E145 2008 Meets the VCs Session 14 Venture Finance Tom Kosnik (Adapted from slides originally created by Tom Byers) Copyright 2008 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be reproduced for educational purposes only. 1
Meet the VCs! Ravi Belani DFJ www.dfj.com Rowan Chapman MDV www.mdv.com Trae Vassallo Kleiner Perkins www.kpcb.com Chi-Hua Chien Kleiner Perkins www.kpcb.com 2
Sessions 2-8: Idea Versus Opportunity 2003 Mark P. Rice, Babson Sessions 9-16: Realities of Business Operations 3
Today s s Agenda Part I. What is the purpose of a business plan? Part II. Given the nature of the business and the objectives of the founders, what capital resources are needed to build the venture? 4
Part I. What is the purpose and actual value of a business plan? 5
Money is plentiful but scarce in boom times and bad 6
Too much of a good thing can knock a venture off balance 7
First Time Entrepreneurs often Ride The Money Talent Merry-Go Go-Round 8
One reason for a Business Plan is to raise capital to grow your. business. Another is to clarify and focus your strategy PEOPLE & RESOURCES Experiences, Skill, Contacts, Attitude, Knowledge Favorable Sociological Factors Opportunity-Appropriate Knowing and Being Known CONTEXT Macroeconomy, Tax, Regulatory, Socio-political Appropriate Risk / Reward Allocation and Incentives Investor Value Added OPPORTUNITY Entry Barriers, Customers, Suppliers, Substitutes, Rivalry, Economics Favorable Technology Macroeconomy Project-Appropriate Financing Option Preservation Favorable Rules of the Game DEAL Allocation of Risk and Reward, Incentives, Signals, Sorting, Consequences Reference: Sahlman et al. (1999) The Entrepreneurial Venture 9
Outline of a Business Plan Executive Summary Market Analysis Vision and Concept (including Technology) Competitive Positioning and Marketing Business Model Organization Financial Projections Ownership Focus of Sessions 13-16 10
Part II. How Tech E s E s Finance Their Ventures The ABCs A. Amount of Cash Needed and Purpose B. Sources of Capital C. Deal Structure 11
A. Amount of Cash Two Key Questions #1 How much money is needed for this round of financing? Typical Financing Stages (or Rounds): Seed Early Mezzanine Late (e.g., IPO) 12
#2 Which white hot risk(s) is to be reduced with this money? Team Risk Capital Risk Technology Risk Market Risk 13
B. Sources of Capital 14
Angel Investors Corporate VC Venture Capital Firms Bootstrapping Other 15
A Deeper Look at Venture Capital Firms INSTITUTIONAL INVESTORS (Limited Partners e.g. University Endowments, Pension Funds) VENTURE CAPITALISTS (Finding and Funding Entrepreneurial Companies) ENTREPRENEURS (Starting and Building Companies) Source: Andy Rachleff 16
US Venture Capital and the Economy GDP: about $12.5 trillion annually Hedge funds: $1 trillion over 3 years Mutual funds: $230 billion in 2007 Buyout funds: $86 billion in 2005 Venture capital? $31 billion in 2007 just 0.2% of $13.8 Trillion U.S. GDP. Source: BLS website, Investment Company Institute, Thomson Financial, VCA 17
But VC-Backed Companies = 17% of GDP 18
At Year # Venture Capital Under End Firms Mgt 1970 28 $1B 1980 89 $4B 1990 398 $31B 2000 887 $223B 2001 949 $252B 2005 866 $259B Source: 2006 VCA Yearbook, prepared by Thomson Financial, page 18 19
After a Peak in 2000, Now on a $25B+ Annual Pace in US Source: PricewaterhouseCoopers/ ational Venture Capital Association MoneyTree Report 20
Historical Comparison of VC Styles People Stage US Model company founders and builders seed International Model (e.g., Europe) consultants and bankers early (A Round), but not seed Provide value added just money Style hands on hands off Objective create very large companies create medium sized companies Philosophy maximize upside minimize downside Returns target a small number of big winners home run investing believe returns can be earned across a portfolio Reference: Mowbray Capital, London
C. Two Key Questions Regarding the Deal 1. What percentage of the company do the investors receive for their cash? 2. What special terms and conditions are necessary to compensate them for the risk? 22
(1) Founding: An entrepreneur begins with a vision and shares of stock in the new venture. Entrepreneur trades stock for ideas, money, and people Value has been successfully created (2) Seed Stage: Venture capitalists provide money in return for stock Employees join via friends & associates in return for cash salary and stock options Ideas become intellectual property which represents the initial value in the company Kaplan s Startup Game A race against time to create value and reduce risk (4) Exit Stage (Success): Company files for IPO or gets acquired (M&A) A viable enterprise has been created (maybe public) Entrepreneur, investors, and employees can cash in stock for money (eventually) Each party continues to build the company, starts the game again, or something else Further growth is delayed until milestones are reached and risk of failure is reduced Reference: Jerry Kaplan (3) Growth Stage: More money, ideas, and people are obtained, but for much less stock than in the earlier stage due to lower risk Company balances earning cash, taking investment, and spending cash to create value 23
Q and A Ravi Belani DFJ www.dfj.com Rowan Chapman MDV www.mdv.com Trae Vassallo Kleiner Perkins www.kpcb.com Chi-Hua Chien Kleiner Perkins www.kpcb.com 24