Seed Funding and Venture Capital CourseCertificate Program <br />Greg Horowitt, Managing Director, T2 Venture Capital<br /...
Overview<br />Introduction to Venture Capital <br />Instruction provided by:<br />Greg Horowitt, Managing Partner, T2 Vent...
Venture 101<br />Seed Funding and Venture Capital Course Certificate Program <br />
Venture 101<br /><ul><li>Introduction to Private Equity and Venture Capital</li></ul>The ‘Capital Food Chain’<br />Overvie...
Venture 101<br /><ul><li>The Entrepreneur</li></ul>How do you assess the right type of capital for your company?<br />Hors...
Risk and Rewards <br />
The Capital Food Chain<br />Friends,family,fools<br />Grants, SBIRs, etc.<br />Angels<br />VCs<br />Strategic Partners<br ...
Internet<br />PersonalComputers<br />IntegratedCircuits<br />Microwaves/Defense<br />TestEquipment<br />VacuumTubes<br />T...
The Growth of Venture Capital <br /><ul><li>East Coast Family Offices
Whitney, Rockefeller, Bessemer (1946-1969)
West Coast IPOs
Varian, Hewlett Packard, Ampex (mid to late ‘50’s)
SBIC Act of 1958 (SBA)
3:1 government match
700 SBIC funds by 1965
Limited Partnerships
External investors as LPs (pension funds, endowments, HNW)
The General Partners (GP) manage the money in exchange for:
2% management fee
20% of the carried interest (profits)
Capital Gains Reduction (‘78)
49.5%  28%
ERISA (Employee Retirement Income Security Act (‘79)
Pension Funds can invest</li></li></ul><li>Venture Capital is Born<br /><ul><li>Draper, Gaither & Anderson (‘58)
Rock and Davis (‘61)
Sutter Hill (‘64)
Patricof & Co. (‘69)
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Seed Funding and Venture Capital

Published on: Mar 3, 2016
Published in: Business      Economy & Finance      
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Transcripts - Seed Funding and Venture Capital

  • 1. Seed Funding and Venture Capital CourseCertificate Program <br />Greg Horowitt, Managing Director, T2 Venture Capital<br />Kauffman Fellow, Class XV<br />
  • 2. Overview<br />Introduction to Venture Capital <br />Instruction provided by:<br />Greg Horowitt, Managing Partner, T2 Venture Capital; Co-Founder, Global CONNECT, Kauffman Fellow, Class XV<br />Instruction focus:<br />Introduction of key terms <br />The role venture capital plays in the funding of early stage companies<br />The venture capitalist as a human capitalist<br />The right funding for you<br />Preparation and execution<br />
  • 3. Venture 101<br />Seed Funding and Venture Capital Course Certificate Program <br />
  • 4. Venture 101<br /><ul><li>Introduction to Private Equity and Venture Capital</li></ul>The ‘Capital Food Chain’<br />Overview of Venture Capital<br />History<br />Definitions<br />Evolution of the industry <br />Fund stages<br />VCs as individuals<br />Background (…where do these people come from?)<br />Qualities (…are they human?)<br />Style (…are they all so arrogant?)<br />Leadership (…how can I learn from them?)<br />What motivates them?<br />Where do they find their deals?<br />How do they assess an opportunity?<br />
  • 5. Venture 101<br /><ul><li>The Entrepreneur</li></ul>How do you assess the right type of capital for your company?<br />Horses for courses<br />How much do you really need?<br />All venture firms are NOT the same<br />How do you know if it’s the right fit?<br />What diligence should you do on the investor / firm?<br />Besides capital, what else do they bring?<br />The ‘rich or king’ dilemma<br />What do YOU want??!!!<br />Why you….and why now?<br />What is your business really worth (valuation)?<br />Having a company ≠ having a business<br />What will the VCs expect from you? (…besides your first born child)<br />Communication (how to read the abstract signals some VCs send)<br />How do you get them to notice you? <br />When will they make you rich beyond your wildest dreams?<br />What is Venture Capital?<br />
  • 6. Risk and Rewards <br />
  • 7. The Capital Food Chain<br />Friends,family,fools<br />Grants, SBIRs, etc.<br />Angels<br />VCs<br />Strategic Partners<br />Venture Debt<br />Liquidity (M&A, IPO)<br />‘Inside’ money<br />Not equity<br />Seed Equity<br />Early Mid, Late<br />Early, Mid, Late <br />Mid, Late Stage<br />Usually later stage<br />
  • 8. Internet<br />PersonalComputers<br />IntegratedCircuits<br />Microwaves/Defense<br />TestEquipment<br />VacuumTubes<br />The Birth of Venture Capital <br />Venture <br />Capital<br />Innovation Networks<br />1910<br />1960<br />1970<br />1980<br />2000<br />1990<br />1930<br />1940<br />1950<br />1920<br />Steve Blank, Stanford University 2009<br />
