venture capital

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  • 1. Venture CapitalThe Investment Processand Great Investment

2. What is Venture Capital? Money invested: By professionals (venture capitalists) In early-stage companies In order to produce financial returns. Does not include: Buyout investing Mezzanine investing Angel investors. 3. What is Venture Capital? Funds are usually: Raised from the investors (limited partners) By the firm (general partners) For a set period of time (around 12-years) Supposed to return above-average interests (during bubble, 40%,50%, 90% yearly) By investing in private companies and exiting via IPO or buyout. 4. Money Flow in Venture Capital Limited Partners commit to $x million Participate in draw-downs on regular basis Money is not given to the VCs all up front.The VC charges a few percent of the money committed, to pay for salaries and expenses.Usually, first liquidity events go to repaying investors.When investors are fully repaid, limited and general partnersshare the proceeds (80%-20% or 85%-15%). The general partner share is called carry.Many permutation of arrangements with limited partners. 5. Players in Venture Capital Limited Partners Typical investors in venture capital funds: Pension funds Foundations Local governments Universities Wealthy individualsGeneral Partners Ex-CEOs Ex-investment bankers Ex big-8 consultants The occasional scientist or MD 6. Types of Venture Capital Funds Funds tend to specialize by stage, industry, or geography Stage: Seed Funds (the earliest institutional funds) Early Funds (will go in right after seed) Mezzanine Funds (prefer funding just prior to liquidity, IPO orbuyout) Industry Oxford Biosciences (Medical) Trident, Northpoint (IT, telecom) NEA Company is a generalist but individual general partnersspecialize Geography (Samller Funds tend to stay in a region) Anthem Capital Local here 7. Early Investments LifecycleStart-up V1.1 conceptEng. SpecsPrototypeAlfaBetaV1 Res. & Develop. CUSTOMERS Marketing & Sales M&SPlan V1Plan V2 Plan V0.1 Prod. & Ops P&O Plan V0.1Plan V1Plan V2Seed (< 1 mil)Early Stages ( 1 - 10 mil)Expansion/ ( 10+ mil) development Angels Incubators Accelerators Venture Capital Private Equity & Merchant Banks 8. Death valley is a serious problem capital needs owner,'DEATH VALLEY'family fundingtime ideaseed and start-up growth mature growth, expansion Source: Wissema, Technostarters, why and how? 9. Where does VC fit in?Sources of New Venture FinancingSeed Start-upEarly Growth Rapid Growth Exit Entrepreneur Friends and Family Angel Investors Grants Strategic Partner Venture Capital Asset-based Lender Equipment Lessor SBIC Mezzanine Lender IPO Public Debt Acquisition, LBO, MBO Red shading indicates primary focus of investor type. Blue shading indicates secondary focus, or focus of a subset of investors of the type. 10. Venture CapitalWhere the money is invested (Q107) Silicon Valley$2.1 billion New England $976 million Southeast$579 million Greater DC$197 million 11. Venture capital is clearlyassociated with innovationSource: Yozma after USA Census, OECD, Correlation between VC and ICT14%Israel 12% IVC Research Center, CBS ICT share in GDP10% IrelandKoreaUK USA8% JapanSweden6%Canada France 4%0,0%0,1% 0,2%0,3%0,4% 0,5%0,6% 0,7% 0,8%VC investment in ICT as % of GDPICT = Information and Communication Technologies 11/13 12. 0. 0% 0. 1% 0. 2% 0. 3% 0. 4% 0. 5% 0. 6% 0. 7% Israel0. 8%USACanadaKoreaSwedenUKNetherlands Ireland France FinlandBelgium Source: OECD 1999-2002, IVC Research Center 2002, CBS (Isr.) EU NorwayNewDenmark Relative to GDPGermany Australia VC Investment in ICT ItalySwitzerlandGreece Spain Portugal Austria Japan 13. Venture Capital What venture capitalists do: Finance rapidly growing companies Typically buy equity rather than lend money Often sit on the board of directors Help management teams (but also direct) Take a long-term view 14. What Venture Capitalists do ... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them in exchange for private equity (usually a minority stake) structure the deal Support the entrepreneurs in succeeding. E.g.: providing financial advice in headhunting and setting up advisory boards in contacting customers, channels, in steering and positioning the company in managing PRs activities in managing IP and legal issues Look after value creation further round of financing merger and acquisition, IPO, 15. A Day in the Life of a VC VCs travel 60-90% of time Network with other VCs, lawyers, I-bankers, CEOS theyfunded in past and limited partners Attend industry conferences for market intelligence and dealflow Meet companies, read biz plans Heavy due diligence, phone and in person Attend industry conferences Negotiate deals Participate on boards of directors 16. The Venture Capital Process Find Deals Research Deals A 3-6 Month Process Structure and Close Deals Manage The