Transcript Document

VENTURE CAPITAL
Dominic Shaull
Michael Jordan
VENTURE CAPITAL
WHAT IS IT? A BRIEF HISTORY OF VENTURE CAPITAL
NEED FOR FUNDING
SOURCES OF FUNDING
ADVANTAGES AND DISADVATANGES
ALTERNATIVE PATHWAYS
VENTURE CAPITAL
WHAT IS VENTURE CAPITAL?
Way to obtain money and experience for a business via
the private equity of Venture Capitalists (individuals
willing to invest in a start up)
If money is not obtained through VC, it will have to be
obtained from one of the following:
Bank Loans, personal savings, or boot legging (Use of
company’s profits early-on to grow)
VENTURE CAPITAL
THE HISTORY OF VENTURE CAPITAL
Some of the first Venture Capitalist include the following:
Vanderbilts
Whitneys
Rockefellers
Warburgs
VC in the first half of the 20th century was the domain of wealthy
individuals and families
The Small Business Investment Act of 1958 was the first step
toward a professionally-managed venture capital industry
Officially allowed for the licensing of private "Small Business
Investment Companies”
Considered as the first venture capital firm
VENTURE CAPITAL
THE HISTORY OF VENTURE CAPITAL
In 1960s and 1970s, VC firms focused their
investment on starting and expanding
companies
Companies were primarily exploiting
breakthroughs in electronic, medical, or
data-processing technology
In the 1980s, the industry was hampered
by sharply declining returns and certain
venture firms began posting losses for the
first time
The market for initial public offerings
cooled in the mid-1980s before collapsing
after the stock market crash in 1987
NASDAQ Composite Index
VENTURE CAPITAL
THE HISTORY OF VENTURE CAPITAL
The late 1990s were a boom time for VC, they benefited from a
huge surge of interest in the Internet and other computer
technologies
Initial public offerings of stock for technology and other
growth companies were in abundance and venture firms were
reaping large returns
In the 2000s VC funding has spread widely through the medical
field
Many start-ups have become centered around early disease
detection and prevention
VENTURE CAPITAL
FAILURE
 Failure – Amp’D Mobile (2007)
Raised 360 million, crashed into bankruptcy
Lax on customer credit check
Had 90 days to make payment instead of 30 like Verizon
80,000 of company’s 175,000 customers were unable to
pay bills
Burned companies such as MTV Networks, Columbia
Capital Equity Partners, Highland Capital Partners
VENTURE CAPITAL
2010 Investments in Industry
In Millions of Dollars
Biotechnology
Software
IT services
413.9
321.3
245.8
205.7
175.2
171.1
152.4
141.4
133
93.8
45.3
37.9
11.3
Semiconductors
Networking and Equipment
Consumer Products and Service
Electronic/Instrumentation
Healthcare Services
Other
0
200
400
600
755.4
800
1,035
1000
1,296.10
1,282.20
1200
1400
[1]
VENTURE CAPITAL
WHY DO YOU NEED VENTURE CAPITAL?
New companies are often too small and lacking in
experience to raise the money needed to produce a new
product
Examples of Startup Costs:
Continuation of R&D
Employee Salaries and Benefits
Manufacturing and Production Costs
Patent Fees
Venture capitalists bring much needed capital to the
companies but also bring often needed financial expertise
VENTURE CAPITAL
WHY VENTURE CAPITAL OVER BANK LOAN?
Availability
Banks usually do not offer loans to startups without
strict provisions to reduce the risk
Venture capital is usually generated from a pool of
investors, which reduces the overall risk of the
investment
VENTURE CAPITAL
Customers
Public
Investors
Banks
Government
Grants
Friends &
Family
SOURCES
Angels
Venture
Capital
Corporate
Investment
VENTURE CAPITAL
Friends &
Family
• Members of your personal
network
• Have adequate means to
make an investment
Venture
Capital
• Professional investment
managers
Angels
• Experienced investors
using own wealth
Corporate
• Corporations make the
investment
VENTURE CAPITAL
Banks
• Commericial/State
institutes providing
financial services
• Loans and such
Public
Investors
• General public can invest
by buying shares of the
company
• For established companies
Gov Grants
• Department of Defense
Customers
• Customers make direct
investment in the R&D of
new products or services
VENTURE CAPITAL
Venture Capitalist
Corporate Investment
• Invest in companies with
potential for high return
• Raise money and put into
funds
• Funds vary in size ($50m
to $2b)
• Each fund has a specific
profile (eg. Medical devices)
& investment horizon (eg. 5
yrs)
• Able to povide multiple
rounds of funding & have
extensive networks of
contacts
• Made by large companies
for strategic & financial
reasons
• Two ways to provde funds:
• Purchase equity in
support of R&D or
licensing agreement
• Traditional venture
investments
VENTURE CAPITAL
Government Grants
• DoD gives $1b/yr to earlystage R&D
• Projects must serve DoD
need & have commercial
applications
• There are two programs:
SBIR and STTR
SBIR
• Small Business Innovation
Research
• Small technology
companies or Individual
innovators who form a
company
• Up to $850,000
STTR
• Small Business Technology
Transfer
• Small companies working
cooperatively with
researchers at universities &
other research institutions
• Up to $850,000
VENTURE CAPITAL
GET STARTED
 Be a people person
 Know your capital investors
 Be active about your managerial decisions
[2]
VENTURE CAPITAL
HOW TO OBTAIN VC?
