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Transcript of QUARTERLY REPORT, APR-JUN 2007 An Introduction To Venture Capital Anand Lunia Executive Director &...
![Page 1: QUARTERLY REPORT, APR-JUN 2007 An Introduction To Venture Capital Anand Lunia Executive Director & CFO, SEEDfund anand@seedfund.in.](https://reader036.fdocuments.in/reader036/viewer/2022070408/56649e535503460f94b48c84/html5/thumbnails/1.jpg)
QUARTERLY REPORT, APR-JUN 2007
An Introduction To Venture Capital
Anand LuniaExecutive Director & CFO,
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QUARTERLY REPORT, APR-JUN 2007
What is Venture Capital
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Private Equity & Venture Capital“Private Equity” means capital to companies
not quoted on a stock market ,in exchange for an equity participation.
Venture Capital (VC) is a sub-class of Private Equity
• characterized by investments made for the purpose of developing, launching, and expanding new products or service offerings.
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How VC’s work
Investor
Investor
Investor
VCfund
Investor
Startup
Startup
Startup
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Capital Lifecycle
Seed (< € 1 mil) Early Stages (€ 1 - 10 mil) Expansion/ (€ 10+ mil)development
Angels Incubators Accelerators Venture Capital Private Equity &Merchant Banks
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What Venture Capitalists do ...• Sift through thousands of (good and bad) investment
propositions
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What Venture Capitalists do ...• Sift through thousands of (good and bad) investment
propositions• Identify a few valid initiatives and finance them
– in exchange for private equity (usually a minority stake)
– structure the deal
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What Venture Capitalists do ...• Sift through thousands of (good and bad) investment
propositions• Identify a few valid initiatives and finance them • Support the entrepreneurs in succeeding. E.g.:
– providing financial advice– in headhunting and setting up advisory boards– in contacting customers, channels, … – in steering and positioning the company– in managing PRs activities– in managing IP and legal issues
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What Venture Capitalists do ...• Sift through thousands of (good and bad) investment
propositions• Identify a few valid initiatives and finance them • Support the entrepreneurs in succeeding. E.g.: • Look after value creation
– further round of financing– merger and acquisition, IPO, …
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Attributes of a Great VC
• Bets on people not trends• Driven by the big idea• Looking for a ‘Winner’• Not afraid of failure• Understand how to manage a portfolio of
risk• Serves as a fantastic coach• Does her best work outside of the board
room• Not waiting for validation from other VCs
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QUARTERLY REPORT, APR-JUN 2007
Deciding whom to give money
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In the VC’s Mind• Is this the right team?• What’s the entrepreneur's motivation?• Is this a billion dollar opportunity?• Is it a game changer?• How competitive is the space?• How defensible is the product?• How much is this thing going to take?• How long to maximize value and exit?
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In the VC’s mind• IRR (Internal Rate of Return)
– Company’s Current and Future Valuation• Comparables (P/E,P/S,…), “Number of”, DCF, …
– What’s The Best Strategy To Create Value• Which are the achievable milestones and what’s the financing
needed ?• When is the break-even expected ? With which margins and
revenues.
– Exit Strategy• Trade sale, IPO, Nth+1 round of financing, ..
• Minimizing Risks– Diluting the investment– Liquidation Preference rights
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Stages of Investment
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Stage v/s Return
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Assessing the Entrepreneur
• Understanding motivations• Determining commitment level and
willingness to sacrifice• Gauging ego• Appetite for risk• Domain expertise• Leadership abilities and vision
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Assessing Portfolio Risk
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Why 10x?
• The “Portfolio Effect”– Out of Ten Start-ups Funded
• 2 successes at 10x or better• 5 ‘OK’ returns at 2x to 5x• 3 write-offs, total loss of invested money
• Venture Capital is fundamentally an institutionalized form of aiming for Outliers!
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QUARTERLY REPORT, APR-JUN 2007
Which VC to go with?
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Most Appreciated VC Contributions• Financial Advice • Corporate Strategy & Direction • Sounding board for ideas • Challenging status quo • Contacts or market information • Management recruitment • Money !!!! S
ourc
e:
“The
Eco
nom
ic I
mpa
ct
of V
entu
re C
apita
l in
Eur
ope”
(E
VC
A a
nd C
oope
rs &
Lyb
rand
)
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What to look for in a VC
• People you LIKE !– Trustworthy & Collaborative
• Can bring value, not money only !– Do not have to be experts in the sector
but have to understand the business.– Good network of contacts.
• Ask for references
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What VCs are Not Good at
• Long term research investments• Sustainability• Evolutionary development• Asset maximization• Billion $ capital requirements
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QUARTERLY REPORT, APR-JUN 2007
Want to raise VC money?
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The Financing Lifecycle• Approach
– Elevator’s Pitch and Info Memo• Presentation
–Business plan–Meetings
• Negotiation – Term Sheet (or Letter of Intent)
• Verification and Validation–Due diligence
• Closing & Financing• Value Creation• Exit
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The Business Plan• A Product/Service description
– Pros and cons of the solution– Market needs it satisfies– Barriers to Competition
• Business Model– Market Analysis (strategic and tactical)
• Competitors– Execution Plan
• Marketing and Sales Plan• Research and Development Plan• Operations Plan
• Team• Financials
– Valuation Model & Placement Terms– Income Statement, Balance Sheet & Cash Flow
• 3 years minimum, quarterly breakdown• 1st year in monthly breakdown
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The Business Plan -MYTH
+ + + =Marine Lines
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The Term Sheet• The parties• Securities to be issued• Amount of financing & disbursement schedule• Pre-financing valuation• Option plan & earn-out• Use of proceeds• Liquidation Preference• Protective Provisions, Voting Rights and BoD participation• Anti-dilution• Lock-ups • Tag along and drag along• Exclusivity• Reporting• ...
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Board Seats and Reserved Matters
• Corporate boards:• Not involved in day-to-day operations• Hold extreme control in major
corporate events (sale, mergers, acquisitions, IPOs, bankruptcy)
• Lead VC in each round takes seat(s)• Reserved matters (veto or approval):• Any sale, acquisition, merger,
liquidation• Budget approval• Executive removal/appointment• Strategic or business plan changes
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Other Typical VC Rights
• Right of first refusal on sale of shares• Tag-along rights: follow founder sale on pro rata
basis• Drag-along rights: force sale of company• Liquidation preference: multiple of investment• No-compete conditions on founders• Right to participate in subsequent rounds
(usually follow-on)• Later VC rights often supercede earlier• Anti-Dilution Protection• Recompute VC shares based on subsequent
“down round” so that issuing more shares does not “dilute” the value of VC’s holding
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QUARTERLY REPORT, APR-JUN 2007
Trends in VC investing
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What’s Going to be Hot
• Virtualization• Mobility services• Location based services• Enterprise services & software• Internet gaming and entertainment• Gen Y lifestyle products & services
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QUARTERLY REPORT, APR-JUN 2007
Thank You