What I tell every Entrepreneur. My Experiences. Team Risk. Defensibility

Transcription

1 What do you the founder have? Passionate dream Ace engineering team Lecture 11: The Nitty Gritty Reference customers First version of the product Slide deck that shows a $1B TAM and $30M of year 3-4 revenues Peter B. Danzig, PhD What does the series A investor see? Thousands of PPT slide decks a year--- Meets a hundred teams a year with $1B TAMS But an only pitch 1, 2, or 3 deals/year to his other partners Funds one new company per year and serves as a board member to 6 more companies at various stages My Experiences Advisor Lead Investor and Chairman Investor Friend of the Company Many walks with prospective founders All VC meetings are good; they re keeping their options open. If a VC is interested, he schedules the next meeting during this meeting

2 My Experiences Founded: Internet Middleware Sold to NTAP Joined: Akamai as Technology at end of first year Investor: Riverbed (IPO), Peribit (JNPR), ArrowPoint (CSCO) Advisor: VMware (EMC), Ironport (CSCO) Lead Investor Vaska (small business) Asset sale Board Chairman/Lead Investor- PepperMob FAILED Advisor: Ensighta (FEYE) : Virtuata (CSCO) Advisor/Investor Instart Logic, Panzura TAB To a dozen companies that went nowhere What I tell every Entrepreneur Every investor is looking for reasons NOT to invest Team Risk (s), s, Engineers Market Risk Market Size, Competitors, Go to Market Acquirers Technology Defensibility and Engineering Risks Two Year market or engineering head star Strong patents or tech Team Risk Single founder: CTO or CEO Balanced skill founders with experience Consumer: Marketing Enterprise: Product Marketing Engineering: Usually can wait on the Enterprise Sales: Usually can wait on Team Due Dili[gence]: Virtuata: Single crazy reference call PepperMob: Single bad reference NetCache, Ensighta & Akamai: Scientists Defensibility Academic paper/technical leadership Deep knowledge, Self driving cars and Robotics Material Science: Batteries Nanomaterials: Theranos (oops) Authors of public reference model Hadoop: Cloudera, Couchbase, Defensibility by market head start Leads to these huge series A rounds rolling up what used to be A, B, and C rounds

3 Market Risk Market Size: Silicon valley wants $1B new markets. Uber: compelling vision GetListed: Failed to disrupt Monster and Dice Competitors: Each new sector has room for 1 winnertake-all, 1-3 acquisitions, and everyone else fails VMware (Double Winner, Acq and IPO and Acq) Xen (Acquired) Go to Market: Direct versus channel sales versus freemium Consumer/Viral Acquirers: Cisco/Facebook/Google/Amazon Fund Types have different goals Angels and Friends & Family Try explaining capital loss to your dentist VC Trying to make his mark. Value add investor. Needs IPO s and $300M+ Acquisition Mezzanine Low risk big sum investors Bankers Sell IPOs Equity Seed investors Equity, 100% Employee Pool, 0% Equity Employee Pool Seed Investors Typically invest on a convertible note. That is, they loan money to the company and hope that the series- A investor gets the paperwork right and treats the seed investors with respect. Let s assume the seed investors convert their loans into series-a investment at the terms of the series-a investor.

4 Series A Cap Table Valuation Raise 6M on 9M Pre Series B Post Dilution Equity Pool Raise $7.3M on 22.5M Pre for Post 29.8M Series A Investor + Seed Investors, 40% Employee Pool, 19% Equity, 40% First Employee, 1% Employee Pool, 6.250% Series B 25.00% Series A 30.00% Equity, 30.00% Engineering 2.00% Sales, 3.00% Marketing, First 3.00% Employee, 0.75% Series C Post Dilution Equity Pool Raise $11.25M on 45M Pre for Post 56.25M Post IPO Equity Pool Raise 125M on 500M Pre for 625M Market Cap Series B 20.00% Series C 20.00% Series A 24.00% Equity, 24.00% Employee Pool, 5.000% Engineering, 1.60% Sales, 2.40% Marketing, 2.40% First Employee, 0.60% Mezzanine and IPO Investors, 20.00% Series C 16.00% Series B 16.00% Equity, 19.20% Series A 19.20% Engineering, 1.28% Sales, 1.92% Marketing, 1.92% First Employee, 0.48% Employee Pool, 4.000%