Investment Exit The Investment 17. VC Investment processTender launchAnalysis of Offers Deal fulfilment MonitoringExitPreparation ofFormal analysis (checking out Negotiations ofAccomplishment ofExits from portfolio tender terms for completeness of required investmentinvestmentfunds Tenderdocuments) agreement agreement announcement Primary financial & legalSigning of VC fund financials (offer form, key analysis of documents (VCinvestmentComplying with conditions offunds resulting in a short listagreement information investment that includes 1 to 5 best offers Transfer ofstandards by VC agreement) In-depth financial & legalfinancial resources fund Gathering of offers analysis (meetings withto the fund Use of state aidmanagement teams from shortaccording to thelist and presentation of their drawdown scheduleoffers, due diligence of offersFinal choice of offers 18. Most Appreciated VCs Contributions Financial Advice 44% Corporate Strategy & Direction 43% Source: The Economic Impact of Sounding board for ideas 41% (EVCA and Coopers & Lybrand) Venture Capital in Europe Challenging status quo 32% Contacts or market information 26% Management recruitment 10% Marketing strategy 7% Money only 12% 19. Venture CapitalCharacteristics of venture fundable companies: Experienced management Defensible market Good business model (can make money) Proprietary intellectual property Manageable funding requirements Valuation expectations in line with market 20. Venture Capital in the EUWhat does a VC asks for VC investors stake Source: The Economic Impact of (EVCA and Coopers & Lybrand) 2% have 1 - 9% Venture Capital in Europe 38% have 10 - 33% 21% have 34 -49% 39% have 50+ % 21. How to approach a venture capitalist The Business Plan A Team A Presentation and an Elevators Pitch References An NDA (if required) 22. The Business Plan A Product/Service description Pros and cons of the solution Market needs it satisfies Barriers to Competition Business Model Market Analysis (strategic and tactical) Competitors Execution Plan Marketing and Sales Plan Research and Development Plan Operations Plan Team Financials Valuation Model & Placement Terms Income Statement, Balance Sheet & Cash Flow 3 years minimum, quarterly breakdown 1st year in monthly breakdown 23. The Term Sheet The parties Securities to be issued Amount of financing & disbursement schedule Pre-financing valuation Option plan & earn-out Use of proceeds Liquidation Preference Protective Provisions, Voting Rights and BoD participation Anti-dilution Lock-ups Tag along and drag along Exclusivity Reporting ... 24. How does a VC think IRR (Internal Rate of Return) Companys Current and Future Valuation Comparables (P/E,P/S,), Number of, DCF, Whats The Best Strategy To Create Value Which are the achievable milestones and whats the financingneeded ? When is the break-even expected ? With which margins andrevenues. Exit Strategy Trade sale, IPO, Nth+1 round of financing, .. Minimizing Risks Diluting the investment Liquidation Preference rights 25. A possible valuation scenario Company X. Quoted on Stock Exchange Z.Valuation 100mil, Sales 50 mil, Earnings 5 mil.P/E = 100/5 = 20, P/S = 100/50 = 2. Company Y. Acquired for 20 mil with sales of 10 mil. P/S = 20/10 = 2. Your UnwiredCo plan forecasts 30 mil in sales and 5 mil in earnings in 2014.Its buss. model is similar to X and Y. Lower Valuation of UnwiredCo in 2009 using P/S of 2 is 30*2 = 60mil Higher Valuation in 2009 using P/E of 20 is 5*20 = 100 mil Present Post-Money1 valuation (discount-rate2 of 50%) is between 60/(150%)5years = 8mil and 100/(150%)5years = 13.3milThe UnwiredCo requires a 4 mil financing round. The Pre-Money valuation is between 8-4=4mil and 13.3-4= 9.3mil. An agreement is reached at a pre-money valuation of 6mil. hence the Investor will obtain a 4 / (6 + 4) = 40% stake in the company.1 Valuationof the company after the investment. 2Target Annualized Return of Investment 26. European Private Equity FundsPrivate Equity & Venture Capital Activity,European Private Equity & VC AssociationSource: Annual Survey of Pan European Net IRRs to Investors Stage 1 YR 3 YR5 YR 10 YR Early Stage 26,0 14,524,014,3 Development 31,5 21,419,411,8 Balanced40,4 56,445,420,7 All Venture 35,6 36,333,617,2 Buyouts 10,9 30,626,218,0 Generalist1,9 12,6 17,812,3 All Private Equity15,6 29,225,816,3 IRR: Internal Rate of Return. Rate of discount which equates the present value of the cash outflows associated with an investment with the sum of the present value of the cash inflows accruing from it and the present value of the valuation of the unrealized portfolio. 27. Some Statistics 99%+ of All Startups Do Not Require Institutional Venture Capital VCs average initial investment is $3M+ Average Dilution from Initial VC Investment is 40%+ VCs look at over 100 business plans for every one they f

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