venture capital primer rev2 101309
DESCRIPTION
Venture Finance PrimerTRANSCRIPT
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Raising Capital to Fund Growth
Jeff Amerine, PMPTechnology Licensing Officer
Adjunct Instructor, EntrepreneurshipUniversity of Arkansas
Advisor, Innovate [email protected]
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Introductions Financing Basics Where’s the Money? What’s Available in Arkansas? Financing Sources What Attracts the Money? Recap / Q&A
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• About me:– US Naval Academy 1984– US Air Force Officer 1984-1990– System engineer, product manager, VP, CEO, CTO
• 18 years in telecom and software technology development
• 7 startup ventures• 3 Fortune 500s
– U of A Technology Licensing Officer & Adjunct Instructor, Entrepreneurship
– Staff Advisor, Innovate Arkansas
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“I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the
difference.”
The Road Not TakenBy: Robert Frost
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$$
Time
Seed Early Growth Mature / Expansion
Adrenaline Junkies
Growth Leaders
Crank Turners
Revenues
Expenses
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Passion and commitment: You have to be a true believer
Value proposition: Solves a real problem or meets a real need
The team: Onboard the bus and in the right seats
Competitive advantage: Better, faster, cheaper
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Focus, focus, focus: Avoid trying to “boil the ocean”
Repeatable, scalable processes: Execution is key
Choose your customers well!
Remember accounting profits are great but cash is king!
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How do I finance my startup??Equity???Debt???
Bootstrap???Other???
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Equity finance = selling shares or membership units
Advantages: Does not impact cash flow, higher risk tolerance. Disadvantages: Loss of control; dilution of interest
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Debt finance = taking a loan from a bank or individual
Advantages: Does not dilute ownership Disadvantages: Loan payments, personal guarantees, banks don’t lend money to startups without assets
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Bootstrapping= working for free or using “FFF” money
Advantages: May not dilute ownership, friendly terms Disadvantages: Family issues, personal guarantees, not eating or having fun….
Friends Family Fools
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Government: Grants, SBIR/STTR, Loans, Recovery Act
Advantages: Does not dilute ownership Disadvantages: Takes forever, political decision criteria, government rights and oversight
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Angels VCs Strategic investors Debt Mezzanine Public markets Other
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Mostly not here…but we are working on that point
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Angel – Fund for Arkansas’ Future◦ $6M angel fund◦ Will do up to $500K investments
Seed Capital◦ Arkansas Science & Technology Authority (ASTA)◦ Will do up to $50K-$300K in royalty/ debt financing
Mezzanine ◦ Diamond State I & II◦ Look for EBITDA positive growth stage companies
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• Other Investment Incentives– Arkansas Economic Development Commission
• Equity investment state tax credits – 33.3% • Can be monetized and transferred
– ASTA• R&D state tax credits – 33%• Can be monetized and transferred
– Arkansas Capital Corporation• New Market Investment tax credits• SBA Loan Guarantees
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Management Team, Management Team, Management Team
Intellectual Property that can be a barrier to entry Customer traction – can the company execute?
Physical proximity to the investors Other interested investors – nobody wants to be first Entrepreneur skin in the game
Realistic valuation – this depends a lot on where you sit
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Angels◦ Typically high net worth individuals◦ Look to do very early stage seed investments◦ Often bring relevant domain knowledge◦ Occasionally form “Angel Funds”◦ This group can some times be broadened to
include “friends, fools, and family”◦ Examples: Fund for Arkansas’ Future
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• VC Firms grew out of Silicon Valley in the 1950s• Largest concentration around R&D Universities• Desired returns: Typically a minimum of 10X• Examples: Kleiner-Perkins, Sevin-Rosen, NMP
• Investment Preferences: – Proven management team– Intellectual property that creates high barriers– Customer traction
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Venture Fund LLP
Limited PartnersVenture Investments
•Public Institutions•Individuals•Private Equity Firms•Mutual Funds
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Successful VC funds:◦ Out of ten investments made after 3-5 years:
One big home run – at least 10X or more return Four marginal survivors Three on life support Two total failures
“1 home run (10x) out of ten investments” ……Chrysalis VC Fund
Historical Returns – High teens to >30%
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1-2 Winners10X Returns
Due Diligence on 20 Investments
Receive 1000s of Business Plans
Read 1000s of Executive Summaries
Invite 100s of Companies to Present
Invest in
10
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Returns by Asset Class
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Yr. 1 Yr. 3 Yr. 5 Yr. 10 Yr. 20
Early/Seed VC
Balanched VC
Later Stage VC
All Venture
NASDAQ
S&P 500
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Industry Preference Stage Preference Investment Size Parameters Geographic Preference Risk Balancing and Age of Fund Fund Experience and Expertise Due Diligence
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Based on VC perceived risk, usually not the risk the entrepreneur sees
Four main risk categories:◦ Product/Technology risk◦ Market risk◦ Execution/Management risk◦ Financing Risk
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No “standard” way to determine valuation!!