 Ensure the investors your company/idea fits their
investment profile
 Research & find your target
Which partner of the firm should you speak to about
your idea
 Who has a history of supporting ideas or
companies similar to yours
Do:
 NOT Send a “cold” email
 Have someone introduce you (e.g. LinkedIn)
 Set up a meeting with the investors
ELEVATOR PITCH
Tailor speech
30 sec
Who are you speaking
to? Know your audience
make them want
to hear more
Potential Rewards
Better
How do investors get
their reward
What does your
idea/product fulfill
How much
How much capital
do you need
$$ Needs
Pick one Semi-Applicable Youtube Video for your
viewing pleasure:
1.)
http://www.youtube.com/watch?v=cd2rWeswwGw
2.)
http://www.youtube.com/watch?v=sYeup5zrZbs
3.)
http://www.youtube.com/watch?v=azRzqI3BJ2A
VENTURE CAPITAL
BUSINESS PLAN
 Once Elevator Pitch worked, business plan is
used to provide the detailed plan
How much you plan to make?
Where do you plan to make the products?
What is the cost of production?
What is already in the market & how you compare?
 Answer all the questions VCs have before
giving you their money
[2]
VENTURE CAPITAL
SOUCE OF FUNDS
ADVANTAGES
DISADVANATGES
Family and friends
• Least expensive funding source
• Flexible alternative for early-stage funding
• Limited expertise
• Do not understand level of inherent risk
• Not able to participate in subsequent
rounds of funding
Angels
• Moderately priced, early-stage funding source
• Take on considerable risk
• Exercise less control than venture capitalists
and corporate money
• Act more quickly than venture capitalists
• Limited expertise
• Not able to invest in subsequent rounds
• Negatively affect terms and level of control by
company’s perspective
• Multiple angels to meet funding needs
• Valuable experience to share with innovators
• Provide access to vast network of contacts
• Ablility to take on considerable risk
•Participate in multiple rounds of funding
• Exercise considerable control over venture’s
direction, management, and exit
• Require considerable share of ownership in
exchange for investment
• Expect high returns or other terms not
favorable to company
• Lead to meaningful product/project synergies
• Provide accesss to valuable resources
• Less expensive than venture capitalists funding
• Lend to young company’s credibility
• Provide company with a “built-in” exit strategy
• Limited value in return for building business
•Conflicts with corporate investors
•Issues with intellectual property ownership
•Limit value realized from exit stragety if
corporate investor has “right of first refusal”
Venture capitalists
Corporate investment
[2]
VENTURE CAPITAL
SOUCE OF FUNDS
Customers
Government grants
Banks
ADVANTAGES
DISADVANATGES
• Extremely inexpensive funding
• Potential for young company’s credibility
• Provide valuable market-based insights
revelant to product development
• Lead to conflicts if company seeks to sell
the innovation to customer’s competitor
• Customer seeks to limit way in which
innovation is marketed to match its best
interest
• Inexpensive funding
• Founders not require to part with any equity
in the company
• No influence over any business decisions
• Strengthen a young company’s credibility
• Highly competitive
• High expectations based on rigorousness of
research performed
• Lengthy funding review cycles
• Funding capped at $850,000 per project
• Access to funds usually does not require the
company to share ownership
• No influence over any business decisions
• Interest payments are tax deductibles
• Secured relatively quickly and used to help
bridge short-term financing gaps
• Business assets can be used as collateral
• Affect cash flow as regular payments of
principal and interest must be made
• Start-ups pay a premium on their loans
• Start-ups may have difficuilty getting loans if
no revenue or tradeable assests
[2]
VENTURE CAPITAL
ALTERNATIVE PATHWAYS
 Partnering
Two entities share responsibility for the development or
commercialization of an idea or invention
 Licensing
Transfer of an idea or invention from the innovator to a
licensee in exchange for ongoing royalties and/or other
payments
 Sale/Acquisition
Innovator chooses to sell an idea outright, completely
relinquishing control to acquirer
 Crowd-Funding
[2]
VENTURE CAPITAL
REFERENCES
[1] Berkeley Entrepreneurs Forum Shaking the MoneyTree presentation:
http://entrepreneurship.berkeley.edu/main/index.html
[2] Zenios, Makower, and Yock. Biodesign: The Processing of Innovating Medical
Technologies. Ann Arbor, Michigan: Edwards Brothers Inc., 2010.