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Copyright ©2008 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be

reproduced for educational purposes only.

E145 E145 2008 Meets the VCs2008 Meets the VCs

SessionSession 1414Venture FinanceVenture Finance

Tom Kosnik(Adapted from slides originally

created by Tom Byers)

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Chi-Hua Chien

Kleiner Perkins

www.kpcb.com

Ravi Belani

DFJ

www.dfj.com

Meet the VCs!Meet the VCs!

Trae Vassallo

Kleiner Perkins

www.kpcb.com

Rowan Chapman

MDV

www.MDV.com

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© 2003 Mark P. Rice, Babson

Sessions 2-8:

Idea Versus

Opportunity

Sessions 9-

16:

Realities of

Business

Operations

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TodayToday’’s Agendas Agenda

Part II. Given the nature of the business and the objectives of the founders, what capital resources are needed to build the venture?

Part I. What is the purpose of a business plan?

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Part I. Part I. What is the purpose and actual What is the purpose and actual

value of a business plan?value of a business plan?

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Money is plentiful but scarce Money is plentiful but scarce –– in boom in boom times and badtimes and bad

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Too much of a good thing Too much of a good thing can knock a venture off balancecan knock a venture off balance

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First Time Entrepreneurs often Ride First Time Entrepreneurs often Ride The The Money Talent MerryMoney Talent Merry--GoGo--RoundRound

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One reason for a Business Plan is to raise One reason for a Business Plan is to raise capital to grow your business.capital to grow your business.

Another is to clarify and focus your strategyAnother is to clarify and focus your strategy

PEOPLE & RESOURCESExperiences, Skill,

Contacts, Attitude, Knowledge

CONTEXTMacroeconomy,Tax, Regulatory,Socio-political

DEALAllocation of Risk

and Reward, Incentives, Signals,

Sorting, Consequences

OPPORTUNITYEntry Barriers,

Customers, Suppliers,Substitutes, Rivalry,

Economics

Project-AppropriateFinancing

Option Preservation

Opportunity-AppropriateKnowing andBeing Known

Appropriate Risk / RewardAllocation and IncentivesInvestor Value Added

Favorable TechnologyMacroeconomy

Favorable Rulesof the Game

Favorable Sociological Factors

Reference: Sahlman et al. (1999) The Entrepreneurial Venture

.

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Outline of a Business PlanOutline of a Business Plan

• Executive Summary

• Market Analysis

• Vision and Concept (including Technology)

• Competitive Positioning and Marketing

• Business Model

• Organization

• Financial Projections

• Ownership

Focus of

Sessions

13-16

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Part II. How Tech EPart II. How Tech E’’s Finance s Finance Their Ventures Their Ventures …… The The ““ABCsABCs””

A. Amount of Cash Needed and Purpose

B. Sources of Capital

C. Deal Structure

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A. Amount of Cash A. Amount of Cash ……Two Key QuestionsTwo Key Questions

#1 How much money is needed for this “round” of financing?

Typical Financing Stages (or Rounds):

Seed � Early � Mezzanine � Late (e.g., IPO)

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#2 Which “white hot” risk(s) is to be reduced with this money?

Team Risk

Technology Risk

Capital Risk

Market Risk

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B.B. Sources of CapitalSources of Capital

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Venture

Capital

Firms

Angel Investors Corporate VC

Boot-

strapping

Other

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A Deeper Look at A Deeper Look at Venture Capital FirmsVenture Capital Firms

VENTURE CAPITALISTS(Finding and Funding

Entrepreneurial Companies)

ENTREPRENEURS(Starting and Building

Companies)

INSTITUTIONAL INVESTORS(Limited Partners – e.g.

University Endowments, Pension Funds)

Source: Andy Rachleff

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US Venture Capital US Venture Capital and the Economyand the Economy

• GDP: about $12.5 trillion annually

• Hedge funds: $1 trillion over 3 years

• Mutual funds: $230 billion in 2007

• Buyout funds: $86 billion in 2005

• Venture capital?

$31 billion in 2007… just 0.2% of $13.8

Trillion U.S. GDP.

Source: BLS website, Investment Company Institute, Thomson Financial, 5VCA

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But VCBut VC--Backed Companies = Backed Companies = 17% of GDP17% of GDP

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At Year End

# Venture Firms

Capital Under Mgt

1970 28 $1B

1980 89 $4B 1990 398 $31B

2000 887 $223B 2001 949 $252B 2005 866 $259B

Source: 2006 5VCA Yearbook, prepared by Thomson Financial, page 18

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After a Peak in 2000, After a Peak in 2000, Now on a $25B+ Annual Pace in US Now on a $25B+ Annual Pace in US

Source: PricewaterhouseCoopers/5ational Venture Capital Association MoneyTree™ Report

Historical Comparison of VC StylesHistorical Comparison of VC Styles

US ModelInternational Model

(e.g., Europe)

Peoplecompany founders

and buildersconsultants and bankers

Stage seedearly (A Round), but not seed

Provide “value added” “just money”

Style hands on hands off

Objectivecreate very large

companiescreate medium sized companies

Philosophy maximize upside minimize downside

Returnstarget a small number of

big winners –home run investing

believe returns can be earned across a portfolio

Reference: Mowbray Capital, London

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C. Two Key Questions C. Two Key Questions Regarding the Regarding the ““DealDeal””

1. What percentage of the company do the investors receive for their cash?

2. What special terms and conditions are necessary to compensate them for the risk?

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Kaplan’s Startup Game

“A race against time to create value and reduce risk”

(1) Founding:

An entrepreneur begins with a vision and shares of stock in the new venture.

Entrepreneur trades stock for ideas, money, and people

(2) Seed Stage:

•Venture capitalists provide money in return for stock

•Employees join via friends & associates in return for cash salary and stock options

•Ideas become intellectual property which represents the initial value in the company

Further growth is delayed until milestones are reached and risk of failure is reduced

(3) Growth Stage:

More money, ideas, and people are obtained, but for much less stock than in the earlier stage due to lower risk

Company balances earning cash, taking investment, and spending cash to create value

(4) Exit Stage (Success):

•Company files for IPO or gets acquired (M&A)

•A viable enterprise has been created (maybe public)

•Entrepreneur, investors, and employees can cash in stock for money (eventually)

•Each party continues to build the company, starts the game again, or something else

Value has been successfully created

Reference: Jerry Kaplan

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Chi-Hua Chien

Kleiner Perkins

www.kpcb.com

Ravi Belani

DFJ

www.dfj.com

Q and AQ and A

Trae Vassallo

Kleiner Perkins

www.kpcb.com

Rowan Chapman

MDV

www.MDV.com