  • 9. The Growth of Venture Capital <br /><ul><li>East Coast Family Offices
  • 10. Whitney, Rockefeller, Bessemer (1946-1969)
  • 11. West Coast IPOs
  • 12. Varian, Hewlett Packard, Ampex (mid to late ‘50’s)
  • 13. SBIC Act of 1958 (SBA)
  • 14. 3:1 government match
  • 15. 700 SBIC funds by 1965
  • 16. Limited Partnerships
  • 17. External investors as LPs (pension funds, endowments, HNW)
  • 18. The General Partners (GP) manage the money in exchange for:
  • 19. 2% management fee
  • 20. 20% of the carried interest (profits)
  • 21. Capital Gains Reduction (‘78)
  • 22. 49.5%  28%
  • 23. ERISA (Employee Retirement Income Security Act (‘79)
  • 24. Pension Funds can invest</li></li></ul><li>Venture Capital is Born<br /><ul><li>Draper, Gaither & Anderson (‘58)
  • 25. Rock and Davis (‘61)
  • 26. Sutter Hill (‘64)
  • 27. Patricof & Co. (‘69)
  • 28. Kleiner Perkins (‘72)
  • 29. Sequoia (‘72)</li></li></ul><li>Types of Investment Capital <br /><ul><li>Angels</li></ul>Usually a wealthy individual who wants to stay ‘active and involved’<br />Often has some knowledge or connection to the technology or life sciences world<br />Usually makes smaller investments ($25-50K per investment as part of an angel group, or perhaps more as a single investor)<br />Wants to stay involved and feels their contribution to the start up goes beyond the ‘cash’ invested. <br /><ul><li>Institutional VC</li></ul>Professionally managed (GP) <br />Usually have a ‘theme’ or focus (sector, stage, industry, etc)<br />Money raised from pension funds, endowments, high net worth individuals, fund of funds, sovereign wealth funds, etc.<br />Most often set up as a Limited Partnership<br />2/20 (management fee + carried interest)<br /><ul><li>Grants</li></ul>Non-dilutive investment <br />Government programs<br />Foundations<br />
  • 30. Types of Investment Capital <br /><ul><li>Strategic Ventures</li></ul>Usually corporate (think Intel, Qualcomm, Novartis, Google)<br />Often a focus on companies that are complimentary and synergistic to their internal efforts<br />Balanced ROI with strategic goals<br />Most often not the ‘lead’, and will invest with institutional VCs <br /><ul><li>Private Equity </li></ul>Invest in the tangible assets of a company<br />Buy low, sell high<br />Usually an investment bank that is compensated as a percentage of the deal<br />Usually syndicated capital <br />Motivated by ROI<br /><ul><li>Banks</li></ul>Issue debt (loans) secured by assets (receivables, property, equipment, etc.) or other assets (including intellectual property)<br />
  • 31. Entrepreneurs:Go Where the Investors Are<br />Angels<br />Number of Investors<br />Valley of Death<br />VCs<br />$5 million<br />$10 million<br />Investment (one round)<br />
  • 32. <100 IPOs (VC funded)<br />< 500 VC Seed/Start-up Investments<br />40-50,000 Angel Investments<br />500-700,000 New Companies<br />0<br />200,000<br />400,000<br />600,000<br />800,000<br />New Company FormationSource of Funds<br />Typical Year<br />
  • 33. Outside Equity Capital for Entrepreneurs<br /><ul><li><1 in 10 Start-ups obtain angel financing
  • 34. <1 in 1000 Start-ups are VC financed
  • 35. <1 in 10,000 new companies go public
  • 36. <1 in 10 angel deals see VC money</li></li></ul><li>Investor Motivation<br />ROI 5 year increase<br />Stage<br />Seed <br />Start-up<br />Early <br />Mid <br />Later<br />60% 10x+<br />50% 8x<br />40% 5x<br />30% 4x<br />25% 3x<br />
  • 37. Venture Capital Method<br />Investment<br />Exit Year<br />Revenues (5th year)<br />Net Profit (5th year)<br />P/E (industry)<br />Company Value<br />Required ROI<br />Required Capital Growth<br />% Equity Required at Exit <br />Pre-money Valuation<br />$2 million<br />5th Year<br />$40 million<br />10% = $4 million<br />12X<br />$48 million<br />50% = 8X<br />$16 million<br />33%<br />$4 million<br />* In reality, we would need more than 33%, since dilution will probably occur<br />
  • 38. Venture Mechanics: Valuation<br />Pre-money V: agreed value of company prior to this round’s investment (I)<br />Post-money valuation V= V + I<br />VC equity in company: I/V= I/(V+I), not I/V<br />Example: $5M invested on $10M pre-money gives VC 1/3 of the shares, not ½<br />This should be viewed as a partnership, not an acquisition<br />I and V are items of negotiation<br />Generally company wants large V, VC small V, but there are many subtleties…<br />This round’s V will have an impact on future rounds<br />Possible elements of valuation:<br />Multiple of revenue or earnings<br />Projected percentage of market share<br />
