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2010 Innotech VC Pitch
By Roydean Osman, May 2010
Highlights
1. Funding ECO System
2. Arts & Craft of Valuation
3. Venture Capital Evaluation Process
4. Preparing for VC Elavator Pitch!
Highlights
Interactive Session / Q&As
Highlights - Key Take Aways
Highlights methodologies used by venture capitalists and professional investors to
estimate the value of a company
Understanding of how equity proportions are allocated to investors
Analyzing a startup financing and utilization requirement
Benefits of partnering with VCs:
O are active investors and bring more to the deal than just money,
o spend a large amount of time,
o reputation capital,
o access to skilled managers,
o industry contacts, network,
o and other resources.
Basic understanding of how to position your business to a VC.
Preparation for a VC elevator pitch!
Funding ECO System
Matu
rity
Exp
an
sio
n
Time
Growth
& Profit
Fu
nd
ing
Ne
ed
s
Point
Zero
Seed
Pre
Seed
Gro
wth
Other Grants,
SME Loans &
Incubators,
Government
Incentives, Angels
& Corp Investors
Project Financiers,
Commercial Banks,
Venture Capitals,
Private Equity, Credit
Guarantee Corporation,
Leasing & Factoring
Providers, Govt. Agencies
MDEC
Institutional &
Foreign Investors,
Public Funds,
Merger &
Acquisitions,
Merchant BanksCradle
Funding ECO System R
isks
Capital
Innovation
ProcessIdeas Invention Incubation Start-Up Growth Liquidity
Venture Capital Funds
Arts & Craft of Valuation
Differences between the entrepreneur‘s/ private investor‘s finance and
corporate finance
Entrepreneur‘s / Private Investor‘s Finance
More volatile
Imperfect
Less accessible than corporate capital markets
Obtain source of capital differently
Companies are younger, more dynamic
Environment are more rapidly changing and uncertain
Liquidity & timing are everything
Corporate Finance
Arena of public companies compete in well-established capital
markets
Have access almost to everything
Arts & Craft of Valuation
In the VC eyes, determination of a company‘s value is elusive and it‘s more
arts than science
So, what‘s a start-up company worth ?
It all depends!
Very imperfect market capitalization unlike public companies
where market capitalization is readily determined.
Entrepreneurial valuation are cash, time and risk.
Arts & Craft of Valuation
Some Valuation Methodologies Used by Investors
Net Present Value
Comparables
Real Options
Turkish Bazaar
Adjusted Present Value
First Chicago Method
DCF
Golden Handcuff
Venture Capital Method
Venture Capital Evaluation ProcessIndustry Structure & Analysis
Buy Side : Private Equity, Venture Capital, Angels,
High Net Worth, Investment Bank, Institution
Industry & Market
Sector Players
Company Insight
Mg mtT eam
S trong Org .
S truc t.
C learE xit
S trateg y
S trong Value
P ropos ition
S oundOps .P lan
S oundMktg .P lan
S tg c .R oapMap
P ric ingModel
T arg etMarket
B iz .Model
S uff.F unding
CC
oo
mm
pp
ee
tt
ii
tt
ii
vv
ee
AA
dd
vv
aa
nn
tt
aa
gg
ee
JJ
VV
CC
oo
ss
BB
uu
ss
ii
nn
ee
ss
ss
Financial Financial
ReturnsReturns
Knowledge Knowledge
TransferTransfer
EconomyEconomy
Of Of
ScalesScales
ShareholdersShareholders
ValueValue
ScalabilityScalability
Due Diligence
Business Plan
Venture Capital Evaluation ProcessFirst Hand Assessment
VC
Check
Points
Market Attractiveness :
• Size of Market
• Market Need
• Market Growth Potential
• Access To Market
Product Differentiation :
• Uniqueness of Product
• Technical Skills
• Profit Margins
• Patentability of Product
Managerial Capabilities :
• Management Skills
• Marketing Skills
• Financial Skills
• References of Entrepreneurs
Resistance to Environmental
Threat:
•Protection from Competition
• Protection of Obsolescence
• Protection against Downside
Risk
• Resistance to Economic
Cycles
EX
PE
CT
ED
RE
TU
RN
PE
RC
IEV
ED
RIS
K
Venture Capital Evaluation ProcessTo Do List
List the most important points about your company.
Strong management team.
Patents and unique technology or model.
Use of Proceeds
Attractiveness of the venture for investment.
Market trends, market growth rates.
Size of the target market.
