Raising Venture Capital May 17, 2011 Vinit Nijhawan Executive-in-Residence [email protected].
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Transcript of Raising Venture Capital May 17, 2011 Vinit Nijhawan Executive-in-Residence [email protected].
Sources of Capital• Venture Capital
– Angel– Institutional VCs
• Government– SBIR (<500 people, $5B)
• Eleven departments participate: NIH, NSF, DoD, DoE, etc.• Two phases: $100K, $750K
– STTR (<500 people, $900M)• Five departments participate: NIH, NSF, DoD, DoE, NASA• Collaboration with universities, government labs• Two phases: $100K, $750K
– Massachusetts• Mass Life Sciences• MTDC• Mass Energy
What is Venture Capital?
Johannes Gutenberg, a goldsmith, had the idea of producing small, regular blocks of steel with letters on them to be used as mould to mass-produce letter blocks. However, it took many years before he convinced a businessman, Johann Fust, in 1450 to back his invention and loan him 1600 guilders. Source: The Economist, 31 December 1999.
Venture capital is one type of private equity investing and typically refers to equity investments made in young companies during their launch, early development or expansion.
Definition….
It is not new….
Launch velocity….
Began in US after WWII and took off in the 1980s driven by ICT. Then took off in Europe and Israel in 1990s and now is taking off in India and China.
US Venture Capital Invested
US - 2006– $25.7bn– 1446 transactions– $10.5m average investmentEurope - 2006– €4.1bn– 867 transactions– €14m average investment
NVCA
Am
ou
nt
Investe
d
($B
)N
um
ber o
f Deals
Investment on Track to Match Last YearDeal Flow and Equity into Venture-Backed Companies
Source: Dow Jones VentureSource
$6.4
$28.5$23.8
$32.5$34.0$31.0
$25.1$23.6$20.3$22.5
$36.8
$94.0
661
6348
3339
2479 2291 2461 26182834 3042 2939
26572874
$0
$25
$50
$75
$100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q'2011
0
1,000
2,000
3,000
4,000
5,000
6,000
Amount Invested ($B) Number of Deals
Healthcare Deal Flow Allocation Down Slightly in 2011 Deal Flow Allocation by Selected Groups (Annual)
% D
eal Flo
w A
llocati
on
Source: Dow Jones VentureSource
26% 24%27%13%
51%
34%34%50%
9%
17%18%10%
12%
20%17%26%
2% 5%4%<1%
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q'2011
Energy andUtilities
Business &FinancialServices
ConsumerServices
InformationTechnology
Healthcare
Northern California Companies Continue to Garner Most InvestmentRegional Investment Dollars in the United States 1Q’ 11
Source: Dow Jones VentureSource
Southern California
9%
Northern California
36%
Mid-Atlantic19%
All Other US5%
Pacific Northwest
3%
New England14%
South Central3%
South East7%
Midwest East4%
Working with Angels, VCs, Both?
• Individual “Angel” or “Private” Investor– Invests own money, gets full return– Typically industry veterans
• Venture Capitalists– Compensated on fees, profit share– Dedicated, institutional investor
• Angel Groups– Large networks of industry experts– Usually 2-3 with greatest skills lead + “bench”– Organized, institutional structure
Angel Groups Addressing Void Left by VC
Stage Pre-Seed Seed/Start-Up
Funding Gap between
$500,000 and $5,000,000, targeting average M&A and up
Early Later
Source Founders, Friends
and Family
Individual
Angels
Venture Funds
Investment
$25,000 to $100,000
$100,000 to $500,000
$5,000,000 and up(initial capital may be smaller,
but exit targets higher)
VC Firm Incentives
• >$250M in Fund– >$40M/Partner– >$10M/Investment– >$50M Liquidity/Deal, Exits >$500M
• Institutional LPs– Meticulously measure IRR– Next fund depends on top quartile performance
• From Company’s Perspective– Pro/con: 800lb Gorilla as your friend– Technical risk OK ($ can fix that);
Can’t Bring Market Risk (exit too small)– Return needs to justify $30-40M+ from syndication, multiple
rounds– “We Fund BIG Ideas….”
Angel Investor Incentives
• <$100M in Fund/Network– $10M/Partner or less– $500K-$3M Investment– $5M-20M Liquidity/Deal, Exits $50M-100M
• Institutional LPs, SBIC, Individuals– Maybe more flexibility in performance (non-ERISA $)– Maybe less, eg., SBIC program….
• From Company’s Perspective– Pro/con: good returns on average M&A transaction– Market risk OK; technical risk bad (can be bottomless pit)– Shallower pockets may be disincentive to pile on risk– “Who is going to buy you?...”
Submissions(~30 PlansPer Month)
Managing Director pre-
screens emailed
submissions.
Screening TeamReview
(5 – 10 PlansPer Month)
Screening team votes on
which companies to
invite to general
meeting.
General MeetingPresentations(1 – 3 PlansPer Month)
Managing Director polls members for
level of investment
interest in deals, recruits diligence
team, and facilitates
selection of deal lead to begin term
sheet negotiations.
Manage Investment
Board member represents
member interests and
seeks an attractive exit.
Deal lead closes
transaction and the sidecar
fund invests in companies that attract at least
$250K in investment
from at least 5 members.
Diligence & TermSheet Negotiations
(Coordinated byManaging Director
& Deal Lead)
Typical Deal Process (Angel)1-2 months
1 month 1-2 months 3-5 years
Submissions(~100 PlansPer Month)
Associate pre-screens
emailed submissions.
Associate Review
(20 – 30 PlansPer Month);
Lead & Secondary
Partner Review (3-5 per month)
Lead partner decides to invite to general
meeting.
General MeetingPresentations(1 – 2 PlansPer Month)
Partnership agrees to submit
term sheet to begin exclusive due diligence. Negotiate term
sheet
Manage Investment
Board member represents
member interests and
seeks an attractive exit.
Negotiate deal documents and
close
Diligence & Investment Term
Negotiations
Typical Deal Process (VC)2-3 months
1 month 2-3 months 3-5 years
Preferred Stock Deal Terms
•Liquidation Preferences
•Participating Preferred
•Cumulative Dividends
•Cash-Out Election on Sale
•Anti-Dilution Protection
•Class Voting/Veto Rights
•Board Composition