5 Liquidity Events: Happily Acquired Sell series B company for $100M s share 30M First employee experiences $750k First employee might hold options instead of stock. Then he pays full W2 income tax, might be at the 40% marginal federal rate plus California state taxes of 12%. Asset Sale-- Sell series B company for $20M Oops Perhaps no value for common stock Employees/founders get nothing for their stock Acquirer creates new incentives to maintain the team Perhaps RSUs (Restricted stock units) Perhaps cash retention bonuses holds stock, and pays 15-20% cap gain taxes. Acqui-hire Perhaps sell a young company pre-product Cisco/Google/Amazon/Facebook Get great engineering team expert at an area Good for seed investors. A disappointment for venture investors. Low risk upside but cultural disappointment to employees and founders Virtuata (Cisco) Ensighta (FEYE) Internet Middleware (NTAP) My Experiences PepperMob Chairman Instart Logic TAB/Investor Panzura - TAB/Investor Ensighta - Advisor Virtuata - NetCache -

6 Momentum versus Traditional VCs My experience with an enterprise mobile app PepperMob make your average sales guy as good as your best Raised $1.5M. $300k my own money, $300k Dave Cheriton, $300k venture firms, $600k friends I was Chairman e.g. Did everything I could to make /CEO successful Damning criticism: there s oxygen and there s vitamins. This is vitamin PepperMob Lessons Having raised seed funds from a tier-1 VC, couldn t raise funds from anyone else unless they lead Met 35 VC firms couldn t get anyone over the edge despite several partner meetings failed the VC dili[gence] test. The one firm that wanted to write a check ducked out after giving me a verbal. This came back to haunt me during shutdown. Viral growth is exponential, not linear J PepperMob Lessons Direct sales requires $200k contract values---whether it be product or service Salesforce.com mobile app proved there was no market---but we misread this as a market poorly served Two of my investors couldn t afford to lose their $25,000 and I should have refused their checks PepperMob Lessons Momentum investors Show 200,000 daily users with viral growth, and we re in Tech investor Show me team, intellectual property, market, & differentiation It s too easy to raise seed funds and too hard to raise VC funds

7 Virtuata Anti-virus/Anti-malware by guaranteeing computer security invariants Control flow invariance Code invariance Market: Enterprise, Cloud, or Consumer? Team: Joe and I Defensibility: Compelling albeit incomplete at the time Tier1 wrote term sheet and then backed off after bad due dili[gence] call Virtuata Cisco acquired Virtuata and eventually included us as a product feature. The key switch and router team considered using us as fundamental security for all Cisco products, but nothing happened. Seven team members earned $1M on a $32M total acquisition value. Most all left Cisco. Bromium: Has raised $115M on a last round valuation of $242M. Virtuata Weakness in GTM for Cloud and Enterprise VMware owned the hypervisor and wouldn t play ball New GTM: Through potential acquirer CSCO called me January 2011 and said, give me that term sheet and we ll fund you. My challenge: Recruit a team for a low value spin-in Venture firm that dissed us funded our competitor, Bromium Virtuata Cisco acquired Virtuata and eventually included us as a product feature. The key switch and router team considered using us as fundamental security for all Cisco products, but nothing happened. Seven team members earned $1M on a $32M total acquisition value. Bromium has raised $115M on a last round valuation of $242M. No liquidity events. Layoffs. A year ago, raised funds on a down round.

8 Virtuata Lesson: A single on a single round of funding is lower risk, perhaps not or perhaps better IRR than a triple on 4 rounds of funding. Recruiting for Virtuata was pretty easy: if you missed Facebook, at least I can get your kids their college educations. Downside for partnering with a strategic, if strategic bumbles, then raising money might be impossible. Ensighta (Dawn Song, UCB) Macarthur Fellow Award winner in computer security, UCB Professor She wanted to do computer security for mobile apps, but was consulting into Google who were focused on the same space She wanted to flip the technology and make riskless wealth during her university sabbatical. Issues: How to fund, UC Berkeley IP entanglements, how to flip Ensighta (Dawn Song, UCB) Sold to FEYE, pre-ipo Time fame: Perhaps months Lesson: You can exploit your academic reputation and bootstrap it into wealth you just need to be the world expert on an interesting technology Instart Logic Pre-IPO startup in content delivery & advertisement integrity Raised $300K seed round in Fall 2010 to optimize application downloads. Realized their market was too small realized that their technology let them address the $1B content delivery space I took many an investor call, arguing that their technology was the missing piece in content delivery

9 Instart Logic Once in the content delivery space, realized their customers were losing billions of dollars on ineffective advertisements Team*, Market*, Technology* Has raised $140M so far.next step is IPO.what acquirers are left standing? Akamai, IBM, Google? Summary Team, Market, Technology/Differentiation Raising seed rounds are easy/full venture rounds not Questions? Peter Danzig,