Examples: ◦ Net Present Value of Discounted Cash Flows◦ Multiple of Annual Revenues◦ Multiple of Net Income◦ Multiple of Subscribers◦ Valuation by Comparison◦ Use of Valuation Tools – www.equitynet.com
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Recommendation: ◦ Look at the comparable companies in your space
◦ Set your valuation within the range of the comps
◦ Be conservative
Pre-revenue startups seldom have valuations greater than $3M-4M even with great IP and management
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Term Sheet – a proposal to invest Not binding Outlines the deal points Investment contingent on negotiation and
due diligence
Key Points◦ Pre-money valuation◦ Post-money valuation
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Pre-money valuation = $4M Investment = $1M Post-money valuation = $5M
VC ownership = $1M / $5M = 20%
VCs typical want preferred stock
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Typical VC deal needs an exit in 5-7 years Want a 10X return minimum Play for capital appreciation
◦ Example: $1M today = $10M @ Exit
◦ VC Protections = Preferred Stock, Ratchets, Anti-dilution
◦ VC Ownership will “Ratchet-up” if company misses milestones
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Key Points to Negotiate
◦ Board of Directors
◦ Vesting & Acceleration
◦ Option Pool & Acceleration
◦ Preferred Stock
◦ Anti-Dilution Protection
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Comprehensive review of everything◦ Management references◦ Market size & need◦ Sales Pipeline & Customers◦ Strategic relationships◦ Financials◦ Intellectual property◦ Legal issues
Grueling process that will find the BS! Can last 30-90 days
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Entrepreneurs’ Disease: 100% X 0 = 0
Unrealistic valuations
Lack of preparation for having a VC “help” run your company
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Excellent management that has a track record
Intellectual Property or Subject Matter Expertise that creates a competitive barrier
Solves big problems in big markets - $1B++
Customer traction – i.e. somebody will buy your widget
Entrepreneur “skin in the game”
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Skype◦ VOIP service provider◦ Revenues based on “eyeballs”, advertising or some such◦ No cost for PC-to-PC calls◦ Initial VC investors:
Draper –Richards: Bill Draper and Howard Hartenbaum - $250,000 initial investment
◦ Sells to eBay in 2006 for $2.1B
◦ Initial VCs make 1300X return on their initial investment
Irrational Exuberance?? Possibly, but some big hits still happen – RARELY.
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Guy Kawasaki interviews:◦ Mike Moritz, Sequoia Capital and Paul Graham,
Y Combinator◦ http://www.building43.com/videos/2009/08/07/fire
side-chat-money-and-passion/
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• Existing Fortune 500 firms• Look to invest in technologies that can benefit
their business portfolio• Open to “Extrapreneurship” i.e. spin-outs• Create their own venture funds• Examples: GE, IBM, Intel, Honda, NEC, Chevron
• Upside: Can bring tremendous market access• Downside: Very slow moving typically
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Honda Strategic Venturing (HSV)
Strategic venture investment arm of the global Honda R&D organization.
• Window to Global Innovation : Create new value jointly by bridging the outside
entrepreneurs and our internal R&D through venture investing• Spinout of Internal R&D projects : Develop new businesses via technology
carve-outs which find a better commercial fit outside of Honda • Entrepreneurship at Honda R&D : Enhance Honda’s innovation spirit by
harnessing entrepreneurship in the global venture community
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Drive Innovation
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Alternative Energy• Fuel cell, hydrogen reformer • Battery, Bio-fuel, Solar energy• Energy harvesting
Robotics
Communication for Mobility
• Sensors, Gyros, Radar• Actuators, Motors• Image processing, voice recognition
• Wireless Communication• In-vehicle network• Human machine interface
Advanced Materials• High performance materials: coating, fabric,
rubber, structure, nano• Functional materials: catalysts, membranes,
electrodes
High Interest Technologies
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Target: ◦ Game-changing technologies ◦ Technologies that can contribute to Honda’s R&D road map
Primary Interest: Mutual Strategic Value◦ We offer:
Funding Joint development with Honda R&D Product / Market knowledge
◦ We seek: Board observer rights Strategic commercial rights
Investment Size: ◦ Seed-to early-stage:
HSV Fund (Honda’s technology venture fund w/ partner Atrium)◦ Mid-to late-stage:
Honda Motors direct investment
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Some venture firms focus on debt◦ Gives first preference on assets◦ Can be convertible to equity◦ Avoids/limits shareholder dilution…◦ But it has to be paid every month
◦ Examples: Western Tech Investments, Silicon Valley Bank, Commercial banks/SBA loans
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Growth financing to get to liquidity event
Targeted at profitable companies that need to scale
Last stage financing before M&A activity or IPO -
Typically $10M-$100M or more in financing
Can be debt/equity and is typically a syndicate of private equity funds
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Forget about it…. Post 2001 - virtually unavailable
Sarbanes-Oxley (SOX) requirements have a further stifling impact
Not a good exit or liquidity strategy for US-based tech startups at this point
Some rare exceptions still arise…
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US Government◦ SBIR/STTR funding can be a great source of seed,
pre-seed funding
◦ Universities know how to get this funding
◦ No dilution, no equity, and no debt
◦ Some Incubators use this to get companies rolling: Virtual Incubation Company (VIC)
◦ Process can be slow and involved
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$$
Time
Seed Early Growth Mature / Expansion
Angels
VCs
Strategic InvestorsDebt Investors
Revenues
Revenues
Expenses
Mezzanine
Bootstrap – self financing
SBIR/STTR
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UniversityR&D
TechnologyEngine
Entrepreneurial
Culture
AvailableVentureFinance
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UniversityR&D
TechnologyEngine
EntrepreneurialCulture
AvailableVentureFinance
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The Road Less Traveled – new ventures are critical to our economic health and success!
The team, the plan, and a good finance strategy are key
A “startup culture” has to be nurtured
Arkansas is taking steps to create the right environment
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Raising Capital to Fund Growth
Jeff Amerine, PMPTechnology Licensing Officer
Adjunct Instructor, EntrepreneurshipUniversity of Arkansas
Advisor, Innovate [email protected]
“Techpreneurship Blog”http://blog.innovatearkansas.org