High Risk Capital Seeking 50%+ Annual Rates of Return

Capital providers are active investors who will step in with rights/controls designed to protect their investment

Investors typically have prior experience and expertise of building companies and working with start-ups

Investors look at high growth and scalable opportunities in a 4-6 year time frame

Majority of Startups Do Not necessarily Require Institutional Venture Capital

Raising Venture money is no guarantee of success nor lack of it means failure

Typical dilution from initial VC investment varies between 25% to 40% depending on the context

VCs look at over 100 business plans for every one they finance

More than 60% of VC investments fail

SAS Institute ( > US $ 3 Billion in revenues) HP Best Buy Microsoft (Only took $1M VC after being

profitable ) Oracle Broadcom Walmart MicroStrategy

Amp’d Mobile: Amp’d Mobile takes the crown for money-burning, with $360 million that ended in bankruptcy. The company’s major problem was its customers’ ability to pay. While other mobile providers check for an ability to pay bills within 30 days, Amp’d let it go to 90 days and marketed to these risky customers. It has been reported that 80,000 of the company’s 175,000 customers were unable to pay their bills

Procket: Networking company Procket was once one of the most highly valued telecom startups in the U.S. It had $272 million in venture-capital funding and a valuation of $1.55 billion but was ultimately sold to industry behemoth Cisco Systems Inc. for a disappointing $89 million

Webvan: Webvan was a grocery-delivery business that served nine metropolitan areas. Once valued at $1.2 billion with plans to expand to 26 cities, the company went bankrupt in 2001. Despite millions in sales, the company’s demise was brought on by a money-burn that exceeded sales growth. Major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs. Additionally, it acquired HomeGrocer just a few months before going under. This fast expansion proved to be too much for Webvan. This company that once had about $800 million in venture capital ended up with $830 million in losses, with about $40 million on hand.

Caspian Networks: Caspian Networks, orgiginally founded as Packetcom Inc., had a number of ups and downs, including a washout in 2002; the company finally shut down in 2006. Caspian Networks fluctuated from more than $300 million in funding and 323 employees to less than 100 employees and closed doors.

Kozmo.com: Kozmo.com’s small-goods delivery service, while a recipient of around $250 million in investment, and popular with students and young professionals, ultimately met its end and liquidated in 2001. Its business model was criticized as unprofitable because it didn’t charge for deliveries. Kozmo.com’s demise is profiled in the documentary film e-Dreams.

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Examples of VC Misses – Bessemer Venture Partners’ Anti-Portfolio eBay"Stamps? Coins? Comic books? You've GOT to be kidding," thought Cowan. "No-brainer pass.”

Apple ComputerBVP had the opportunity to invest in pre-IPO secondary stock in Apple at a $60M valuation. BVP's Neill Brownstein called it "outrageously expensive."

GoogleCowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?”

IntelBVP's Pete Bancroft never quite settled on terms with Bob Noyce, who instead took venture financing from a guy named Arthur Rock

IntuitAlong with every venture capitalist on Sand Hill Road, Neill Brownstein turned down Intuit founder Scott Cook. Scott managed to scrape together only $225K from friends, including HBS classmate and Sierra Ventures founder Peter Wendell, who personally invested $25K to get Scott off his back.

PaypalDavid Cowan passed on the Series A round. Rookie team, regulatory nightmare, and, 4 years later, a $1.5 billion acquisition by eBay.

Start-ups with a Heavy R&D Component of the business◦ Semiconductors◦ Biotech◦ Datacom/infrastructure plays

Start-ups chasing a Very Large Opportunity Requiring A Lot of Working Capital

Starts-ups creating new markets/categories with new innovation/technology

Start-ups seeing lots of traction in their business and need growth capital to take advantage of the market

Founder Dilution◦ Assuming a successful outcome, average founder will

own between 10% to 15% of the business @ exit event Liquidation Preference

◦ If the start-up gets sold for less than the valuation at which VC’s came, then VCs will take their money out first

Investor Involvement/Control over business◦ Investors actively participate in the business and will

have significant decision making powers and also veto rights over most critical decisions.

