Starting Up Introduction to venture Capital by Anand Lun

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An Introduction To Venture Capital:

An Introduction To Venture Capital Anand Lunia Executive Director & CFO, SEEDfund [email protected]

What is Venture Capital:

What is Venture Capital

Private Equity & Venture Capital:

Private Equity & Venture Capital “ Private Equity ” means capital to companies not quoted on a stock market ,in exchange for an equity participation. Venture Capital (VC) is a sub-class of Private Equity characterized by investments made for the purpose of developing, launching, and expanding new products or service offerings.

How VC’s work:

How VC’s work Investor Investor Investor VC fund Investor Startup Startup Startup

Capital Lifecycle:

Capital Lifecycle Seed (< € 1 mil) Early Stages (€ 1 - 10 mil) Expansion/ (€ 10+ mil) development Angels Incubators Accelerators Venture Capital Private Equity & Merchant Banks

What Venture Capitalists do ...:

What Venture Capitalists do ... Sift through thousands of (good and bad) investment propositions

What Venture Capitalists do ...:

What Venture Capitalists do ... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them in exchange for private equity (usually a minority stake) structure the deal

What Venture Capitalists do ...:

What Venture Capitalists do ... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them Support the entrepreneurs in succeeding. E.g.: providing financial advice in headhunting and setting up advisory boards in contacting customers, channels, … in steering and positioning the company in managing PRs activities in managing IP and legal issues

What Venture Capitalists do ...:

What Venture Capitalists do ... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them Support the entrepreneurs in succeeding. E.g.: Look after value creation further round of financing merger and acquisition, IPO, …

Attributes of a Great VC:

Attributes of a Great VC • Bets on people not trends • Driven by the big idea • Looking for a ‘Winner’ • Not afraid of failure • Understand how to manage a portfolio of risk • Serves as a fantastic coach • Does her best work outside of the board room • Not waiting for validation from other VCs

Deciding whom to give money:

Deciding whom to give money

In the VC’s Mind:

In the VC’s Mind • Is this the right team? • What’s the entrepreneur's motivation? • Is this a billion dollar opportunity? • Is it a game changer? • How competitive is the space? • How defensible is the product? • How much is this thing going to take? • How long to maximize value and exit?

In the VC’s mind:

In the VC’s mind IRR (Internal Rate of Return) Company’s Current and Future Valuation Comparables (P/E,P/S,…), “Number of”, DCF, … What’s The Best Strategy To Create Value Which are the achievable milestones and what’s the financing needed ? When is the break-even expected ? With which margins and revenues. Exit Strategy Trade sale, IPO, N th +1 round of financing, .. Minimizing Risks Diluting the investment Liquidation Preference rights

Stages of Investment:

Stages of Investment

Stage v/s Return:

Stage v/s Return

Assessing the Entrepreneur:

Assessing the Entrepreneur • Understanding motivations • Determining commitment level and willingness to sacrifice • Gauging ego • Appetite for risk • Domain expertise • Leadership abilities and vision

Assessing Portfolio Risk:

Assessing Portfolio Risk

Why 10x?:

Why 10x? The “Portfolio Effect” Out of Ten Start-ups Funded 2 successes at 10x or better 5 ‘OK’ returns at 2x to 5x 3 write-offs, total loss of invested money Venture Capital is fundamentally an institutionalized form of aiming for Outliers!

Which VC to go with?:

Which VC to go with?

Most Appreciated VC Contributions:

Most Appreciated VC Contributions Financial Advice Corporate Strategy & Direction Sounding board for ideas Challenging status quo Contacts or market information Management recruitment Money !!!! Source: “The Economic Impact of Venture Capital in Europe” (EVCA and Coopers & Lybrand)

What to look for in a VC:

What to look for in a VC People you LIKE ! Trustworthy & Collaborative Can bring value, not money only ! Do not have to be experts in the sector but have to understand the business. Good network of contacts. Ask for references

What VCs are Not Good at:

What VCs are Not Good at • Long term research investments • Sustainability • Evolutionary development • Asset maximization • Billion $ capital requirements

Want to raise VC money?:

Want to raise VC money?

The Financing Lifecycle:

The Financing Lifecycle Approach Elevator’s Pitch and Info Memo Presentation Business plan Meetings Negotiation Term Sheet (or Letter of Intent) Verification and Validation Due diligence Closing & Financing Value Creation Exit

The Business Plan:

The Business Plan A Product/Service description Pros and cons of the solution Market needs it satisfies Barriers to Competition Business Model Market Analysis (strategic and tactical ) Competitors Execution Plan Marketing and Sales Plan Research and Development Plan Operations Plan Team Financials Valuation Model & Placement Terms Income Statement, Balance Sheet & Cash Flow 3 years minimum, quarterly breakdown 1st year in monthly breakdown

The Business Plan -MYTH:

The Business Plan -MYTH + + + = Marine Lines

The Term Sheet:

The Term Sheet The parties Securities to be issued Amount of financing & disbursement schedule Pre-financing valuation Option plan & earn-out Use of proceeds Liquidation Preference Protective Provisions, Voting Rights and BoD participation Anti-dilution Lock-ups Tag along and drag along Exclusivity Reporting ...

Board Seats and Reserved Matters:

Board Seats and Reserved Matters Corporate boards: Not involved in day-to-day operations Hold extreme control in major corporate events (sale, mergers, acquisitions, IPOs, bankruptcy) Lead VC in each round takes seat(s) Reserved matters (veto or approval): Any sale, acquisition, merger, liquidation Budget approval Executive removal/appointment Strategic or business plan changes

Other Typical VC Rights:

Other Typical VC Rights Right of first refusal on sale of shares Tag-along rights : follow founder sale on pro rata basis Drag-along rights: force sale of company Liquidation preference : multiple of investment No-compete conditions on founders Right to participate in subsequent rounds (usually follow-on) Later VC rights often supercede earlier Anti-Dilution Protection Recompute VC shares based on subsequent “down round” so that issuing more shares does not “dilute” the value of VC’s holding

Trends in VC investing:

Trends in VC investing

What’s Going to be Hot:

What’s Going to be Hot • Virtualization • Mobility services • Location based services • Enterprise services & software • Internet gaming and entertainment • Gen Y lifestyle products & services

Thank You:

Thank You

Slide 33:

Enterprising India 2011, - The largest & most exciting jugaad ( unconference ) by TiE in India scheduled on 4-5 March, 2011 at Mumbai. Visit us at http://summit.enterprising.in/