Fundraising. George Abe

Transcription

1 Fundraising George Abe

2 Agenda Stages of Investment Bootstrapping, F&F, Angels, Government Venture Capital Overview Fundraising Process and Documents What s the Investor Thinking? 2

3 Been There, Done That In times of great commercial prosperity there has been a tendency [toward] over-speculation on several occasions [after that]. The success of one project generally produces others of a similar kind. Popular imitativeness will drag a community too anxious for profits into an abyss Charles Mackay

4 Stages of Investment You Friends & Family Angels Government Venture Capital, Series A (first institutional round) Venture Capital, Series B, C, D, E, F, etc. Debt (commercial banks) Mezzanine IPO or M&A (investment banks) LBO/MBO 4

6 Bootstrapping Financing by credit cards, second mortgages, savings, spouse Customer financing Consulting Custom development Moonlighting Your home is your factory (e.g. Mrs. Fields) Don t spend time fundraising; more time on the business Hardest work but retains the equity Most fulfilling 6

7 Friends and Family Should they get voting rights? Would a loan be better? What if the lender/investor dies? Can you deal with estate trustees? Arrange flexible repayment Link payment to cash flow rather than fixed schedule What about family gatherings? Is the relationship more important than the $$$ 7

8 Angel Investors High net worth individuals Invest < $100k of their own money Multiple angels sign a common term sheet Have experience, normally management background Want to stay in the game /Too much golf Want to invest before the VCs get in When valuations are lowest Examples Tech Coast Angels, Pasadena Angels, Band of Angels 8

9 Angels vs. VCs Angels Invest own money Precede VCs Smaller amount invested Usually take common stock. Legal fees coupled with small amount of capital prevent preferred shares sold Can invest with VCs VCs Invest LPs money Follow Angels More invested Usually get preferred stock and attendant preferences (board seat, liquidation preferences, participation ) 9

10 Government Programs State and local developmental programs Tax abatement, grants, expedited services Federal programs SBIR, STTR, ATP Assistance from public utilities Southern Cal Edison 10

11 Federal Programs Small Business Innovation Research Program (SBIR) Set aside program for small businesses to participate in Federal R&D Small Business Technology Transfer Program (STTR) Set aside program for small businesses and research institutions to participate in Federal R&D Advanced Technology Program (ATP) of NIST Direct funding by NIST $1 million/year for multiple years Requires professional management 11

12 SBIR Set Aside Amounts 10 Federal agencies with R&D budgets greater than $100 million are required to participate Amounts allocated as a percentage of R&D budget: FY : 1.25% FY : 1.5 % FY : 2.0 % FY 1997 and beyond: 2.5 % $1.5 billion in FY

13 SBIR Details Agencies participating Defense, HHS/NIH, NASA, DoE, NSF, USDA, DoC, EPA, DoT, Education Company must apply to agency for funding Program authorized through 2008 Can be grants or contracted deliverables Fills the gap between research and prototype 13

14 SBIR Grants or Contracts Grant Agencies Unrestricted research Companies submit proposals to agency HHS/NIH, NSF, DoE, USDA, Education Contract Agencies Agency issues an RFP, specifying a project Similar to contract consulting DoD, NASA, EPA, HHS/NIH, DoC, DoT, Education 14

15 SBIR Qualifications For profit, American-owned and independent Principal researcher is employed by business Creates issues for professors; they can t be full time employees of the small business Must have ability to oversee research project; it helps to have a PhD or MD 500 employees or less One application can be submitted to many agencies But a single project cannot be funded by multiple agencies 15

16 SBIR Funding Phases Phase I awards of up to $100,000 6 months to explore technical merit or feasibility Phase II awards of up to $750,000 2 years, expand Phase I results Only Phase I award winners qualify Applications made to Federal Agency, not SBA Requires inside knowledge of agency requirements then link to agency solicitations 16

18 VC Firm Basics Organized as limited partnerships, usually Stage/Industry focused Seed/Series A versus later stage Healthcare versus information technology Invest in preferred shares Preferences over common shares Debt does not have the return possibility VCs share information, deals. Syndication is common Information Sources Pratt s, Venture Wire, Venture Source, PWC, E&Y, NVCA 18

19 VC Fund Organization Limited Partnerships GPs make the decisions; LPs put up ~99% of the money Normally 10 year life, short extensions LPs commit funds but don t wire the money until asked Capital Calls ~ 5% of commitment for each capital call Recycling Liquidity Dry Powder Reserved for Continuing Funding Why Aren t VC organized as C Corps? 19