Time and Efforts◦ Fund raising takes lot of time and efforts and could

distract the founders from business

Business is way too early and there are no metrics or traction to demonstrate

Business needs only small infusion of capital

Business has no differentiation and has minimal barriers to entry

Customer Value proposition is not clear and is yet to be crystalized

Founders are dilution sensitive and want to be always in control

1. Cash to fuel growth2. Strategy / business advice3. Introductions: investors, customers,

partners4. Recruiting assistance 5. Organizational Building6. Access to networks7. Credibility

1 Leadership potential of lead entrepreneur 2 Leadership potential of management team 3 Industry expertise in management team 4 Track record of lead entrepreneur 5 Track record of management team 6 Sustained share position 7 Marketing and sales expertise of team 8 Organisational abilities of team 9 Ability to get cash out of the investment 10 Degree of product-market understanding 11 Expected rate of return on investment 12 Time to breakeven 13 Finance and accounting expertise of team 14 Ability to create post-entry barriers 15 Business meets funding constraints

16 Process/production capabilities of team 17 Uniqueness of product/technology 18 Market growth and attractiveness 19 Degree of market already established 20 Time required to payback investment 21 Ability to influence nature of the business 22 Importance of unclear assumptions 23 Stage of investment required 24 Ease of market entry 25 Strength of suppliers and distributors 26 Nature and degree of competition 27 Location of business 28 Business and product fit with VC portfolio 29 Projected market size 30 Sensitivity to economic cycles 31 Ability to syndicate 32 Seasonally of product market 33 Scale and chance of later financing rounds 34 Location of business relative to fund.

Not learning from mistakes and moving on fast enough from failures Fighting the wrong enemy ( Eg: Microsoft thought it was IBM/Apple and

others, not the Internet. Sun thought it was HP/Dell/IBM, not Linux) Confirmation bias supported by self selected group of people Failure to understand market/consumers and trends and sticking on to a

static view of things Midas-touch-syndrome which leads to believe that founders can succeed in

a market about which their understanding is limited Founders and CEOs who think they have all the answers and don’t need to

listen to sceptics Excessive obsession in chasing only growth and ignoring profitability Too many decision makers and people influencing company/strategy etc Not giving up or moving on when market reality requires them to do so Failure to adopt and make required changes

Where and when is the exit? How much can this company sell for? How much total money will it take to grow the company

to the point that someone will buy it for What percentage will the investor need to get the return

(ROI) desired? 10x? 25x? 50x? Desired IRR at the fund level? (Internal Rate of Return)

>30% (per annum) Investors perception of risk-efforts-reward for the specific

opportunity

Early stage investors are looking for rapid growth◦ e.g., 10X growth in 24-36 months

Valuation is responsive to milestone achievement◦ Prototype completion◦ Product launch◦ Market adoption/traction/First 1M users◦ Business model validation◦ Rate of growth◦ Level of mitigation of product risk, market risk and execution risks

in the business Things always take longer and cost more than anticipated Runway to raise next round/metrics to next round

Valuations are: More art than science What the market says your company is worth What a disinterested investor is willing to pay

Not: Family member, existing equity holder, corporate investor At any Given point of time, the Company is

worth what someone will pay for it at that point of time

What someone is willing to pay for is a function ofSupplyDemandMarket LiquidityValuation trends/comparable transactions/metrics prevalent at that point of timeRisk-return perception

Valuation is also influenced by Which Way Is The Tide Going?A Rising Tide Lifts All BoatsBut, A Falling Tide Strands ThemOverall State of the Economye.g. Purchasing Cycles: Will Customers Purchase Today?Condition of Public Equity MarketsTime to IPOAcquisition trendsFunding Cycles of Venture Capital InvestorsAllocation of Funds By Pension Funds and Institutions How Do They Determine How Much To Allocate To Alternative Investments Such as Venture Capital?How Much Venture Capital Is Available at that point?

Funding Cycles of Venture Capital InvestorsHow Much Venture Capital Is Available?What Sectors Is It Invested InWhat Stage of Business Is It Invested In?

The TEAM and Experience The Business Model and Its Sustainability Evidence of a Business- Will the Dog Eat

The Dogfood? Momentum or Lack Thereof Valuation story Positioning and Negotiating Skills

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