Getting Money from VCs and Angels

Thomas J. Toy

PacRim Venture Partners

January 27, 2005

Introduction

January 27, 2005 3

Introducing PacRim Venture Partners

Silicon Valley Venture Capital Firm founded in 1999

Invest in early stage Information Technology companies generally in Silicon Valley– Focus areas: Telecom, Software including internet, semiconductor

food chain

Always invest via syndicates of venture capital firms

Willing to be lead investor or active participant

Look to provide value-add to accelerate growth

January 27, 2005 4

Introducing Tom Toy

PacRim Venture Partners: Co-founder and Managing Director (1999-present)

Technology Funding: Partner and Managing Director of Corporate Finance (1987-1999)

Bank of America: Vice President in Corporate Banking (1979-1987)

Northwestern University: B.A., M.M. (MBA)

Boards of Directors: UTStarcom (Nasdaq: UTSI), White Electronic Designs (Nasdaq: WEDC), several private companies

San Francisco State University MBA Lecturer; Myelin Repair Foundation Business Advisory Board; San Francisco Chamber of Commerce The Job Forum Regular Panelist

The Fundraising Dance

January 27, 2005 6

The Start-Up’s Financial Food Chain

Boot Strap

Angel Investors

Venture Capital

Venture Debt

Corporate Partners

Commercial Bank Debt

Public Markets

Mergers & Acquisitions

January 27, 2005 7

The Fundraising Dance

The business plan

Targeting the “right” investors

Finding an “In”

Due diligence

The role of syndicates

Termsheets, negotiations, documentation

Life after the investment

January 27, 2005 8

The Business Plan

Business plan: 25-40 written pages (plus financials); full description about the business– Executive Summary: one page summary with complete information

about the company – Management– Market/sales strategy/competition– Technology/Product– Financials– Any regulatory issues

Two purposes– Strategic road map– Marketing document

Be focused

Lots of resources to assist

January 27, 2005 9

The “Venture Funnel” Reality

First Contact: 100 Companies

Initial Diligence: 30 Companies

Due Diligence: 5 Companies

1 Company Funded

Commitment: 2 Companies

January 27, 2005 10

Angel Investors

Given the “Venture Funnel Reality”, try Angels first……..

Angels are a huge segment in the U.S.

So who are Angels?– Everyone that you know—friends, family, business friends, friends

of friends, friends of friends of friends, etc…..

How do you find the Angels?– Networking, networking, networking

Advantages and disadvantages with Angels

January 27, 2005 11

Targeting the “Right” VCs

Once you decide that you want venture capital money……..

Target the right VCs so that you don’t waste time and resources

VCs have specific focuses; – Stage– Industry– Geography– Funding needs– Leader or follower– Quality of money– Sufficiency of money– A “spiritual match”

January 27, 2005 12

Establishing First Contact: The More Personal, The Better

Established funding sources receive many, many unsolicited contacts

As a quick way to prioritize, personal introductions are sorted to the top– Other VCs– Other portfolio companies– Industry friends– Bankers, lawyers, accountants

In Silicon Valley, unsolicited contacts are often ignored

In other environments, they may be more welcome– Smaller business communities– Very specific niches

You get one “shot”; make it count!

January 27, 2005 13

The “Elevator Pitch”

First contact often includes an “elevator pitch” – a brief description of the concept or idea

The elevator pitch should contain no more than 3 sentences and some supporting information

It helps orient the investor and quickly sort out ideas that may be of interest

Elevator pitch example: “Epinions.com is a web site that helps people make buying decisions. The content is provided by consumers themselves and experts as they contribute reviews. When consumers actually purchase, Epinions receives a fee from the merchant for referring the sale. The team includes several Netscape founders and an early Yahoo employee. The site is launched, and we’ve got about 1 million visitors a month.”

January 27, 2005 14

The Presentation Gives the Entrepreneur’s View

The presentation should be 15 – 30 powerpoint slides describing the idea and the company

It should contain at a high level all of the information the VC needs to know to make an investment– Concept– Team– Market problem & market size– Product/solution– Competitors/positioning– Financials– Financial needs

January 27, 2005 15

The Next Step: VC’s Initial (Quick) Diligence

The investor gets up to speed on the market– The VC’s personal knowledge about the sector– Friends who may know the market– Google

Perhaps a few quick checks on the management team– Any overlaps are helpful

Perhaps a short discussion with the VC’s partners

Goal: come to a quick decision on whether it is a real opportunity ASSUMING everything the entrepreneur says checks out

January 27, 2005 16

Due Diligence: Categories

Once the VC gets truly interested, due diligence begins……..

