Vc Intro Seedfund Iimc

QUARTERLY REPORT, APR-JUN 2007

An Introduction To Venture Capital

Anand LuniaExecutive Director & CFO,

SEEDfundanand@seedfund.in

QUARTERLY REPORT, APR-JUN 2007

What is 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

Investor

Investor

Investor

VCfund

Investor

Startup

Startup

Startup

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 ...• Sift through thousands of (good and bad) investment

propositions

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 ...• 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 ...• 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

• 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

QUARTERLY REPORT, APR-JUN 2007

Deciding whom to give money

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• 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, Nth+1 round of financing, ..

• Minimizing Risks– Diluting the investment– Liquidation Preference rights

Stages of Investment

Stage v/s Return

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

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!

QUARTERLY REPORT, APR-JUN 2007

Which VC to go with?

Most Appreciated VC Contributions• Financial Advice • Corporate Strategy & Direction • Sounding board for ideas • Challenging status quo • Contacts or market information • Management recruitment • Money !!!! S

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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

• Long term research investments• Sustainability• Evolutionary development• Asset maximization• Billion $ capital requirements

QUARTERLY REPORT, APR-JUN 2007

Want to raise VC money?

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• 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

+ + + =Marine Lines

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

• 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

• 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

QUARTERLY REPORT, APR-JUN 2007

Trends in VC investing

What’s Going to be Hot

• Virtualization• Mobility services• Location based services• Enterprise services & software• Internet gaming and entertainment• Gen Y lifestyle products & services

QUARTERLY REPORT, APR-JUN 2007

Thank You