This short presentation covers investment analysis framework to access attractiveness of early stage companies and startups.

1. Anton Fedorov
BURAN VENTURE CAPITAL
tonyfedorov.com

2. Table of contents
1. Venture Capital overview
 What is VC?
 Business model
 Risks – Reward curve
2. Investment framework
 Team
 Business Specifics
 Market Opportunity
 Exit returns
 Risk mitigation
3. Lessons learned
2

3. 3
What is Venture capital and why it exists.
Venture capital (VC) is type of funding for a new or growing business which usually involves
high risk financial risks.
Difficult for traditional financiers (banks /
capital markets) to fund these firms due to
low credible information and low ticket sizes
VC’s address with three key mechanisms:
 Sorting: picking the right entrepreneurs.
 Controlling: limiting “agency” problems, through
a mixture of incentives and monitoring.
 Certifying: developing a tradition of quality and
fair dealings.
What
Why
Venture Capital overview

4. VС Business / Economic Model
4
Assets
Investments
Entry
 Deal sourcing
 Due diligence
 Decision making
 Deal documentation
Value creation
 “6-month plan”
 Portfolio review:
 Budgeting & strategic decision-making
 HR
Exit
 Decision making
 Organizing exit process
 Deal documentation
KPIs
 Cash-on-cash multiple also known as
multiple of cost
 IRR
Liabilities – Limited Partner commitment
 Investment team
 Track record
 Investment philosophy (investment themes, investment approach)
 Investment strategy (deal sourcing, structuring, return targets / risk-reward curve)
 Fundraising
Key deal metrics with LPs:
 Carried interest rate (standard rate 20%)
 Hurdle rate (standard rate 8%)
 Management fee (standard rate 2%)
Equity – General Partner commitment
 “Skin in the game”
Income
statement
Fund & investors Fund managers
Investment income (+) MF income (+)
Investment cost (-) Carry income (+)
Deal expenses (-) Operational expenses (-)
Gross result / IRR
Net income / (loss)MF expense (-)
Carry expense (-)
Net result / IRR
Venture Capital overview

5. 5
Risk – reward curve
100%
30%
10%
1%
3%
Venture Capital overview
VC’s goal is to provide 5-10x gross return over
7-10 years timeframe
To accomplish one must focus not just on
excess returns, but protecting downside
64.8%
25.3%
5.9%
2.5% 1.1… 0.4%
32.4%
48.6%
11.3%
4.8%
2.1% 0.8%
0-1x 1-5x 5-10x 10-20x 20-50x 50x+
Gross return based of companies '04-'13
Simulated returns if losses reduced by 50%
By % of financings in companies going out-of-
business, acquired, or IPO ‘04-’13. N = 21,460 3
Gross realized Multiple range
%offinancings
Gross return: 7.5%
Cash-on-cash return: 2.1x
Realized
14.7%
3.9x
Simulated:
Targetreturns
Risk

6. Investment framework
6
Issues /
Conclusions
1. Team
2. Business
specifics
3. Market
opportunity
4. Exit
returns
5. Risk
mitigation
How to protect downside?
(negative protections, liq. pref. and liq. value)
Is founder's team an A-level one?
Is there enough muscle in the company?
(business model, traction, product market fit)
Is there an opportunity to create a large company?
(market, competition, defensibility / entry barriers)
Is there an opportunity to return a >10x?
( successful previous exits in industry, good deal terms)

7. 1. Team:
7
Is founder's team an A-level one?
• Sufficient management team industry expertise
• Serial entrepreneurs
• Founders’ capital contribution US$150k+
• Multiple founders
1
Integrity:
Qualities of Founders:
Reduce asymmetry of
information risk
Goal to accomplish
Reduce founder “flight” risk
Reduce chance of failure
Reduce chance of failure
Scoring questions
Passionate vision:
Experience & expertize:
Leadership:
Commitment.
 Cash contribution
 Time
Reduce founder “flight” and
asymmetry of information risk
Investment framework