Venture Capital Evaluation ProcessThe Investment Process
Biz Plans Kicks-In
Products /ServicesConcepts/IdeasAnalysis
Entrepreneur Analysis
Business/ VentureAnalysis
ConditionalTermsheet
Approval
Biz PlansSource Internally /Externally
•This is a go/no go stage•Fit into VC investment criteria?•Initial Market/Value Chain Analysis•Competitive Technology Analysis•Value Proposition?
• Who are they?
• What background?•Credentials?•Do they have previous operating & profit responsibility?• Depth of business venture industry knowledge•Characteristic?
• Vision, Mission of Company?• Core business?• Biz Model?• What is the go to market strategy ?• Financial Forecast•Fund Utilization
• Deal Structure negotiations• Deal instruments –grant / equity / debt • Tailoring high impact business milestones with fund disbursement
•Proposed to invest and to obtain Investment Committee Approval
Deal Sources
Due DiligenceDeal Terms
Investment Decision & Conclusion
Co
mm
ercializatio
n &
M
arket Entry
Go/No-GoScreening Evaluation Continues
Venture Capital Evaluation ProcessWhat are you worth????
VC Cash
Leadership
(CEO)
Implementation
(CMO, CTO,
CFO)
Idea
Idea has limited value
Ability to implement project
is most important
Venture Capital Evaluation ProcessNegotiate with VCs !!!!
$
Com
pany V
alu
e
VC Maximum Value
Entrepreneur Minimum Value
Negotiating Space
PE Multiples
Seed
Early
Expansion
Mezzanine
1 to 2x
2 to 3x
4 to 5x
20 – 50x
Venture Capital Evaluation ProcessVC Roles
Strategy Development
Active board membership
Attract outside expertise and know-
how
Attract later round investors
Attract other stakeholders,
management
Provide contacts, access to info,
people, institutions
Venture Capital Evaluation ProcessVenture Capital Method
1. Identify the company’s forecasted net income within n years up to exit year. Estimate normally based on sales and margin projections.
2. Assign appropriate P/E ratios to the company based on current multiples for companies within similar economic characteristics.
3. Derived at a Terminal Value . E.g. Terminal Value (t) = Net Income x P/E ratio.4. Terminal Value can be discounted. Normally VCs discount rates range from 30% - 80% due
to the risks involved in the type of investments.
Required InvestmentOwnership (%) = Required Total Terminal Value
Ownership Required (%)New Shares =
1 – Ownership Required x old shares
Venture Capital Evaluation ProcessVenture Capital Method
Post-money valuation: The valuation of the company immediately after a round of investment is closed.
Pre-money valuation: The valuation of the company just before closing a new round of investment, including the value of the idea, the intellectual property, the assembled management team, and the opportunity.
Terminal value: The valuation of the company at exit; that is, the proceeds of the sale of the company via a merger or acquisition or an initial public offering and at which time the investors' ownership can be liquidated.
ROIn: The cash-on-cash return on investment expected for such an investment in the year of the harvest, or exit. This ROI is commonly expressed as a multiple of invested cash—that is, 10x, for example—regardless of the time since investment (n years).
If the terminal value of a company seeking seed/start-up capital is estimated to be $60 million and we assume the stage of the company is appropriate for investors to expect 30x ROI in year of harvest, then the post-money valuation of this company can be estimated at $2 million. If the required investment is $0.5 million, then the pre-money valuation would be $1.5 million.
Venture Capital Evaluation ProcessFinancial Engineering
To overcome valuation or incentive issues, VC’s will engage in ‘financial engineering’
Debt
Preferred Shares
Preferred Convertible Securities
Mixed Debt and Equity
Ratchets or Clawbacks (Downside for Investor, Upside for Entrepreneur)
Liquidation preferences
Fundamentally challenges notion of pre-money value, as values and returns become contingent on future events
Venture Capital Evaluation ProcessExit Strategy
Exit
Sale
M&A
IPO
Liquidation
US
UK
Dubai
Singapore
US VCs
Partners
US Incubation
Collaborations
ICT
Non-ICT
Liquidity
access
Universities
Private
Liquidity
access• SESDAQ
• CATALYST
Liquidity
access• AIMS
Liquidity
access• Investors
Malaysia
Venture Capital Evaluation ProcessVC End Game
Managed Risk
Fewer losses than perceived
Return for success is substantial
Close partnership and supervision
Staged financing
Window on Technologies and New Businesses
High Potential Return
Lower initial valuations
Opportunities for leverage
Higher upside potential
Creates Jobs and Provides Economic Development
Prepare for the VC elavator pitch!Business Model needs to be clear !
