Venture Capital

Fundraising Methodology
October 28, 2009
What Is Venture Capital?
 What Is Venture Capital?
Private equity class specialized in funding and building early
stage, high growth potential enterprises
 Typical VC Fund Structure
• General Partners invest capital on behalf of
Limited Partners
– LPs include endowments, pension funds, charities,
corporations, individuals, and fund of funds
– GP contributes personal capital as well
– GP earns 2% annual management fees & 20%
carried interest, i.e., share of profits
• Capital called as needed, with primary investing
done in first 5 yrs of 10 yr fund cycle
• Quality fund returns 3x capital, or 18-20% IRR
– 1/3 of deals will likely fail, 1/3 will return amount
invested, and 1/3 will drive majority of returns
 Where Do VCs Invest?

Informati
on
Technolo
gy

Life
Sciences

Clean
Technolo
gy
 Fund Example: SoftBank
Capital
Focused on early stage high growth technology based businesses
benefiting from the rapid deployment and adoption of broadband
and mobile technologies

Experienced
Team
(5 former
CEOs)

Select
Historical
Investments

Select
Current
Investments
Industry Investment Trends

Source: MoneyTree Report – NVCA/PWC/Thomson Reuters

 Renewable Energy
• Renewables dominating “Green”
VC investing and expected to
grow with support of Obama
administration
• Billions of dollars in loans and
grants available for R&D for
everything from new battery
technologies to more efficient
use of fossil fuels
• VC challenged by capital
requirements for large green
infrastructure deals

Source: FastCompany/Chubby Brain

Fundraising Process

You set the valuation.

I’ll set the terms.*

*Don’t be fooled by the cover price

Why Raise Venture Capital?
• Guidance & Support
• Board participants; Interim executives
• Product management, business development and
financial planning support
• Access
• Industry contacts
• Leverage portfolio
• Credibility
• Stamp of approval with customers, partners and
vendors
• Cash
• But at a high cost of capital, so Guidance, Access
and Credibility should justify that cost
 Typical Company Profile
• Team
• Ranges from a single, 1st -time entrepreneur to a full
team of seasoned entrepreneurs
• Stage of Development
• Ranges from pre-revenue to approaching profitability
• VCs sit between angel and growth/buyout investors,
though some funds cross over into these stages
• Size of Round
• Definitions vary, normalized range from $2M-$15M
• Deals frequently syndicated between multiple funds to
strengthen board and diversify risk
 Typical Deal Timeline
• Average firm reviews 1000+
deals per year
• 99% of deals turned down
• Promising deals present to
partnership 2-6 weeks post
initial meeting
• Partnership approved deals
receive term sheet
• Accepted term sheets
followed by 2-6 weeks of final
diligence and legal
documentation
• Average firm, in normal
market, closes 8-12 new
investments/yr

Note: Graphic via NVCA; Industry statistics are approximations

 Deal Evaluation
Focus varies by firm, but key elements include:
• Concept
– What is the product or service?
– Why will customers buy it?
• Opportunity
– What is the market size and penetration strategy?
– What is the competitive landscape?
• Team
– Can they execute on development, sales and support?
 Financial Projections
• Focus on key revenue and expense drivers
– Sensitivities important given model immaturity
– Viability of margins long term
• How much additional capital required?
– What is the potential dilution from later rounds?
• Focus on model details varies based on stage
– Seed stage may not yield revenue for 18-24 mos.
– Later stage deals may consider debt financing, requiring covenant
maintenance
 Term Sheet
Price
•
Pre vs. Post $ Valuation
–
Option Pool implications
–
Liquidation Preference
•
Liquidation: Sale of company as opposed to IPO
–
Multiples and Dividends
–
Participation: Full, Capped and Non-Participating
–
Stacked vs. pari passu
–
Impact on management ownership and resulting motivation
–

Board Configuration
•
Option Pool: Pre vs. Post $ Dilution
•
Anti-Dilution Rights: Weighted Avg. thru Full Ratchet
•
Pro Rata Rights for future rounds
•
Protective Provisions
•
Term Sheet summary at www.AsktheVC.com
•
 Term Sheet (cont’d)
• Board of Directors
– Investor Seats and Observers
– Founder and Independent Seats
• Protective Provisions
– Veto rights for overall preferreds or by class
– On changing rights of preferred class, selling existing
or raising additional shares, change of control, board
composition, raising debt
• Anti-Dilution
– Full Ratchet, Broad or Narrow-Based Wghtd Avg
• See term sheet series at www.AsktheVC.com
 Legal Documentation
• Stock Purchase Agreement
– Price and # of shares sold, reps & warranties
• Certificate of Incorporation (a/k/a Charter)
– Establishes rights, preferences, privileges and
restrictions of each class and series of stock
• Investor Rights Agreement
– Information, registration, and pre-emptive rights
• Voting Agreement
– Board composition, drag-along rights
• See www.NVCA.org for these and other template
docs
 Subsequent Financing
• Bridge funding
– Discount into next round or warrants
• External rounds
– Up rounds vs. Recaps
• Internal rounds
– Potential pay to play when syndicate
broken
• Venture Debt
 Exit Strategy
• Acquisition
– Strategic buyers
– Financial buyers for high cash flow
business
• IPO
– Market appetite for venture-backed
deals
– Sarbanes Oxley
 www.SoftBank.com

@joevc - www.twitter.com/joevc

www.JoeMedved.com