20 VC Fund Staff General Partner Venture Partner Role depends on the fund Principal, Associates, Analysts Partner track or not Don t normally get carried interest Entrepreneur in Residence Interns 20

21 Overlapping VC Funds ( Vintages ) GPs raise multiple funds overlapping in time Fees add up May have different LPs Investment by subsequent funds into earlier funds 21

22 VC Initiated Companies The VC, usually the General Partner, has the idea No company in place GP, VP or EIR will take the management role Often start by taking university licenses VCs get the founders shares, often common 22

23 Limited Partners (Sources of Capital) Fund of funds (investment banks) Pension funds Endowments Corporations High net worth individuals VC general partners, for tax reasons 23

24 VC Firm Numbers ~ 500 USA VC firms More internationally 3 to 6 General partners High profile firms (KPCB, NEA) have more Each gets over 1,000 business plans annually Solicited, unsolicited, , over the transom, network Can call on $50 million to $1 billion Can span fund vintages Investments should get liquid < 10 years More like 7 years 24

25 After 3 Down Years, Investment Rises in 04 Deal Flow and Equity into Venture-Backed Companies $ $94.6 6,000 Amount Invested ($B) $75 $50 $25 $ $ $ $ $13.1 $ $49.5 $ $ $ $ Amount Invested ($B) Number of Deals 5,000 4,000 3,000 2,000 1,000 Source: Dow Jones VentureOne/Ernst &Young; Courtesy SunAmerica 0 25 Number of Deals

26 Early Stage Investing Trending Down 100% 8% 8% 80% 33% Restart 46% 45% Later 60% 22% Second 40% 36% 26% First 20% *44% *43% Seed *21% 0% Source: Dow Jones VentureOne/Ernst &Young; Courtesy SunAmerica 26

27 How Do General Partners Make Money? Management fees 2 to 3% per year Carry or Carried Interest ~20% of investment profits go to GPs Strong firms like KPCB can get up to 30% Direct investments into the fund 27

28 Carried Interest Calculation $100 million in committed capital Assume exits of $150 million in 10 years Assume 80/20 distribution Carried interest to GPs is $10 million 20% of ($150 million - $100 million) Proceeds to LPs of $140 million $100 million original stake plus 80% of surplus Where do the fees come from? ~$2 million/ year, declining annually 28

29 Anatomy of a Capital Call Assume $100 million committed capital Assume 4 invested committed at $25 million each Fund executes deals for $4 million. Needs cash. GP issues 5% capital call. Covers fees as well. Each LP wires $1.25 million to GP account 5% of 25% of $100 million If the fund has cash available due to a prior liquidity event, there may be no need to issue a call Called Recycling liquidity What happens if an LP does not honor a capital call? See your Limited Partnership Agreement 29

30 Catalysts for VC Industry Involvement VCs need a new story Nanotechnology? Theme restaurants? Energy? VCs go into hibernation between innovations Witness the post minicomputer bust Domain knowledge Won t invest without confidence Reduction of technology risk Continued government and university research One success is needed to create a herd mentality Herd mentality is also a risk 30

31 Why Venture Capital? Is a VC necessary to start a business? No, but knowing the process is useful <1% of new companies use a VC (Kauffman) When is a VC really useful? Time to market is crucial High initial capital requirements Management input is needed, from that VC in particular Often, really big winners are VC backed Google, Cisco, ebay, VCs have money, experience, contacts The disciplines of VC fundraising are important But you can win without VC $$ 31

33 Investor Fundraising Process They get your summary or plan, somehow Initial meetings and phone conversations Partner presentation Due diligence Investment syndicate formed Term sheet, normally by the potential investors Closing documents or definitive documents Funding Bridge, Full close, Rolling close 33

34 Write a Good Business Plan Even though VCs are not likely to read it Especially, if they don t know you ahead of time Write it for your edification You need it for other reasons (recruiting, banking, government grants, licensing, ) Write an excellent Executive Summary VCs might read that and get interested in the full plan Have a really good elevator pitch 34

35 Write A Private Placement Memo (PPM) Or, Offering Memorandum or Prospectus Mostly Boilerplate Amount requested Disclaimers Risks Offering to accredited investors Disclosures of prior transactions Business plan can be a supporting document 35

36 Elevator Pitch Tagline, something catchy, attention getting Pain How you solve the problem TAM Status Credentials Sustainable advantage Request Pitch varies depending on purpose Raise equity, get a job, get a vote, hire, borrow 36

37 Executive Summary Format Maximum of 3 pages; 1 or 2 are better Mini business plan; covers all the points Bullets with tables are OK Induce the investor to read the full plan Must be compatible with the Powerpoint 37

