Megginson

Business 95Business 095 4 creditsTuesday- 5pm-8:40pmKCI building, Room 4006ben@dubin.com

Ben Dubin

Work number: 408-621-0170 and mention that you are a Foothill student in my Business 95 class1Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.1Class Bloghttp://bus95.blogspot.com

All files from class will be there along with some interesting required readings2McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.23McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.Venture Capital Venture capital (also known as VC or Venture) is a type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company.

Venture capital investments are generally made as cash in exchange for shares in the invested company.Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.34McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.Venture Capital Venture capital investments are made for only one reason

To make money!Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.45McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.Venture Capital Dont lend or give money, it is investedWe take ownership positions along side founders and employees*Interest need to be aligned for the best resultsWe all make money or none of us do*Often take board seats to help be part of the company

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.56McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.Venture Capital Venture Capitalists take risksVenture Capitalists always want to reduce riskMore everything reduces risk more revenue, technology, people, customers, patents, market share, etc.Funding just as much money as the company needs reduces risk seed round, Series A, Series B, Series C,

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.67McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.Venture Capital Venture Capitalists are usually General Partners in a partnership (LLP)Investors in our funds are call Limited Partners (they are our bosses)Standard structure is:Management fee - set at 2% of capital under management. Example: a $500M fund would provide $10M a year as a management fee.Carried Interest usually set at 20%. This means that after all drawn down capital is returned we get 20% of the profits. Example: if a fund is $500M and it returns $700M the venture investors get $40M.

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.7Why Early Stage/High Growth?8

Risk versus RewardBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.8Why Early Stage/High Growth?9Goal - 10 times our money in 5 years!Why such a high goal?Out of 10 investments:4 companies will fail3 companies will break even2 companies will show some positive return 1x to 3x1 will be a winner 3x+Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.9Mistakes Entrepreneurs Make10Success DOES NOT EQUAL venture capital fundingIn fact MOST companies that are venture funded failBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.10Mistakes Entrepreneurs Make11Most Entrepreneurs dont know really how to bootstrap a companyBootstrapping = starting of a self-sustaining process that is supposed to proceed without external inputBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.11Mistakes Entrepreneurs Make12They dont really understand POSITIONINGBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.12Mistakes Entrepreneurs Make13They spend money on unimportant thingsAnd basically RUN OUT OF CASHBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.13Mistakes Entrepreneurs Make14They hire too many people too soonBefore they VALIDATE their business model/product/serviceBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.14Mistakes Entrepreneurs Make15They chase Investors instead of CustomersBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.15Mistakes Entrepreneurs Make16They start building a product/service/etc before VALIDATING itBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.16Mistakes Entrepreneurs Make17They dont network enough or without focusBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.17Mistakes Entrepreneurs Make18They talk to investors too soonBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.18Mistakes Entrepreneurs Make19They dont focus on the BUSINESS MODELBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.1920Venture Capital when Successful

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.20Would you have invested in ?21

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.21Would you have invested in ?22

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.22Would you have invested in ?23

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.23Would you have invested in ?24

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.24Sequoia Capital did25WebvanSegwayYahooGoogleAnd.AppleOraclePaypalYouTubeWhatsapp ($19B sale to Facebook!)Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.2526The Myth

