+ All Categories
Home > Documents > Venture Capital Primer Rev6

Venture Capital Primer Rev6

Date post: 01-Nov-2014
Category:
Upload: jamerine
View: 1,055 times
Download: 2 times
Share this document with a friend
Description:
Venture Capital Primer - Update
Popular Tags:
59
Raising Capital to Fund Growth Jeff Amerine, PMP Technology Licensing Officer Adjunct Instructor, Entrepreneurship University of Arkansas Advisor, Innovate Arkansas [email protected]
Transcript
Page 1: Venture Capital Primer Rev6

Raising Capital to Fund Growth

Jeff Amerine, PMPTechnology Licensing Officer

Adjunct Instructor, EntrepreneurshipUniversity of Arkansas

Advisor, Innovate [email protected]

Page 2: Venture Capital Primer Rev6

Introductions Financing Basics Where’s the Money? What’s Available in Arkansas? Financing Sources What Attracts the Money? Recap / Q&A

Page 3: Venture Capital Primer Rev6

– BS, US Naval Academy 1984– MS, Operations Management – University of Arkansas– 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– Manager & Investor, Gravity Ventures Arkansas

Page 4: Venture Capital Primer Rev6

University of Arkansas Technology Licensing Office◦ Access to 100+ technologies developed at the UA◦ Team of business and intellectual property professionals◦ Mission:

Commercialize world-class research to build a sustainable knowledge-based economy to benefit Arkansas and the world.

◦ http://www.uark.edu/ua/tlo/index.html

Page 5: Venture Capital Primer Rev6

Innovation Center535 Research Center Blvd

Page 6: Venture Capital Primer Rev6

Academic

BusinessLegal

Page 7: Venture Capital Primer Rev6

◦Patents

◦Trademarks

◦Copyrights

◦Trade Secrets

TM

©

Page 8: Venture Capital Primer Rev6
Page 9: Venture Capital Primer Rev6
Page 10: Venture Capital Primer Rev6

10

What Does IA Do?

•Accelerate the technology commercialization process

•Facilitate partnerships between firms, universities and economic development organizations

•Prepare firms to obtain early-stage capital •Provide expert assistance in technology, business, organizational management and marketing

•Advise with legal and intellectual property matters

Page 11: Venture Capital Primer Rev6

“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

Page 12: Venture Capital Primer Rev6

$$

Time

Seed Early Growth Mature / Expansion

Adrenaline Junkies

Growth Leaders

Crank Turners

Revenues

Expenses

Page 13: Venture Capital Primer Rev6

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

Page 14: Venture Capital Primer Rev6

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!

Page 15: Venture Capital Primer Rev6

How do I finance my startup??Equity???Debt???

Bootstrap???Other???

Page 16: Venture Capital Primer Rev6

Equity finance = selling shares or membership units

Advantages: Does not impact cash flow, higher risk tolerance. Disadvantages: Loss of control; dilution of interest

Page 17: Venture Capital Primer Rev6

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

Page 18: Venture Capital Primer Rev6

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

Page 19: Venture Capital Primer Rev6

Government: Grants, SBIR/STTR, Loans, Recovery Act

Advantages: Does not dilute ownership Disadvantages: Takes forever, political decision criteria, government rights and oversight

Page 20: Venture Capital Primer Rev6

Angels VCs Strategic investors Debt Mezzanine Public markets Other

Page 21: Venture Capital Primer Rev6

Mostly not here…but we are working on that point

Page 22: Venture Capital Primer Rev6

Angel ◦ Fund for Arkansas’ Future

$6M angel fund Up to $500K investments

◦ Gravity Ventures Arkansas $>1M angel fund $50K-100K investments

Page 23: Venture Capital Primer Rev6

Public Sector Seed Capital◦ Arkansas Science & Technology Authority (ASTA)

◦ Up to $50K-$300K in royalty/ debt financing◦ Arkansas Development Finance Authority (ADFA)

◦ Risk Capital Matching Fund - $100K - $750K

Mezzanine ◦ Diamond State I & II◦ Look for EBITDA positive growth stage companies

Page 24: Venture Capital Primer Rev6

• 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

Page 25: Venture Capital Primer Rev6

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

Page 26: Venture Capital Primer Rev6

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

Page 27: Venture Capital Primer Rev6

• 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

Page 28: Venture Capital Primer Rev6

Venture Fund LLP

Limited PartnersVenture Investments

•Public Institutions•Individuals•Private Equity Firms•Mutual Funds

Page 29: Venture Capital Primer Rev6

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%

Page 30: Venture Capital Primer Rev6

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

Page 31: Venture Capital Primer Rev6

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

Page 32: Venture Capital Primer Rev6

Industry Preference Stage Preference Investment Size Parameters Geographic Preference Risk Balancing and Age of Fund Fund Experience and Expertise Due Diligence

Page 33: Venture Capital Primer Rev6

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

Page 34: Venture Capital Primer Rev6

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

Page 35: Venture Capital Primer Rev6

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 $1M-2M even with great IP and management

Page 36: Venture Capital Primer Rev6

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

Page 37: Venture Capital Primer Rev6

Pre-money valuation = $4M Investment = $1M Post-money valuation = $5M

VC ownership = $1M / $5M = 20%

VCs typical want preferred stock

Page 38: Venture Capital Primer Rev6

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

Page 39: Venture Capital Primer Rev6

Key Points to Negotiate

◦ Board of Directors

◦ Vesting & Acceleration

◦ Option Pool & Acceleration

◦ Preferred Stock

◦ Anti-Dilution Protection

Page 40: Venture Capital Primer Rev6

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

Page 41: Venture Capital Primer Rev6

Entrepreneurs’ Disease: 100% X 0 = 0

Unrealistic valuations

Lack of preparation for having a VC “help” run your company

Page 42: Venture Capital Primer Rev6

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”

Page 43: Venture Capital Primer Rev6

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.

Page 44: Venture Capital Primer Rev6

Guy Kawasaki interviews:◦ Mike Moritz, Sequoia Capital and Paul Graham, Y

Combinator◦ http://www.building43.com/videos/2009/08/07/

fireside-chat-money-and-passion/

Page 45: Venture Capital Primer Rev6

• 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

Page 46: Venture Capital Primer Rev6

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

Page 47: Venture Capital Primer Rev6

Drive Innovation

Page 48: Venture Capital Primer Rev6

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

Page 49: Venture Capital Primer Rev6

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

Page 50: Venture Capital Primer Rev6

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

Page 51: Venture Capital Primer Rev6

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

Page 52: Venture Capital Primer Rev6

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…

Page 53: Venture Capital Primer Rev6

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

Page 54: Venture Capital Primer Rev6

$$

Time

Seed Early Growth Mature / Expansion

Angels

VCs

Strategic InvestorsDebt Investors

Revenues

Revenues

Expenses

Mezzanine

Bootstrap – self financing

SBIR/STTR

Page 55: Venture Capital Primer Rev6
Page 56: Venture Capital Primer Rev6

UniversityR&D

TechnologyEngine

Entrepreneurial

Culture

AvailableVentureFinance

Page 57: Venture Capital Primer Rev6

UniversityR&D

TechnologyEngine

EntrepreneurialCulture

AvailableVentureFinance

Page 58: Venture Capital Primer Rev6

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

Page 59: Venture Capital Primer Rev6

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


Recommended