VALUE
PROPOSITION
COST
STRUCTURE
CUSTOMER
RELATIONSHIP
TARGET
CUSTOMER
DISTRIBUTION
CHANNEL
VALUE
CONFIGURATION
CORE
CAPABILITIES
PARTNER
NETWORK
REVENUE
STREAMS
INFRASTRUCTURE CUSTOMEROFFER
FINANCE
Prepare for the VC elavator pitch!Key points for building up your presentation
Since a VC elavator pitch is not an Investment Committee Presentation, it is
recommend that we use the ―KISSS‖ concept of presenting as VCs‘ time are
precious. ….and so are yours. 9-12 slides ONLY!
Elavator pitch should be around 5 to 15 minutes maximum including Q& A. VCs
not asking you any question may reflect they are less interested. Get them excited!
The more they ask; the more clearer the picture of the business and the bigger
window of chances might open for you to get funded.
What ever you present, please do not claim ―You are the first in the world to..‖
unless you have hard evidence of the first patenter. Lets not put a booster on your
invention or services as VCs also looks at other factors, experience and market
leadership.
Less words in your presentation but more facts, figures, graphs and statistics of
your potential customers , market sizes, technology platforms,etc.
When the time is up, the time is UP. Do not extend and try your luck. You can
meet them again on the floor.
NOTE: KISSS = ― Keep It Short and Simple Stupid. ―
Prepare for the VC elavator pitch!Slide 1
Company X E.g tag line/moto:” Vision for the Future”
Investor Presentation
[Date]
This is a sample template of
an Investor Presentation (IP).
If you‘re looking for funding,
you should have one,
because sooner or later you‘ll
have to make a presentation.
Prepare for the VC elavator pitch!Slide 2
Seeking to raise RM x million to fund
commercialization, marketing and working capital
activities.
Objective
Please specify your objective
of this presentation. You have
limited time. VCs have limited
time. If you let them know
earlier your intention, they will
have a clear mind of how
much to be raised in
parallel with the evaluation of
your business proposition.
Prepare for the VC elavator pitch!Slide 3
Company X. provides [service or product] to [customers, market
segment] helping them to [value proposition which must be better or
cheaper by at least 25%] compared to solutions available today.
Business Proposition
General Rule: Four bullet points to a page, no
more than four words to a bullet point , clearly
explain your business proposition.
Explain, when was your company established,
what does it do and what is the value
proposition for your (product/services) to a
target market.
Prepare for the VC elavator pitch!Slide 4
Patented widget process
Increases effectiveness by 60%
Decreases cost by 40%
Backward compatible with legacy systems
Strong expansion opportunities into additional markets
[X, Y and Z] in the future
The Product/ Services
A single product idea may not be the
basis of a sustainable company in the
long-run. If you have other markets that
you can expand into in the future, say
so.
Faster, better and / or cheaper – by
at least 25% to have reasonable a
chance against established
competitors. Emphasize what the
benefits are here, and save the 90-
slide technical discussion on how it is
accomplished for later due diligence.
Prepare for the VC elavator pitch!Slide 5
Technology Platform
Your invention and creation are meant to be
showcased. Please do not keep it to
yourself. If VCs are to put money in your
company, you should at least be able to
explain a high level overview of your
technology platform and how it drives your
products/ services. Explain it in figure or
diagram forms, with a KISSS concept. The
more you confuse the VC , the chances
your are not GETTING funded is bigger.
One of the most important section in your pitch is
this slide. Please understand and give full
attention of the market. If you are not aware of
the market, chances for creating value in your
business is slow will hit a stumbling block. Show
you have knowledge of the market. Do not under
estimate the VCs understanding as they‘ve
evaluate tons of business plans, communicated
with industry players and for them to invest, they
know the market.
Prepare for the VC elavator pitch!Slide 6
Forrester says that ―…‗billions and billions‘ of widgets in our industry
will be sold, and growth will be infinite—forever.‖
We‘ve surveyed 20 companies in-depth, which are in our target
market. Summary results:
Approx. 120 such companies in our market
Company sales revenues from $10-70 million, co.‘s mostly profitable
Annual widget purchases/co.: $1-12 million, median $3 million
Growth of widget purchases: about 17%/year for last three years
Market in volatile phase currently, due to technology change
Total Market potential: $350 million (based on ―bottom up‖ analysis)
The Market
You also have to do a ―bottom
up‖ market analysis, actually
doing a survey of potential
clients, or a thorough
segmentation breakdown. The
―bottom up‖ market will tell you
how many potential clients are
actually relevant to you.