38 Investor Presentation Very big deal; less than 10% get this far overheads Grab attention early What is your elevator pitch? Bring samples, visual aids Use diagrams/charts Bring more than one person, show there is a team Have hard copies ready Rehearse You have one hour, including Q&A 38

39 Investor Presentation Specify the money requested Say what will you do with the money; identify milestones Use samples; present current results Have and phone contacts on presentation Learn from the presentation experience; get feedback Treat it like an audition You are selling yourself, not just your knowledge Show poise, maturity, confidence, enthusiasm Inspire confidence in you, not the plan Did I mention to rehearse?? 39

40 During The Presentation, Don t. Bluff; say I don t know if you must Spend much time on technology Spend much time on any one area; hit all points Expect to get a yes or no Expect do this only once Say obvious things. These are bad icebreakers: The Internet will take over the world Moore s Law is. Cancer is a serious disease Burn your bridges You may be back for another deal Repeat yourself Georges Doriot kept a stopwatch on his desk. "I use it to see how long it takes someone in a meeting to tell me the same thing three times" 40

41 Due Diligence Off sheet references Customers and prospects Competitors Background checks Other investors Current investors Professional services support Better yet, it s better if the entrepreneur and the investor know each other beforehand. 41

42 Due Diligence Checklist Charter documents (Articles, SPA, LPA, ) Financials (audited, unaudited, working papers) Personnel records (non-compete, NDAs, pay ) Corporate agreements (sales, subcontracts) Banking agreements (loans, liens,..) Government permits and certifications Intellectual property Legal action External analyses Ownership etc 42

43 Term Sheet Valuation/Amount Raised/Dilution Cap table and option pool Vesting for founders Liquidation preference Participating preferred Board composition Protective provisions Shareholder Rights (voting, registration, co-sale...) Short form vs. long form... Use a lawyer? 43

44 Closing Documents Articles of Incorporation Stock Purchase Agreement Shareholder Rights Agreement Voting Rights Agreement Co-Sale Agreement Option Agreement Employee Agreement.. These need lawyering and it really adds up 44

46 What s the Investor Thinking? HOW DO I GET MY MONEY BACK?? Market risk Size, share, market development Technology risk Will it work Competition risk Can you keep a sustainable advantage Financing risk Is there enough cash now and later Management risk Can you execute Sustainable advantage Will you be good when I need to get repaid? 46

47 What s the Investor Thinking? Management team Current team Ability to round out the team Functional experience Domain experience Culture, personalities, chemistry Willingness to contribute where most valuable You will be replaced Georges Doriot s Rule "Someone, somewhere, is making a product that will make your product obsolete. 47

48 What s the Investor Thinking? Geographic desirability Industry focus Fit with other portfolio companies Reputation of the firm Reputation of co-investors Financial modeling You are ALWAYS being evaluated 48

49 Milestones Depends on the product Key to valuation and financing Can you hit the milestone with requested funding? Sample milestones Team assembled; CEO hired, functional VPs hired Prototype built Tape out of semiconductor IC Alpha test, beta test, component test, system test, field test Certification (ISO, Telcordia, Phase x clinical trial) First customer shipment Gross Margin > 0 Cash flow breakeven Financing event 49

50 How to Choose an Investor Chemistry Treat it like a marriage Perform due diligence on firm & partner Ask for references Use your network Active vs. passive Lead or follow Industry knowledge How busy are they Talk to other funded entrepreneurs Successes and Failures 50

51 How to Choose an Investor What were they like during the tough times? Board meeting attendance Attentiveness matters Track record Hat trick of experience Technology Management/leadership Investor Where does their money come from? Are their interests aligned with yours (term sheet items) 51

52 What to Get From an Investor $$$ Assistance with strategy Team building / recruiting Advice during company building process Assistance with follow-on rounds of financing Intros to professional service providers CEO mentoring / therapy 52

53 What Should the Entrepreneur Consider? Management control Employment contract Founders stock vesting and repurchase Retention of key staffers and recruitment Value added services from the VC Can the VC complete the round Conflict resolution among investors and between investors and founders Long term financing strategy Dilution Answer the Fundamental Question How does the investor get repaid, with a good return? 53

54 Fundraising Is... Grueling. It can take months and dozens of presentations A learning process. Take notes from those who turn you down. Modify your pitch. A mirror into your personality. The investor learns a lot about you, as do your employees. Act like an adult. 54

55 If You Want To Go Nowhere, Follow The Crowd