2010 Venture Capital Pitch Prep

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


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.


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.


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.


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.


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.


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.


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.


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.


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.


Slow market uptake

Key man risk: Ukr-Maf ―retaliation‖

Failure of key internal initiatives (Shrink-O-Widget)

Key Risks


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.‖


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?


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]

mailto:[email protected]

2010 Venture Capital Pitch Prep

Business

Transcript of 2010 Venture Capital Pitch Prep