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Financing Silicon Valley:Understanding Venture Capital and
Making a Killer Pitch
J. Alexander Sloan
Partner
Blackwolf Partners
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Agenda
I. My Background
II. Some Basics on the Venture Business
III. Making a Killer Presentation
IV. Discussion
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My Experience and Perspective
1993 - 1996: The Vietnam Fund Limited
1996 - 1998: Cornell MBA
1999 - 2002: Hambrecht & Quist venture capital unit
Merged into J.P. Morgan Partners
Invested in many younger private technology companies
2004 on: Founding Partner, Blackwolf Partners
Early stage venture fund focus on Cleantech: healthier,
cleaner, more energy efficient products & services.
Board Member, Center for Sustainable Global Enterprise at JGSM
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Blackwolf Ventures$100 m. Tech Fund
driven by demands of:
Blackwolf Ventures$100 m. Tech Fund
driven by demands of:
Healthy Lifestyle(~33%)
Healthy Lifestyle(~33%)
Natural Resource
Sensibility(~33%)
Natural Resource
Sensibility(~33%)
Differentiated
Healthcare(~33%)
Differentiated
Healthcare(~33%)
• Food quality & choice• Clean air & water • Personal development
• Air & water utilization• Energy efficiency• Environmental management
• Healthcare solutions• Complimentary medicine• Cleaner Pharma
Clean TechnologiesClean Technologies
The Blackwolf Cleantech Strategy
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Company Stage
CapitalRequired IPO/Buy Out/Merger
Financing Lifecycle
Takes months to years to reach IPO/Buy Out
$25 m.
< $1 m.
$50 m. +
Startup Expansion Mid to Late Mezzanine Post IPO Mature
R i s k
Capi
tal Req
uired &
Valua
tion
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Many Types of Financing Partners• Founders/bootstrap: entrepreneur and personal savings
• Angels: Individuals: “friends and family”“Bands of Angels”: informal groups of “professional” angels
• Specialized venture firms: smaller, more specialized: Blackwolf
• Traditional venture capital firms: Kleiner, Benchmark, Sequoia, etc.
• Strategic corporate: customers/suppliers who buy into the company.
• Corporate venture units: Intel Ventures, Nokia Ventures, etc.
• Investment banking venture: JP Morgan Partners, Goldman Sachs, etc.
• Investment banks: IPO underwriting.
• Public investors, public stock = currency.
• Debt instruments
Don’t expect to get traditional venture funding…look for best option.
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“Valuation”: what is a company worth?
Public Company:• # shares outstanding X market price per share =
market capitalization = valuation.
• Stock price changes minute to minute, set in pubicmarket of buyers and sellers.
• This is an “indirect”, secondary market.
Private Company:
• # shares outstanding X negotiated price per share.• Transaction negotiated directly between investor and
owner, no “market clearing” mechanism.
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Fuzzy Math:The Mechanics of Valuation and Dilution
“Pre-Money” Valuation
( negotiated value for company)
+ Capital invested
= “Post Money” Valuation
(new valuation for company)
$10 million
$5 million
$15 million
• Investor now owes 5/15 or 33% of the company, and the prior
owners are “diluted” to 66% ownership.
• 33% of the company “cost” $5 m. But at a $20 m. “pre”, raising$5 m. only costs 20% of the company. Or 33% of the company at a$20 m. pre-money valuation raises $10 m.
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Organization & People
• Firm culture: ranges from small private partnership to more
corporate style.
• Decision making process: rule by consensus of all partners.
• the “Monday meeting”
• Partners have diverse backgrounds: technology, banking, consulting,
engineering, operating, sales, marketing and/or venture experience.
• Classic polarities to each partner’s investment approach:
•
quantitative versus qualitative appraisal.
• Business (MBA) versus technical (Ph.D.) perspective.
• Operating versus finance experience.
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What Value do Venture Investors Add afterthe Money is Invested?
• Board seat, guidance on strategy, check and balancefor management
• Accessing contracts/customers/introductions
• Hiring key managers
• Interaction with management
• Network of relationships and synergies between
portfolio companies
Long-term, involved, active partner…..(theoretically)
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Compensation to Venture Firm
1. Fees: 2% - 3% of committed capital, paid annually (covers
salaries, office, overhead, etc.).
2. Carried interest: 20% - 30% of profits after (and only if)
original capital is returned to investors.
• Fees can drive bigger fund size (bigger base) and faster
timing to raise the next fund (double dipping).