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.2627Risk AssessmentPortfolio Return=S# companiesn=1(Probability of SuccessXExpected Exit ValueXOwnership-Cost basis)Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.2728Portfolio PerformancePortfolio Performance=S# companiesn=1(Exit ValueXOwnership_Cost basis)_Management feesBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.28The ProcessDeal Flow we look at lots of ideas before we decide we want to investDue Diligence we do our homework, reference checks, market analysis, etc.Term sheet this is the document that describes our investment proposalLegal - work is done to officially draw up the paper work for the company investmentThe Close we wire the moneyThe Business - board meetings, working with the company, The Exit The Good, the Bad and the Ugly29Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.29Deal FlowInvestment are called DealsWe find companies to meet from all sources People we knowPeople that know usFrom friendsFrom friends of friendsFrom friends of friends of friendsFrom our website/US mail/?30Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.30Due DiligenceDoing our HomeworkWe want to know as much as we can about:The companyThe peopleThe MarketThe technologyThe opportunityThe RisksThe RewardsHow we are going to get out the the dealModel the company investment31Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.31Term SheetThe Term Sheet is a document from the venture capital firm to the company (or entrepreneur)It basically says that we want to make an investmentNot just any investment, an investment as clearly defined and outlined in the term sheetThe term sheet will be signed by usThe entrepreuneur will also sign itIt is a non-binding non-legal documentIt basically says We want to get to a deal with you but only under the terms listed in the term sheet, assuming nothing else blows up in the meantime.32Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.32LegalThe lawyers one for the company and one for the venture investors put together the legal documents for the investmentThey use the term sheet as a guideThe documents will describe everything about a company stock option plan, vesting, class of stock, board of directors, etc.Assume a cost of about $30,000 for closing documentsPaid by the company, after the close (money is wired)33Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.33The CloseThis is where money is wired to the company The venture investor then becomes an owner in the companyThis is point of no return both parties from here on out have one common goalThis entire process from the start may have taken 2-6 months34Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.34The BusinessThis is where hard work and luck pay offWorking with the company may be a 1 to 10+ year processThere will be ups and downsThe key is that we all work together and address problems earlyBad things happen, but if we plan for them or deal with them as a team, we will get through things35Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.35The ExitThis is where the rubber meets the roadAn exit can means one thing the deal is overIt can be a positive event Being boughtBeing soldIPOIt can be a negative event Wind downChapter 7Chapter 11Wash outAll investments have to exitThe time value of money is important here36Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.36Valuation37Valuation is the price that is set on the companyIt is the VALUE of the company in todays marketThis is science and analysis done to determine the valuation of a companyThis is NO science and analysis done to determine the valuation of a companyThe goal is to find a fair price one that works for the company and investorRemember, the goal is that the price will go up in the future, not downBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.37Pre-money38The Pre-money Valuation, or for short, Pre-money, is the price at which we invest in the company.The higher the valuation, the LESS the investors get per dollar on investment.If the valuation of the company was $1M and the VC invested $500K, then the company, after the investment, or POST MONEY, would be $1.5MThe VC would then own 33% of the company ($500K out of $1.5M)The Founders would own 66% of the company ($1M out of a post money price of $1.5M).Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.38Post-money39The Post-money Valuation, or for short, Post-money, is what we say the company is worth after an investment is madeThe goal is that the price will go up in a later roundBen DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.39New Businesses are HardThousands of ways to failFew roads to successRequires superhuman effort and commitmentFounders must have unique vision and leadershipVenture capital is expensiveCompetition is (or will be) fierce40Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.40Why use the Venture Approach?Best way to attack the innovators dilemmaAn efficient and effective way to productize technologies out of the labOrganizes the bets talent around the best ideasA way to manage investmentsA way to integrate external efforts with internal capabilitiesA great way to gain market intelligence41Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.41Leveraging the VC ModelUseful to agument R&D and BD effortsEspecially useful for getting to marketA method to stimulate risk takingA vehicle to compensate for successA way to challenge corporate competitionA way to reinvent the enterprise42Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.42Factors for InvestingSize and risk of opportunityQuality of entrepreneurUniqueness of technologyCondition of marketStrength and speed of competitorsLocation of companyExisting portfolio mix43Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.43Assessing the OpportunityHow big is the market?How competitive is the space?What is the average product cycle time?Will this define the market?Where is the competition heading?How hard is it to sell?Will it be hard to exit?44Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.44Assessing the OpportunityHow big is the market?How competitive is the space?What is the average product cycle time?Will this define the market?Where is the competition heading?How hard is it to sell?Will it be hard to exit?45Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.45VC 101$259.4 billion under management4 states (CA, NY, MA CT) account for $92.9 billion866 registered VC funds

2007 numbers

46Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.46Classic Venture Capital47

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.47Classic Venture Capital48

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.48Classic Venture Capital49

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.49Classic Venture Capital50

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.50Classic Venture Capital51

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.51Where Dollars are Invested in the US52

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.52It is all about the Exit53

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.53Time to Exit is LONG54

Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.54LingoDealUpsideEquityExitPivotIPODown/Up roundSquash/cram downPre-money/Post-money55Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.55LingoAcceleratorAccredited InvestorBleeding edgeBootstrappingBurnrateExit strategyDisruptive TechnologyFirst Mover AdvantageFreemium56Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.56LingoIP (Intellectual Property)LaunchMarket penetrationPivotROI (Return on investment)RunwayScaleableTermsheetTractionVaporware57Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.57LingoLeanEarly adopterLow Hanging FruitMonetizationPipelineStealthThought LeadershipValue PropositionVirality58Ben DubinBusiness 95 Foothill College Winter 2009McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc. All rights reserved.58