  • 39. The Venture Lifecycle<br /><ul><li>Deal Sourcing
  • 40. Deal Structuring
  • 41. Value Creation
  • 42. Preparation for exit
  • 43. Liquidity event</li></li></ul><li>Venture Mechanics<br /><ul><li>Deal Sourcing:
  • 44. Where do VCs find deals?</li></ul>Other VCs<br />Service providers (lawyers, accountants, etc)<br />Angel investor groups<br />Individual angels<br />….from a trusted colleague / friend in their network<br /><ul><li>Analysis (research)</li></ul>Scouting universities and other Research Labs<br />Looking at opportunities in a related space to existing portfolio companies<br /><ul><li>Rarely, but on occasion: </li></ul>Funding programs such as SBIR, STTR<br />Trade Organizations<br />Business Plan Competitions<br />Corporate events<br />Networking events<br />
  • 45. Venture Mechanics<br /><ul><li>Deal development:
  • 46. What do they look for?</li></ul>Great management that is emotionally competent<br />Market opportunity that is trending in the right direction<br />Sustainable competitive advantage<br />Managed and mitigated risk<br />Convinced that people will buy the product…and hopefully buy it again and again and….<br />Solid team with high integrity<br />Strong IP position and / or significant trade secret<br />Entrepreneurial passion, relentlessness imagination, flexibility, coachability, and ‘pushing hard at the edges’ <br />VCs want to be assured that they will get their money out before they die<br />
  • 47. Venture Mechanics<br /><ul><li>Deal Evaluation</li></ul>What must we confirm?<br />How do we calibrate the opportunity against the market?<br />What don’t we know, and what is the risk of not finding out?<br />How do we find this information and what is the cost?<br />Are there any deal killers?<br />
  • 48. You, the Entrepreneur<br /><ul><li>Deal Structuring</li></ul>Alignment of goals and expectations<br />What motivates you, the entrepreneur? <br />Fame?<br />Wealth?<br />Peer positioning?<br />Social good?<br />Do you play nicely with others?<br />What do you want for yourself, and where do you see yourself 5 years from now?<br />How do you assess if you should take outside, dilutive capital?<br />How do you do due diligence on a potential investor?<br />Look at their portfolio companies, and identify synergies<br />Talk to their entrepreneurs<br />Ask around. Find out about the individual as well as the firm. <br />What diligence will they do on you? (Answer: Everything)<br />
  • 49. Value Creation<br /><ul><li>What the VC will bring to the table
  • 50. The pre-investment relationship
  • 51. Helping entrepreneurs validate, calibrate, and refine value proposition
  • 52. Assistance in building global advisory boards
  • 53. Introductions to other investors
  • 54. Mentorship and education
  • 55. Helping them understand what’s ahead
  • 56. The post-investment relationship</li></ul>Being an effective board member<br />Mentorship, coaching and insights<br />Using networks to accelerate value creation<br />Access to high quality talent<br />Access to domain and market experts<br />Access to customers and partners<br />Access to licensees / licensors <br />Engineering a liquidity event<br />
  • 57. Value Creation<br /><ul><li>What will you bring to the table?
  • 58. Execution and adaptation off business model to market demands and customer needs
  • 59. Being able to attract, motivate, and empower team members
  • 60. Being capable of synthesizing new ideas, and demonstrating relevance
  • 61. Being able to mobilize and allocate resources efficiency and effectively
  • 62. Giving customers what they need, AND what they want
  • 63. Leadership and talent development
  • 64. Staying ‘authentic’
  • 65. How to use 360° feedback (from customers, team, market trends, valued advisors)</li></li></ul><li>The Exit!<br /><ul><li>Exits</li></ul>Preparing for the exit<br />Timing<br />Factors which influence the timing<br />Market conditions <br />Investor desires<br />Entrepreneur desires<br />Capital constraints<br />Offers for mergers or acquisition<br />Availability of necessary future resources<br />Competition<br />Mechanics<br />Communication<br />Execution<br />
  • 66. Thank you<br />Greg Horowitt<br />Managing Director<br />greg@t2vc.com<br />

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