1. Presentation/business plan

2. Management team

3. Market/competitors/customer references

4. Technology/Product

5. Investors

6. Financials/return calculations

7. Any regulatory or legal issues

8. Three other elements: credibility factors, points of excellence, common sense

January 27, 2005 17

Due Diligence: Checking All Facts

Check out the facts presented by the entrepreneur– Checking trustworthiness of entrepreneur– Any mis-statement, no matter how small, may kill a deal at this

stage

Check out opinions held by the entrepreneur

Find information the entrepreneur may/may not know– Other companies being funded in the space?– Shifts in strategy on the part of big players?

Goal: find any knowable reasons why this may not be a good investment

January 27, 2005 18

The Role of Venture Syndicates

Why desired?

Build in some extra time for forming the syndicate

January 27, 2005 19

Termsheets, Negotiations, Documentation

Be realistic

Talk with/work with some experienced people (such as Pillsbury Winthrop)

January 27, 2005 20

Life after the Investment

What you get from VCs:– Money– Active involvement– Value-add

The entrepreneur needs to have done his/her due diligence to know what he/she is getting

Thank You!

Discussion

Appendix:

Due Diligence

January 27, 2005 24

Management Team Due Diligence

Resumes for each key member of the management team

At least 3 references; investors are always good references for other investors

Expect the investor to do further checking beyond the provided references

The investor will likely want to spend enough time with the team so as to “know” them

Goals– Find proven ability to execute– Find proven credibility (full disclosure on all facts, good and bad)– Find good contacts & network– Find no credibility showstoppers; most entrepreneurs are GREAT at

presenting as if they have more ability than they actually do

January 27, 2005 25

Market/Competitors Due Diligence

Analyst reports & calculations of addressable market size & growth

Customer, analyst, and market expert interviews to understand market drivers & success criteria

Key questions– What’s changing to allow a new entrant/technology?– Who else is competing in the market?– What makes this company better/different than the others?

Goals– Believe the company has a differentiated

technology/product/service with a good chance of achieving the scale necessary for a good exit

– Believe that it is possible to exit the investment profitably (e.g., multiple potential buyers, attractive public comparables

January 27, 2005 26

Customer References Due Diligence

Sales pipeline (if selling to companies or through distributors)

Key customer statistics & trends (if selling direct or via own web site)

Customer references – be sensitive to how it may impact your business– Actual buyers– Potential buyers– Potential customer contacts you’ve used for market research

Goal: Verify that customers…– …are where the company claims they are in the pipeline– …are willing to pay enough for the service/product– …put that product/service at the top of their list– …are representative of the target market– …are satisfied with the company’s performance

January 27, 2005 27

Technology/Product Due Diligence

Review of IP (patents, trade secrets) or product rights

Technical review by an expert in the area (e.g., senior software person to review an enterprise software, chip designer to review new chip designs, etc.)

Goals– Ensure the technology or product can do what is claimed; verify

“secret sauce”– Ensure that good development standards & practices are in place so

that technology or product development can scale with company– Test expertise of key technical/product team members

January 27, 2005 28

Financials/Return Calculation Due Diligence Financials should be full financials for 5 years

– Costs & Revenues – Income statement & balance sheet

All assumptions should be carefully documented– No, we don’t really expect year 5 to be accurate…– …but the assumptions you use help us understand the business

The investor will create its own return calculation based on valuation comparables

Goals– IRR should be over 70% a year for early, 50% for mid, and 30% for

late stage companies– Financials should be fully thought out and match financials from

other companies in the industry– There should be no hidden liabilities or claims on the company

(e.g., don’t want to finance debt repayment!)

January 27, 2005 29

Company Structure Due Diligence

Complete cap table – all investors, their ownership, and all outstanding options/warrants

Phone calls with key past/present/future investors to ensure:– Compatible investment goals – Willingness for future support– Understanding of relationships and skills of the management team– Understanding of ownership structure (e.g., differing interests for

different investors or series of stock that could potentially damage your investment)

Organization chart review

January 27, 2005 30

Legal Due Diligence

Review of past legal documents (contracts, financing, etc.) for potential problems

Involve lawyers in generating (or review of) financing documents & reviewing patent claims

Goals– Ensure both sides understand & agree on mutually acceptable terms– Avoid any hidden “gotchas” in existing legal documents