E110 Guest Lecture 1(2)

E110 Guest Lecture 1(2) - Venture Capital 04.06.11...

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Unformatted text preview: Venture Capital 04.06.11 Shahin Farshchi, Ph.D. [email protected] 1 Catalyst: Innova-on   Material or substance   Process   Device   Algorithm   System Architecture 2 Fuel: Effort & Money   Personal savings  ­ ¢, $   Friends, family, and other individual investors  ­ $$   Small ­business grants and loans  ­ $$$   Venture Capital financing  ­ $$$$   Government grants and loan guarantees  ­ $$$$$ Concept Plan Execution Growth   Many startups do need to raise venture finance 3 Venture Capital Management Company LLC Limited Partners Pension funds, endowments, foundations, insurance companies, family offices Venture Capital Fund Limited Partnership Portfolio Company C Corp 4 Portfolio Company C Corp Portfolio Company C Corp Venture Capital Firm Structure General Partners Responsible for the fund Associates Venture Partners Identify opportunities, facilitate relationships, sit on boards, assist with recruiting Assist the general partnership in making investment decisions, raising money, and managing portfolio Advisors Industry leaders, academics, policymakers, visionaries 5 How VCs Evaluate Investments   Understand the risk associated with the investment   Understand the reward associated with addressing each risk           Technology Market Financing Competitive Management   Understand the money, time, and expertise required to address the risks   How much $$$ is needed to get where, and how much as that worth? 6 Technology Risk   Demonstrating a concept in practice   Scaling from a “proof of principle” to a “commercial sample”   Performance   Yield   Cost   Compatibility with existing peripheral systems   Mass manufacturability 7 Market Risk   Market value   What kind of value does the market place on the technology?   What is the risk associated with achieving that value?   Market window   Early entry results in requiring additional capital to keep the business afloat until revenue is generated   Late entry puts the company at a competitive disadvantage against incumbents   Market size   Is there a market?   Small market: Will it sustain the company’s expenses   Large market: What will be the competitive dynamic? 8 Compe--ve Risk   Large corporations with cash ­rich R&D organizations   Engage in a strategic partnership?   Other well ­funded startup companies   Competing technologies   Superior and inferior technologies 9 What is the poten-al upside?   Does the anticipated upside justify the potential risk? 10 So what do I present to a VC? Concept Plan Execution Growth Concept Plan Execution Growth   How the innovation would have the most impact   Economics of the business   Who is the customer, supplier, and competition?   How will the customer benefit, and what would they be willing to pay?   What will drive the growth of the business?   Capital required to execute on that model $$ 12 $$$ Concept Plan Execution   Team   Technology   Business Model   Market and Competitive Landscape   Financial Forecast   Interim Milestones   Possible Exit Scenarios Growth Concept Plan Execution Growth   Technology:   What it enables and why customers would care   IP protection   Required development moving forward   How it affects peripheral systems   Demonstrate impact and barriers to entry Concept Plan Execution Growth   Team that brings experience in:   Leadership   Sales and marketing   Technology development   Engineering and validation   Demonstrate the capability to execute on the plan Concept Plan Execution Growth   Market & Competitive Landscape   What is the company selling?   Who is the customer and why would they buy & pay?   What is the sales cycle?   Who are the suppliers?   What drives cost and sales price?   Is the investor comfortable with its prospects? Concept Plan Execution Growth   What are the dynamics of the market?   What drives growth?   What are the external factors that impact the business?   What determines the winners & losers?   Is the company expected to be well ­positioned in this market? Concept Plan Execution Growth   Forward ­looking financials:   How is the company expected to grow financially?   What are the financial requirements moving forward?   Basic cash flow and P&L statement   Operating expenses   Revenues   Gross Margins   Net income   Cash balance Concept Plan Execution Growth   Financing the startup   How much the entrepreneur should raise   Financing terms the entrepreneur should know 19 Concept Plan Execution Growth   Identify the significant milestones that will significantly reduce risk, hence add value to the company               Putting together a team, starting a company, and licensing the technology Showing a proof of concept Attracting a world ­class CEO Developing engineering design libraries Delivering product samples to customers Generating revenue Becoming profitable   Figure out how much time and money will be required to hit each milestone   At least half of the venture money is usually spent on payroll for R&D/ engineering at technology ­focused startups   Request an amount that would take the company to the next step 20 Concept Plan Execution Growth   The first money is also the most difficult to raise   Should the entrepreneur try to raise as much as he/she can in the first round?   Rationale for “yes” answer:   Better resources can be provided early on to ensure success faster   Longer runway means more time will be spent adding value to the company rather than going out to raise money   The company will not be “marketed” as much to VCs   Rationale for a “no” answer:   The company’s higher “post” valuation (premoney + amount invested) would make the company less attractive for follow ­ on investors 21 Concept Plan Execution Growth   Investors offer a “term sheet” that provides a template for:   “Pre ­money valuation”   Amount invested and the option pool   Vesting schedules   Liquidation preferences   Board composition   Protective provisions   Voting rights   Only legally ­binding term is the exclusivity clause   Cannot negotiate with other investors until an agreed date 22 Concept Plan Execution Growth   Valuation   The share of the company that the founders are giving up for the venture financing   Function of the risk ­reward profile   Amount invested   Financing needs for achieving agreed ­upon milestones   Liquidation preferences   Protects preferred shareholders in an event that the company is liquidated 23 Concept   Examples   Semiconductors   Pharmaceuticals 24 Plan Execution Growth Concept Plan Execution Growth   Semiconductor company example Design 25 Prototype Qualification Production Concept Plan Execution Growth   Pharmaceutical company example License 26 Team Drug Candidates Trials Venture Capital Shahin Farshchi, Ph.D. [email protected] 27 Venture investment process   The general partnership makes a decision   An investment is made in return for a stake in the company   The VCs take an active role as advisors and board members   Facilitate access to key customers/potential acquirers   Assist in securing additional non ­dilutive government financing   Build visibility and awareness   Recruit talent & professional management   Assist in raising additional financing   Define competitive strategy and positioning   The VCs assist in identifying/facilitating an “exit”   Acquisition   IPO 28 ...
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This note was uploaded on 10/19/2011 for the course ENGINEERIN 110 taught by Professor King during the Spring '11 term at UCLA.

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