Transcript Venture Capital - University of Mississippi

Venture Capital
How to Sell Your Soul
for a Buck
VC Characteristics
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Usually early-stage equity or equitylinked financing
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Involves high risk
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Lacks liquidity or marketability
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Returns are primarily from capital gains
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Provided by patient investors - who may
give value-added advice
10 Years of Global VC Funding
Year
Deals
Avg/Deal
Total $
1997
3084
$4.75
$14,646
1998
3557
$5.88
$20,900
1999
5403
$9.92
$53,580
2000
7832
$13.38
$104,827
2001
4451
$9.17
$40,798
2002
3042
$7.09
$21,579
2003
2825
$6.69
$18,911
2004
2873
$7.31
$21,004
2005
2939
$7.38
$21,700
2006
3416
$7.46
$25.500
Source: National Venture Capital Association
What do VC’s Want?
“VCs simply want to believe that the
valuation of a company – either public
stock price or private valuation – will
grow high and stay high long enough for
them to sell their interest.”
Source: Cliff Conneighton; Venture Management Handbook: An Entrepreneur’s Guide to
Stock, Finance, and Contracts - pg 99
What do VC’s Want?
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5X or better capital growth in 5 - 10 yrs.
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25% annual capital gains at a minimum
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Eventual liquidity (3 - 5 years)
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Excitement!
What Do VC’s Get?
What Kind of Company?
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At least $10M Revenue in 5 years
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At least 20%/Yr Revenue Growth
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At least 15% pretax profit margin
Four Essential Questions for the
Business Plan
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Does any large, definable, and identifiable group of people
really need your product or service?
Are they willing to pay someone (you or a competitor)
considerably more than, perhaps twice, what it costs you to
produce and deliver it? If the answer depends on volume, do
you know what the volume/cost curve looks like?
Is there some sustainable advantage you will have, in
proprietary technology, cost, capability or marketing, over
others who do or would compete in this market?
Do you have the management team that can execute the plan
successfully?
Conneighton Pg. 100
Types of Ventures
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Life-Style Ventures
– 5 Yr Revenue projections < $10 M
– Started by people with life-style motives
– 90% of all startups
– Zero interest to venture capitalists
Types of Ventures
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Middle Market Ventures
– 5 Yr Revenue projections $10 - $50M
– Offer cash-out and capital gains opportunities
– The backbone of the entrepreneurial economy
– Rely heavily on bootstrap and individual
financing
– About 10% of startups
Types of Ventures
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High Potential Ventures
– 5 Yr Revenue projections > $50 M
– Potential BIG winners
– May require many rounds of financing of
several million dollars
– Expect to go public within 5 years
– Less than 1% of startups
Types of Ventures
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Proprietary Technology
– You own something way cool
– VC’s are very interested
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Execution Play
– You are trying to do something better than
anyone else.
– VC’s are not very interested
Types of VC’s

Venture Capital Funds
– Over 1750 US venture capital and private equiy
partnerships
– $585 Billion capitalization
– Fund about 500 companies/year
– 100 to 1 odds (at best)
– Typically later-stage deal in excess of $3M
Types of VC’s
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Business Angels
– The “invisible” capital market
– Unknown number of individuals (low
profile)
– 3 to 1 odds of finding one
– Typically early-stage deal of $100-500K
involving multiple investors
– Find one and you’ve found 5 or 10
How to Find an Angel
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Look close to home
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Check civic and charitable organizations
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Check for private pilots
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Check for expensive hot cars
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Use gatekeepers (lawyers, accountants)
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Check other startups
How to Court an Angel
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Show them a great business plan
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Kiss their %!!
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Ask them for advice (Beware of
Micromanagers)
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Act like you have done your homework
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Don’t act like you know everything
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Act EXCITED!
Types of Financing
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Bootstrap Financing
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–
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Personal savings
Family and friends
Credit cards
Second mortgages
Customer advances
Extended terms from vendors/suppliers
80% of the Inc. 500 fastest growing private
companies were financed solely by these methods.
Types of Financing
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Early-Stage Financing
– Seed financing: A small amount of capital
to prove a concept or qualify for startup
capital
– Startup financing: for completing product
development and initial marketing to get
ready to do business
– First-stage financing: funds required to
begin full-scale operation
Types of Financing
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Expansion Financing
– Second-stage financing: provides working
capital for initial expansion
– Third-stage or mezzanine financing:
provides funds for a major expansion after
the company has become profitable
Types of Financing
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Bridge Financing
– May be needed between stages
– Usually used before going public
– Meant to be repaid from the next round of
financing
Cost of Venture Capital
Stage
Cost
Seed
80%
Startup
60%
First Stage
50%
Second Stage
40%
Third Stage
30%
Bridge
25%
Capital Gain/ROI Conversion
Exit Year
Growth 3
4
5
7
3X
44 32 25 17
4X
59 41 32 22
5X
71 50 38 26
7X
91 63 48 32
10X
115 78 58 39
10
12
15
17
21
26
A 7-fold increase in the value of the investment
in 5 years is a 48% annualized rate of return on
equity.
Reasons for Rejection
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Lack of confidence in management
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Unsatisfactory risk/reward ratio
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Absence of a well-defined business plan
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Unfamiliarity with products or markets
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Too much wishful thinking
Too Much Wishful Thinking…
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Investors expect to bear risk.
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Investors expect YOU to know how
much risk they will bear and to TELL
them.
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They need to believe that YOU
understand the risk and will be able to
MANAGE it.
A Note on SBICs…
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Small Business Investment Program (1958) The
government licenses privately organized and
managed venture capital firms to make equity capital
or long-term loans (5+ years) available to small
companies.
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Get government-backed (cheap) long term loans to
provide this funding.
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Funding is generally in the $250,000 to $5Mill range
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Specialized SBICs (SSBICs) make investments in
socially and economically disadvantaged
entrepreneurs only.
Information on SBICs…
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National Association of Small Business
Investment Companies: www.nasbic.org
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SBA’s site: Good luck…
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Answers.com -http://www.answers.com/topic/smallbusiness-investment-company-sbic
Other Information
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Garage.com
– www.garage.com
– Pairs high-tech entrepreneurs with seed
financing sources.
Sources of Information
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vFinance.com
– www.vfinance.com
– List of 1800 VC firms, database of 23,000
angel investors
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National Venture Capital Association
– www.nvca.org
– Lots of info for and about VCs