1. Venture Capital How to Sell Your Soul for a Buck

2. VC Characteristics

Usually early-stage equity or equity-linked financing

Involves high risk

Lacks liquidity or marketability

Returns are primarily from capital gains

Provided by patient investors - who may give value-added advice

3. 9 Years of VC Funding Source: National Venture Capital Association $10,993 $4.46 2464 1996 $21,004 $7.31 2873 2004 $21,579 $7.09 3042 2002 $18,911 $6.69 2825 2003 $40,798 $9.17 4451 2001 $104,827 $13.38 7832 2000 $53,580 $9.92 5403 1999 $20,900 $5.88 3557 1998 $14,646 $4.75 3084 1997 Total $ Avg/Deal Deals Year 4. Venture-Backed IPOs Performance http:// www.ventureeconomics.com/vec/news_ve/2005VEpress/VEpress01_04_06.pdf 5. What do VCs 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 Entrepreneurs Guide to Stock, Finance, and Contracts - pg 99

6. What do VCs Want?

5X or better capital growth in 5 - 10 yrs.

25% annual capital gains at a minimum

Eventual liquidity (3 - 5 years)

Excitement!

7. What do VCs Get? Actual performance of venture capital and private equity funds http:// www.nvca.org/pdf/Performanceq32005final.pdf 8. What Kind of Company?

At least $10M Revenue in 5 years

At least 20%/Yr Revenue Growth

At least 15% pretax profit margin

9. Four Essential Questions for the Business Plan

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

10. Types of Ventures

Life-Style Ventures

• 5 Yr Revenue projections < $10 M

• Started by people with life-style motives

• 90% of all startups

• Zerointerest to venture capitalists

11. Types of Ventures

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

12. Types of Ventures

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

13. Types of Ventures

Proprietary Technology

• You own something way cool

• VCs are very interested

Execution Play

• You are trying to do something better than anyone else.

• VCs are not very interested

14. Types of VCs

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

15. Types of VCs

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 youve found 5 or 10

16. How to Find an Angel

Look close to home

Check civic and charitable organizations

Check for private pilots

Check for expensive hot cars

Use gatekeepers (lawyers, accountants)

Check other startups

17. How to Court an Angel

Show them a great business plan

Kiss their %!!

Ask them for advice (Beware of Micromanagers)

Act like you have done your homework

Dont act like you know everything

ActEXCITED!

18. Types of Financing

Bootstrap Financing

• 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 financedsolelyby these methods.

19. Types of Financing

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

20. Types of Financing

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

21. Types of Financing

Bridge Financing

• May be needed between stages

• Usually used before going public

• Meant to be repaid from the next round of financing

22. Cost of Venture Capital 23. Capital Gain/ROI Conversion A 7-fold increase in the value of the investment in 5 years is a 48% annualized rate of return on equity. 24. Reasons for Rejection

Lack of confidence in management

Unsatisfactory risk/reward ratio

Absence of a well-defined business plan

Unfamiliarity with products or markets

Too much wishful thinking

25. Too Much Wishful Thinking

Investors expect to bear risk.

Investors expect YOU to know how much risk they will bear and to TELL them.

They need to believe that YOU understand the risk and will be able to MANAGE it.

26. Dont Forget Partnering

Companies cooperate for common goals

Usually involves cost/revenue sharing

May involve equity stake

May lead to eventual buyout

27. Sources of Information

Garage.com

• www.garage.com

• Pairs high-tech entrepreneurs with seed financing sources.

28. Sources of Information

vFinance.com

• www.vfinance.com

• List of 1800 VC firms, database of 23,000 angel investors

National Venture Capital Association

• www.nvca.org

• Lots of info for and about VCs