Venture CapitalFundraising Methodology

December 12, 2011

What Is Venture Capital?

What Is Venture Capital?Private equity class specialized in funding and building

early stage, high growth potential enterprises

Typical VC Fund Structure• General Partners invest capital on behalf of

Limited Partners– LPs include endowments, pension funds, charities,

corporations, individuals, and fund of funds– GP contributes personal capital as well– GP typically earn 2% annual management fees &

20% carried interest, i.e., share of profits• Capital called as needed, with primary

investing done in first 5 yrs of 10 yr fund cycle• Quality fund returns over 2x, or 20-25% IRR

– 1/3 of deals will likely fail, 1/3 will return amount invested, and 1/3 will drive majority of returns

Where Do VCs Invest?

Life Sciences

Clean Technology

InformationTechnology

Industry Investment Trends, 2000-10

Source: MoneyTree Report – NVCA/PWC/Thomson Reuters

• Web 2.0 driven by utility computing, social marketing, open platforms, advanced programming solutions, and open source tools

• Enables more progress with fewer $• Has yielded many successful startup

incubators and seed funds

Evolution of Venture Capital

Fund Example: SoftBank CapitalVisit www.softbankcapital.com for overview

Fundraising Process

You set the valuation. I’ll set the terms.*

*Don’t be fooled by the cover price

Why Raise Venture Capital?• Guidance & Support

• Board participants; Interim executives• Product management, business development and financial

planning support• Access

• Industry contacts• Leverage portfolio

• Credibility• Stamp of approval with customers, partners and vendors

• Cash• But at a high cost of capital, so Guidance, Access and

Credibility should justify that cost

Typical Company Profile• Team

• Ranges from a single, 1st-time entrepreneur to a full team of seasoned entrepreneurs

• Stage of Development• Ranges from concept to approaching profitability• VCs typically sit between angel and growth/buyout

investors, though some funds cross over stages• Larger fund investments in seed on the rise

• Size of Round• Definitions vary, normalized range from $1M-$10M• Deals frequently syndicated between multiple funds

to strengthen board and diversify risk

Typical Deal Timeline• Average firm reviews 1000+ deals

per year• 99% of deals turned down• Promising deals present to

partnership 2-6 weeks post initial meeting

• Partnership approved deals receive term sheet

• Accepted term sheets followed by 2-6 weeks of final diligence and legal documentation

• Average firm, in normal market, closes 8-12 new investments/yr

• The earlier stage the business, the shorter the process typically runs

Note: Graphic via NVCA; Industry statistics are approximations

Deal EvaluationFocus varies by firm, but key elements include:

• Team– Can they execute on development, sales and support?

• Concept– What is the product or service?– Why will customers buy it?

• Opportunity– What is the market size and penetration strategy?– What is the competitive landscape?

Financial Projections• Focus on key revenue and expense drivers

– Sensitivities important given model immaturity– Viability of margins long term

• How much additional capital required?– What is the potential dilution from later rounds?

• Focus on model details varies based on stage– Seed stage may not yield revenue for 18-24 mos.– Later stage deals may consider debt financing,

requiring covenant maintenance

Term Sheet• Price

– Pre vs. Post $ Valuation– Option Pool implications

• Liquidation Preference– Liquidation: Sale of company as opposed to IPO– Multiples and Dividends– Participation: Full, Capped and Non-Participating– Stacked vs. pari passu– Impact on management ownership and resulting motivation

• Board Configuration• Option Pool: Pre vs. Post $ Dilution• Anti-Dilution Rights: Weighted Avg. thru Full Ratchet• Pro Rata Rights for future rounds• Protective Provisions• Term Sheet summary at www.AsktheVC.com

Term Sheet (cont’d)• Board of Directors

– Investor Seats and Observers– Founder and Independent Seats

• Protective Provisions– Veto rights for overall preferreds or by class– On changing rights of preferred class, selling existing or raising

additional shares, change of control, board composition, raising debt

• Anti-Dilution– Full Ratchet, Broad or Narrow-Based Wghtd Avg

• See term sheet series at www.AsktheVC.com

Legal Documentation• Stock Purchase Agreement

– Price and # of shares sold, reps & warranties• Certificate of Incorporation (a/k/a Charter)

– Establishes rights, preferences, privileges and restrictions of each class and series of stock

• Investor Rights Agreement– Information, registration, and pre-emptive rights

• Voting Agreement– Board composition, drag-along rights

• See www.NVCA.org for these and other template docs

Subsequent Financing

• Bridge funding– Discount into next round or warrants

• External rounds– Up rounds vs. Recaps

• Internal rounds– Potential pay to play when syndicate broken

• Venture Debt

Exit Strategy

• Acquisition– Strategic buyers– Financial buyers for high cash flow business

• IPO– Market appetite for venture-backed deals– Sarbanes Oxley

www.SoftBank.com

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