• Larger fund size can drive up average size of
investments sought: bigger bets.
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Exit and Timing are Key
•
We need to get our investment out of the company to make money.
• Primary means to exit: acquisition/trade sale or IPO.
• Time horizon from investment to exit: months to 5-7 years.
• Returns calculated and compensation paid to venture managers only
when cash or securities are actually distributed to investors.
$0
$5
$10
$15$20
$25
$30
$35
$40
$45
Ven
ture
Day
of IPO
+30
days
+12
0 da
ys
+36
5 da
ys
Co X Stock
• Lock-ups and other sellingrestrictions can dramaticallyaffect returns.
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II. Making Killer Presentations
So, you have:
a winning team, a compelling and practical product,
a clear business plan,
…and you want to pitch to a venture firm or
other investor?
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Your Overall Challenge
• You must clearly convey TWO value propositions:
1. To the customer
2. To the investor
• They are related but not the same.
• Convince me that both are highly attractive and likelyto be realized.
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Understand Your Audience
• Try to learn the backgrounds and perspectives of your expectedaudience.
• Research the firm’s website and Google the team.
– Prior successful and loser deals in your space?
– MBA or Ph.D. “mentality” or both? Adjust your pitch.
– Understands your industry?
• In larger firms, an associate or EIR will likely meet with you first.Partners can drift in and out.
– Play to the firm’s point person. Get an advocate.
• No venture investor ever got fired for saying “Pass”.
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What Do Venture Investors Look for?
• Our Needs:– Company matches current Fund’s investment strategy and timing?
• The Opportunity:– What is the core business opportunity? How big?
• Management:– Great management team? Done this before? Done it together? Can I work
with them?
• Well Planned:– Clear business plan? Plan B & C?
– Unique approach/technology that can be defended?
• The “Deal”:
– Attractive price/valuation? Potential for up-rounds?– Extent of future financing needs before profitability?
– What are the exit opportunities, how long to get there?
You need to communicate answers clearly through a writtenbusiness plan and sharp presentation.
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General Tips to Knock Em Dead
• This is not a corporate presentation. Totally different dynamic.
• One hour (including Q&A), one shot.
• The audience is unprepared and has A.D.D. (and has a Blackberry
under the table).
• Expect to be interrupted.
• It’s not about your slides or your planned order. Feel the flow of
each meeting. Give them what they want.
• Smile and make good eye contact.
• “Touch, Turn, Talk.”
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Interruptions & Flow Management
• You will be interrupted and asked questions out of your plannedsequence. Expect it, and go with it happily.
• Answer the question, then try to get back to your order.
• Be prepared to jump to a supporting “go-to” slide if askedsomething out of your planned order.– Have a printed reference guide of your slide order for yourself.
• A presentation is ideally a give and take of what you want to sayand the audience wants to hear.– Respect both.
• Go with the flow of each meeting, but maintain control.– Yes, it is a test…
• Watch your time.
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Manage Your Content
• Carefully balance your allocation (time and content) to:
1. Your market and its dynamics and opportunities.
2. Your product/service.
3. Competition: lessons, successes, opportunities.
4. Management team and advisors.5. Business model.
• If I don’t get the info, then you get zero credit for it.
Let’s discuss some additional venture investor-orientedneeds for each of these section…
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On slide 1 or 2, no later, explain:1. How big is the company: age, stage, # of employees,
product status, revenue/customers (if any)?
2. How much money has been raised/invested to date, when,valuations used?
3. How much investment are you looking for now?
First, Just the Facts…please!
Startup Mid to Late Post IPO
I need to put your company intoinvestment & portfolio context.
Don’t make me wait or dig for it. ?
? ?
?
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Market Opportunity
• Be highly specific to your product’s target market segment.
– Don’t just use the biggest market research numbers you can find.
– IDC and Gartner are often wrong…and we know it (just check our trackrecords).
• Who are your customers? Explain customers’ current buying behaviors.
• Where is their demand need/pain? What is the current solution? Whyis this solution insufficient?
• Go quickly into discussing your product as the solution.
Too much time is typically spent on this section. Keep moving.
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Your Product/Service
• What is the technology?– How does it work? Is it new or repurposed?
– Is it yours?
• What are the next phases/applications/opportunities foryour core product/service if Plan A fails?
• How will your product sell? Nice or need to have?– Push or Pull market dynamic? Build it and they will come?
– Did you start with a technology or with a market need?
• How will you defend your technology/advantage?– Patents: yeah, and….
