EIA 2015 How VC Funding Works
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Ravi Belani – Managing Partner, Alchemist Accelerator
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EIA 2015 How VC Funding Works
- 1. Ravi Belani @rbelani AlchemistAccelerator.Com Ravib@stanford.edu July 2015 Venture Capital Overview European Innovation Academy
- 2. Yeah, we fight a lot, But In the End, You and I, We are a Perfect Match I wouldn’t want it any other way But now you are gone and I’m all alone, Lying here naked and staring at the phone Wisdom from Say Goodbye to Yesterday
- 3. Navigating the VC-Founder Dance
- 4. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 5. Entreprneurship Lecturer at Stanford ETL.Stanford.EDu Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director 6 Years as a Venture Capitalist Skype, Baidu, Hotmail, Tesla Me: Twitch (Amazon), Pubmatic Director, Alchemist: B2B-Focused Accelerator AlchemistAccelerator.com
- 6. The Leading Enterprise Accelerator GOLD Top US Accelerator of 2015 #1 VentureBeat labeled Alchemist as the Accelerator of the Year for 2013 7 Alchemist companies have been acquired. PAGE 03 60% Over 60% of Alchemist companies raise institutional capital within 12 months of Demo Day (35 companies to date, average raise is $2.1 million).
- 7. Institutional Investors in Flagship Accelerator Program include: Alchemist Investors PAGE 04
- 8. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 10. 3 Sources of Cash: What are the Pros & Cons of Each? Revenue (Customers) Debt (Banks) Equity (Venture Capitalists)
- 11. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 12. How VC’s Make Money Carry Management Fee
- 13. Management Fee Consumers 25% of a FundHow much management fee does a VC make in this fund? $500M Fund
- 14. Management Fee Consumers 25% of a FundManagement Fee Can Consume 25% of Fund Principal $500M Fund $125M Mgmt Fee • 2.5% Per Year For 10 Years • Fund Committed after 3-4 Years • 3 Funds Drawing Management Fee Down on in any given year
- 15. How VC’s Make Money Carry Management Fee
- 16. Case Study of a Young Fund: Kleiner Perkins I (1972) 16 Fund Size $7.5M # of Co’s 17 @ Check Size $450K Return $345M 46x # How much carry did the partners get?
- 17. VC Profit Share: Carry Calculation 17 Fund Returns: $345M - Fund Size: $ 7.5M ----------------------------------- Fund Profit $337.5M X Carry 20% ----------------------------------- Carry $67.5M
- 18. Of Kleiner Perkins’ 17 Investments, 2 were responsible for 90% of returns 18
- 19. VC’s want to return 1/3 of their fund with each investment $500M Fund # of Co’s 30 # Big Winners 1 out of 10 % x = 3 Big Winners in Each Portfolio
- 20. Can Make Money Several Ways: Two Case Studies Google: Rising Star Hotmail: Contrarian Bet
- 21. Optimal Ownership is typically between 20 – 40 % VC Ownership VC Return
- 22. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 23. PRIMARY TERMS Pre-Money Valuation Option Pool Liquidation Preferences Anti-Dilution
- 24. Valuations are a function of fundraising dynamics NOT instrinsics Driven by the ownership needs of the funds you raise from and the cash needs of the company Post–Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund Pre-Money Valuation = Post-Money – Cash Raised Larger Funds are Much More Sensitive about Ownership Needs than Cash Needs! Series A : Raising off of the IDEA Series B: Raising off of RESULTS Trick is balancing the Series A valuation to set you up so you can raise off of Results in the Series B at a markup (ideally 3x!)
- 25. What’s the post? What’s the pre? • $2M given for 25% of the company • $3M given for 25% of the company • $2M given for 20% of the company • $1M given for 40% of the company Post–Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund Pre–Money = Post-Money – Cash Invested
- 26. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 27. WHAT MAKES A SUCCESSFUL NEGOTIATION?
- 28. NEGOTIATIONS 101: DOES A ZOPA EXIST? BATNA: Best Alternative to a Negotiated Agreement ZOPA: Zone of Possible Agreement Alternative to Sell: $1 Alternative to Buy: $8
- 29. Capture Value: How do you know how big the ZOPA is? Alternative to Sell: $1 Alternative to Buy: $8 ZOPA
- 30. Negotiations Generate Value in 2 Phases Create Value: Focus on Interests, Not Positions Capture Value: Understand the Other Person’s BATNA first
- 31. Create Value
- 32. Create Value
- 33. Capture Value: Focus on the Other Person’s BATNA First Alternative to Sell: $1 Alternative to Buy: $8 ZOPA
- 34. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 35. Negotiation Exercise: Count Off!
- 36. Negotiation Exercise: Go Here (Don’t Read the Other) http://bit.ly/EIAFounder1 2 http://bit.ly/EIAVC
- 37. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS TERMS: OTHER SECONDARY TERMS
- 38. VALUATION IS JUST ONE TERM Pre-Money Valuation Option Pool Liquidation Preferences Board Structure
- 39. Employee Pool • Employee Pools typically come out of the PRE-MONEY – that is YOUR Total Dilution is the NEW INVESTOR’s money PLUS the Employee Pool • Can always expand the employee pool later – and when you do, all will be diluted equally. Try to minimize the employee pool to what’s absolutely needed. • Exercise: You own 40% of a company. A VC wants to put in $2m for 25% of your company, and requires a 20% employee pool PRE-MONEY. • What’s the Post-Money Valuation? • What percent of the company do you own afterwards?
- 40. VALUATION IS JUST ONE TERM Pre-Money Valuation Option Pool Liquidation Preferences Board Structure
- 41. Board Composition & CEO Role How many, and what’s the split between preferred, common, and independents? When is the independent important? How do you fire a board member?
- 42. VALUATION IS JUST ONE TERM Pre-Money Valuation Option Pool Liquidation Preferences Board Structure
- 43. Liquidation Preferences Why does Preferred Exist? Check for: • Multiples? • Participating vs Non- participating • Senior or Pari-Passu What’s this?
- 44. Liquidation Preferences Why does Preferred Exist? Check for: • Multiples? • Participating vs Non- participating • Senior or Pari-Passu What’s this?
- 45. Liquidation Rights Exit Value Payout Draw the payouts to: • Investors • Founders Assuming a •$3.5m exit •$10.5m exit •$20m exit •$100m exit
- 46. SECONDARY TERMS: IGNORE THESE Series Investment Anti-Dilution Closing Conditions Dividends Key Dates & Milestones Notes
- 47. TERMS
- 48. TERMS: HERE’S WHAT YOU NEED TO FILL OUT Template: http://bit.ly/1JxjnnH Sample Partially Filled Out: http://bit.ly/1RPFDTq
- 49. Thank You! Ravi Belani @rbelani Ravi Belani 203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860 Ravi@alchemistaccelerator.com