Prepare for the VC elavator pitch!Slide 7
Ukr-Maf Inc.: Have developed ―personalized incentive
plan‖ that supports aggressive sales force strategy, but
product quality is poor.
NokEric Inc.: Have developed 3G-based widget sales
concept, with very high quality, but can only be delivered
through MMS
Competition
Explain to them your competitor
if you have any. VCs won‘t
blindly believe if you don‘t have
any. At least your competitors
might be niche and segmentize.
Explain how you plan to enter
the market with the big boys or
regional or global.
Prepare for the VC elavator pitch!Slide 8
Sustaining Competitive Advantage
Ukr-Maf will self-destruct due to ‗legal enforcement‘
NokEric will ignore this market, because $40 million is table crumbs for NokEric, but
NokEric will continue to develop MMS-based widget sales, and will move aggressively on our market with ‗remote sales‘ in 2004
Critical Success Factors
Unique, sophisticated CRM system to insure bid at appropriate moment
R&D Dept. will reduce mfg. costs by 50% to insure competitiveness using patented ‗Shrink-O-Widget‘ technology.
Business Model DriversBusiness model
drivers really refer to
features and abilities
that you have that
your competitors
either can‘t get or
won‘t develop
because it doesn‘t
meet their business
model. Ukr-Maf
can‘t get
respectability;
NokEric won‘t
rework their systems
to serve this market
niche.
CSF‘s are what
you really have
to do well to win
in your target
market. These
are
―endogenous‖
factors—those
under your
control.
As a rule of thumb, you should
never have more than three key
risks, and you will not usually have
less than two. Thus, if you have 4
or more key risks, you don‘t have a
deal—go back to rethink your
concept. Incidentally, there are
thousands of minor.
Prepare for the VC elavator pitch!Slide 9
Slow market uptake
Key man risk: Ukr-Maf ―retaliation‖
Failure of key internal initiatives (Shrink-O-Widget)
Key Risks
Prepare for the VC elavator pitch!Slide 10
CEO: Buck Young, 28
Buck has had a middle management job at NokEric, where they think pretty well of him and he‘s had a chance to take a close look at the future of the widgets market. He thinks he‘s smarter than everyone else, and therefore expects a VC to finance his scheme.
CTO: Ben Had, 54
Ben has worked all over the place, most recently at Cistel. He‘s a real adult with kids, salary, mortgage, the works. He worked with Buck a few years ago, and Buck sure is a sharp kid—especially if he can convince a VC to finance this project. The idea‘s great, well, as far as a CTO can tell. Ben carries an ABC business card, but he hasn‘t quit his job at Cistel yet.
CFO: Guy Big, 48
Guy is a Senior Vice President at Goldman Sachs. Buck met him at a cocktail party and asked if he could ―use Guy‘s name as a reference‖—which he has. Buck reckons he‘d be pleased to let Guy know about his proposed position—even offer him a job—if the VC finances the deal.
Management Team
The management team is crucial, and you want to
show a balanced, experienced team with good
credentials. Unfortunately, this is often hard for a
start-up to do. One approach is to assemble a
―virtual‖ team where some people are expected to
join if offered the job upon funding – sometimes
listed as ―to be hired.‖
Prepare for the VC elavator pitch!Slide 11
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues
Annual Growth -- 14% % % %
Pre-Tax Profits
Pct of Revenues (55)% (8%) 2% 12% 11%
Cash Investment (2.1) (0.9) -- -- --
Financial Highlights
You don‘t need a whole lot of
detail here. The VC is just trying
to answer the following questions:
1) How big does it get? 2) Does
the growth look manageable? 3)
Is the profitability within norms? 4)
How much cash does it need?
Prepare for the VC elavator pitch!Slide 12
Series A Funding: $3.0M
Milestones to be achieved (24 months)
Establish sales for initial product
Sales run-rate of $3.5M by end of 18 months
Profitability by the end of 24 months
Use of funds
Key management hires $400K
Other technical & support staff $500K
Product packaging & COGS $400K
Sales & marketing expense $950K
General operating expense $750K
Funding Needs
Don‘t forget to
include what the
investment is to
be used for. Be
reasonably
specific. Don‘t
just say ―to run
the business,‖
but show that
some thought
was put into
determining the
amount being
asked for.
You need to say
how long the money
will last, and what is
expected to be
accomplished
during that period.
Thank You [email protected]