leading players will have 10,000+ screens in 4-5 years §  ~ $1000-2000 per screen

›  Operating losses to cover rental costs till revenues catch up §  ~ $2500 per screen per year in initial years

» Minimum $30MN - $40MN to build the business

è Need a syndicate of investors to finance this


Less likely to be Venture Fundable »  Entrepreneur

›  Lack of experience / knowledge in related area ›  Lack of sales and operational experience in founding team ›  Mindset: Always prioritizes profits over growth ›  Mindset: Not open to feedback, change

»  Market ›  Small Market / aiming to build a 20 Cr company in 5 yrs ›  Uncertain Business model, Scalability challenges

»  Differentiability and Competition ›  Me too product / service

»  Capital Requirement ›  Risk of consuming too much capital


Agenda

»  Lifecycle of a business and need for capital »  Venture Fund Economics » What do Venture funds look for ? » When to approach a VC ?


When to approach an early stage Venture Fund ?

»  VC unlikely to make a bet on multiple risk factors ›  Team ›  Technology and Product risk ›  Competitive Risk ›  Market and Business Model risk ›  Exit Risk

»  Product ready / close to being ready & customer traction

»  Some validation of assumptions, business model, market size

»  Presence of Business and Operations guy on team

Lifecycle of a Startup


Concept Stage: Ideation -  Initial market

feedback -  Market Sizing

Feasibility Stage: Product Development, Value Proposition -  Early Customer

Feedback -  Select hires

Market Validation Stage: BD, Fine Tune Biz Model, Partnerships -  Product/Service live -  Early revenue model -  Customer feedback -  Team build out

Growth Stage: Scalability, Teams, Process, Profitability -  Market Validated -  Biz model validated -  Product diversification

Maturity

Time

IPO Self/Angel Seed VC PE Bank Financing

Source of Funds

Mature Stage -  Focus Execution -  Financial predictability -  Risk management

For further details please go to:

http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=powerpoint

Typical investment process

Deal Identification / Preliminary Analysis

Deal Validation

Due Diligence

& Closure

Investment Committee &

Issue of Term Sheet

Typically 1% of deals get through the funnel

30 – 45 days

60 days

15 days

Prelim Market Analysis Discussion : Internal + External

Experts

Deep Dive: Team, Market, Differentiation, Traction,

Financials

Fact Validation. Accounting & Legal Diligence

Background checks

Thank You

[email protected]

tiecon delhi oct 2011 - canaan workshop

Economy & Finance