AIA2018 - Ravi Belani - Creating Funding Strategy, Company Valuation & Exit Strategy

Ravi Belani

@rbelani

AlchemistAccelerator.Com

Ravib@stanford.edu

January 2018

Venture Capital Overview:

Arab Innovation Academy

Funding Strategy, Company Valuation, & Exit Strategy

Navigating the VC-Founder Dance

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

Entreprneurship Lecturer at Stanford

ecorner.stanford.edu/

Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director

6 Years as a Venture Capitalist

Skype, Baidu, Hotmail, Tesla

Me: Twitch (Amazon), Pubmatic

Director, Alchemist: B2B-Focused Accelerator

AlchemistAccelerator.com

#1: Alchemist

#2: Ycombinator

#3: Techstars

#4: 500 Startups

PAG 4

Alchemist Tops CB Insights’ 2016 Rankings of Accelerators Based on Median Funding Levels

Source: https://www.cbinsights.com/blog/top-accelerators-follow-on-funding-rates/

Institutional Investors in Flagship Accelerator Program include:

Alchemist Investors

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SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

Cash is Oxygen

3 Sources of Cash: What are the Pros & Cons of Each?

Revenue (Customers)

Debt (Banks)

Equity (Venture Capitalists)

CrowdFunding

Donation Crowdfunding (JustGiving)

+ Social Impact Initiatives

Customer/ Reward Crowdfunding (Kickstarter)

+ Hardware, Consumer Goods

Debt / Lending Crowdfunding (Funding Circle)

+ Small Business Opportunities, Clear ROI

Equity Crowdfunding (Angellist, Microventures, Gust,

FundersClub, CircleUp, ICO’s)

+ Rounding Out Rounds

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

How VC’s Make Money

Carry

Management Fee

How much management fee does a VC make in this fund?

$500M Fund

Management Fee Consumers 25% of a Fund

$500M Fund $125M Mgmt Fee

• 2.5% Per Year For 10 Years

• Fund Committed after 3-4 Years

• 3 Funds Drawing Management Fee Down on in any given year

How VC’s Make Money

Carry

Management Fee

Case Study of a Young Fund: Kleiner Perkins I (1972)

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Fund Size$7.5M

# of Co’s17 @

Check Size$450K

Return$345M

46x

#

How much carry did the partners get?

VC Profit Share: Carry Calculation

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Fund Returns: $345M

- Fund Size: $ 7.5M-----------------------------------Fund Profit $337.5M

X Carry 20%-----------------------------------Carry $67.5M

Of Kleiner Perkins’ 17 Investments, 2 were responsible for 90% of returns

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VC’s want to return 1/3 of their fund with each investment

$500M Fund

# of Co’s30

#Big Winners1 out of 10

%

x =3 Big Winners in Each Portfolio

Can Make Money Several Ways: Two Case Studies

Google: Rising Star

Hotmail: Contrarian Bet

Optimal Ownership is typically between 20 – 40 %

VC Ownership

VCReturn

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

PRIMARY TERMS

Pre-Money Valuation

Option Pool

Liquidation Preferences

Anti-Dilution

Valuations are a function of fundraising dynamics NOT instrinsics

Driven by the ownership needs of the funds you raise from and the cash needs of the company

Post–Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund

Pre-Money Valuation = Post-Money – Cash Raised

Larger Funds are Much More Sensitive about Ownership Needs than Cash Needs!

Series A : Raising off of the IDEASeries B: Raising off of RESULTS

Trick is balancing the Series A valuation to set you up so you can raise off of Results in the Series B at a markup (ideally 3x!)

What’s the post? What’s the pre?

• $2M given for 25% of the company

• $3M given for 25% of the company

• $2M given for 20% of the company

• $1M given for 40% of the company

Post–Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund

Pre–Money =Post-Money – Cash Invested

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

WHAT MAKES A SUCCESSFUL NEGOTIATION?

NEGOTIATIONS 101: DOES A ZOPA EXIST?

BATNA: Best Alternative to a Negotiated Agreement

ZOPA: Zone of Possible Agreement

Alternative to Sell: $1 Alternative to Buy: $8

Capture Value: How do you know how big the ZOPA is?

Alternative to Sell: $1 Alternative to Buy: $8

ZOPA

Negotiations Generate Value in 2 Phases

Create Value: Focus on Interests, Not Positions

Capture Value: Understand the Other Person’s BATNA first

Create Value

Create Value

Capture Value: Focus on the Other Person’s BATNA First

Alternative to Sell: $1 Alternative to Buy: $8

ZOPA

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

Negotiation Exercise: Count Off!

Negotiation Exercise: Go Here (Don’t Read the Other)

http://bit.ly/EIAFounder1

2 http://bit.ly/EIAVC

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

VALUATION IS JUST ONE TERM

Pre-Money Valuation

Option Pool

Liquidation Preferences

Board Structure

Employee Pool

• Employee Pools typically come out of the PRE-MONEY – that is YOUR Total Dilution is the NEW INVESTOR’s money PLUS the Employee Pool

• Can always expand the employee pool later – and when you do, all will be diluted equally. Try to minimize the employee pool to what’s absolutely needed.

• Exercise: You own 40% of a company. A VC wants to put in $2m for 25% of your company, and requires a 20% employee pool PRE-MONEY.

• What’s the Post-Money Valuation?• What percent of the company do you own afterwards?

VALUATION IS JUST ONE TERM

Pre-Money Valuation

Option Pool

Liquidation Preferences

Board Structure

Board Composition & CEO Role

How many, and what’s the split between preferred, common, and independents?

When is the independent important?

How do you fire a board member?

VALUATION IS JUST ONE TERM

Pre-Money Valuation

Option Pool

Liquidation Preferences

Board Structure

Liquidation Preferences

Why does Preferred Exist?

Check for:• Multiples?• Participating vs Non- participating• Senior or Pari-Passu

What’s this?

Liquidation Preferences

Why does Preferred Exist?

Check for:• Multiples?• Participating vs Non- participating• Senior or Pari-Passu

What’s this?

Liquidation Rights

Exit Value

Payout

Draw the payouts to:

• Investors• Founders

Assuming a

•$3.5m exit•$10.5m exit•$20m exit•$100m exit

TERMS: OTHER PRIMARY TERMS

EXIT STRATEGY

SOURCES OF CASH

AGENDA

INTRODUCTION

HOW VC’s MAKE MONEY

TERMS: VALUATIONS

NEGOTIATIONS 101

EXERCISE

Exits

• Go Public• Be Acquired• Remain an Ongoing Concern• Go Bankrupt

Billion-Dollar Unicorns

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50

51

Exit Valuations

Create Value: Revenue, Growth, Margins

Capture Value: Drive a good negotiation

Create Value

Capture Value: Market Timing

Capture Value: Negotiations

Increasing the # of Suitors Increases Your BATNA

FINAL THOUGHTS

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The future will be far more surprising than most observers realize. – Ray Kurzweil

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10 Years – Variability to NASDAQ > 100%

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10 Years – Variability to NASDAQ > 150%

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10 Years – Variability to NASDAQ > 300%

60

10 Years – Variability to NASDAQ > 400%

61

10 Years – Variability to NASDAQ > 1000%

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FOUNDERS ARE HEROES.They think non-linearly. Angels: Your Job is to FIND THEM.

Thank You!

Ravi Belani

@rbelani

Ravi Belani203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860

Ravi@alchemistaccelerator.com