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Business Model
• Gets the least attention in presentations. Get to it quickly.– Not just excel sheets at the back. Tell a story.
– Clearly walk through the growth milestones of the business:
• Capital needs, hiring, spending, inflection/decision points, alternatives...
• Reasonable projections and assumptions are moreimpressive (and believable) than highly optimistic ones.– Seen too many “hockey sticks”.
• What is Plan B and C for your technology/product?– Think about downside protection, not just upside.
– Investor is buying into the company, not into the product.
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More Business Model Questions
• How much money will this company need to get profitable?
• Minimum and maximum manageable investment load?– What would you do with 1/2 or 2x or 3x the money you are looking
for now?
• Can my fund invest its per deal minimum (could be up to$15-$20 m.) in this company within 3 years.
• Exit strategies are key. Investors need to get out. How?– IPO only? Trade sale options? Likely buyers?
– Comps of similar deals done?
– Timing counts. A fund has its own specific timing needs.
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Connect the Dots and Tell a StoryFYE FYE FYE FC Revised Projections
($ Millions) 6/30/02 6/30/03 6/30/04 (1) Year 1 (2) Year 2 Year 3 Year 4 Year 5
Revenue 5.4 4.8 6.6 10.8 16.5 23.2 29.4 35.0
Gross Profit 4.0 3.4 4.8 7.1 9.6 12.6 15.6 18.2
Gross Margin 74.1% 70.8% 72.7% 65.7% 58.2% 54.3% 53.1% 52.0%
Operating Expense 3.2 2.5 3.2 4.3 4.6 5.6 6.4 7.2
EBITDA 0.8 0.9 1.6 2.8 5.0 7.0 9.2 11.0
EBITDA Margin 14.8% 18.8% 24.2% 25.9% 30.3% 30.2% 31.3% 31.4%
(1) Preliminary, audit to be received prior to clos
(2) Revenue already under contract for year 1 is $7.6 million. Revenue relating to new system sales is projected to be $2.6 million.
New rental contracts in year 1 are assumed to generate only 3 months of revenue for the year ($0.3 million).
Staff 8 12 25 30 40 55
Capital Invested 4,000,000$ -$ -$ 15,000,000$ -$ -$
Cash Burn/month 100,000$ 250,000$ 323,000$ 500,000$ 800,000$ 1,200,000$
Cash Burn/year 1,200,000$ 3,000,000$ 3,876,000$ 6,000,000$ 9,600,000$ 14,400,000$
Cash Balance 2,800,000$ 1,000,000$ 124,000$ 9,000,000$ 5,400,000$ 600,000$
v1.0 v1.5 V 2.0Product
2005 2006 2007 2008 2009 2010 2011 2012
Exit Plan M&A IPO
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Explain Your Competition
• Who is doing your business idea now?
• What do they do wrong or right? What have they taughtyou?
• Very few new companies have no competition. If youhave none, then are you smart or dumb for entering thespace?
• Is your competition a potential threat, partner, targetor source of acquisition…or all of those? How will you
manage this?
• Know case studies of your product area and industrythat show success, including a money-making exit forinvestor.
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The Team• Backgrounds? Done this sector/product before?
• Worked together before?
• Made mistakes before? Learned what?
• Made money for investors before?
• Worked in startup, midsized, and/or larger companies?
• Worked with venture investors before? Whom?
• Relevant connections to this industry and product?
• Board of directors, advisors and investors?
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The Softer Stuff
• Venture decisions are made on imperfect, “soft”qualitative data, this applies to decisions about workingwith people.
• Personality & chemistry matters.– Do I want to work with you for years, through tough times?
– Let your personality come through.
– Do you know your stuff?
– How well and openly do you respond to questions?
– Are you honest about weaknesses and needs?
• Is this just a one-person show?
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Talking Valuation
A venture investor will ask,
“So, what do you think your company is worth today?”
Yes, it’s a sucker question, but be ready:
• Have a reasonable pre-money valuation range prepared.
• Have a plausible answer related to the current status ofthe product, sales and business.
• We love “comps”. Be ready with some examples andstories.
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Summary• Much easier for a venture investor to say “no” to a deal.
• Lots of deals come our way. You need to stand out.
• Great presentations are honest, clear, exciting, direct and flexible.
• It’s about the business opportunity, not just cool technology.
– We call it a “deal” for a reason.
• How can an investor buy low and sell high, and on time?
• Avoid seeking professional money until you have to (or never at all).
• Choose your investors as carefully as we choose you.
Thanks for your attention!