8. 2. Business specifics
8
Scoring questions
• Buran primary investment theme
• First revenues recorded
• Multiple sources of revenue
• Tested and scalable business model
• No external working capital funding required
• Breakeven achievable with Buran investment
2
Business and Financial Metrics
 Revenue recurrence (ARR / MRR)
 Customer Concentration Risk
 Gross margin
 LTV (Life Time Value)
 CAC
Product and Engagement Metrics
 Downloads / Active Users / Customers
 Month-on-month (MoM) growth
 Net Promoter Score (NPS)
 Cohort Analysis / churn:
 Gross churn
 Net churn
Is there enough muscle in the company?
Company metrics: Threshold levels:
MRR > US$40k
Concertation <15%
margins > 30%
LTV / CAC >4-5x
CAC payback 6-9 months
100’s of paying customers / 100k’s of users
Growth is >2-2.5x y/y, >10-15% M/M
NPS >0
Gross (max): -10% per annum for SaaS or
20% for marketplaces
Net is hopefully negative
Investment framework

9. • Addressable market size US$100m+
• Market CAGR for next three years 50%+
• #1 position in niche achievable
• Sufficient entry barriers
3
3. Market opportunity
9
Is there an opportunity to create a large company?
Scoring questionsMarket metrics: Threshold levels:
Market Size:
 TAM (Total Addressable),
SAM (Served/Serviceable Available),
SOM (Serviceable & Obtainable)
 SAM Market growth
 HHI of customers
Competition
 HHI of competitors
 Porter’ 5 Forces analysis
Opportunity timing
 Regulatory changes
 Technology adoption
 UX / Behaviors shifts
SAM >US$100-150m
SOM share 20-30%
in 5-7 years
20-50%
Highly fragmented market
HHI* - Herfindahl-Hirschman Index
Few competitors
Bitcoins
Whatsapp, Youtube, Dropbox, Autonomous driving
Examples:
Dating, Taxi, Snapchat
Investment framework

10. • Successful international peers
• At least one equity exit in this niche occurred in
the last three years
• Target EBITDA margin > 20%
• Fairly priced rounds
(vs. revenue metrics, vs. previous capital raised)
4
4. Exit returns
10
Is there an opportunity to return a >10x?
Scoring questionsReturn characteristics: Targets:
Exit environment
 Diversity of buyers
 Sustainable company
cash flow in future
Deal parameters:
 Entry valuation
 Deal structure
 Healthy captable
Investment framework
Fairly priced rounds
(vs. revenue metrics, vs. previous capital raised)
No secondary
Founders own >50% of the company
EBITDA margin > 20%
Gross margin >50%
Ability to create auction

11. 5. Risk mitigation
11
How to protect downside?
Scoring questionsRisk mitigation:
Portfolio diversification:
Minority protective provisions:
 Board seat
 Reps and warranties
 Covenants
 Pre- and post-closing conditions
 Anti-dilution provisions
 Liquidity rights / transfer provisions (tag, drag,
pre-emptions, ROFR, CoC)
 Information rights
 Indemnities (protection if rights are breached)
• Investment size between US$500-5,000k
• Liquidation preference over 1x
• Liquidation value over BVC investment size
• Board seat and minority protective provisions
• Positive feedback from industry experts
5
Investment framework
Liquidation value:
Liquidation preference > hurdle rate
Important pieces:
 Title to the shares
 Level of indebtedness
 intellectual property
Fraud is a real issue. Protections: due diligence,
personal guarantees, funding in installments.
The only real levers that we have are:
1. Funding schedule and triggers
2. Instigate management changes
3. Forcing a default or an exit
Main consequences:
Follow investment strategy

12. Lessons learned
12
Founder is the key:
• He needs to be a true entrepreneur: leader, ready to experiment, never gives up
• Better to have several founders than one – improves probability that they have a real entrepreneur inside
• Key founder skills: product, technology, HR, marketing and sales
Our how-to toolbox:
• We are investors, not entrepreneurs. Better to pull the plug early, than become the CEO
• Right motivation builds the business
• If the management is not focused, they lose
• Simpler is better
• Product wins over development
Cream of the crop guide:
• Best investments are counterintuitive – betting against the market. What does this really mean?
- You need to spot the value way before anyone else
- Insider trading is not prohibited on private markets
• Winner takes all” does not always apply
• Underfunding could kill the best idea

13. 13
Thank you