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VC FinancingVC Financing

BY:

Prashanti Lakamsani

Shailesh Manjrekar

Steve Martin

Omar Nawaz

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AGENDAAGENDA

Introduction Venture Capital Venture Capitalist Point Of View Revenue, Expenses, & Profitability The Pitch Valuing the Company Dividing the Company To IPO or Not to IPO Market Conditions

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Venture CapitalVenture Capital Venture Capitalist: investor who provides equity capital for high risk

business oportunities Can be generalists or specialists, Regional or Global VC’s are equity investors

– Collateral or security is not required– Part owners of the company

Under pressure to make huge returns Other roles

– Sit on Board of Directors– Recruit executive talent– Structure the company– Raise later rounds of funding– Build partnerships and alliances

A good VC firm puts you on track for IPO

http://www.estartuphelp.com

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Venture Capital by RegionVenture Capital by Region

3rd Quarter 1999 concentrations:Silicon Valley $3.36 billion(38%)New England $927 mil (10%)New York $687 mil (7.7%)Southeast $654 mil (7.3%)Washington DC $638 mil (7.1%)LA/Orange Co. $540 mil (6%)Texas $485 mil (5.3%)Rest of country $1.67 billion (18.5%)

http://estartuphelp.com/vcregion.html

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Venture Capital by RegionVenture Capital by RegionSilicon Valley funding

– Advantages Experienced VC firms with proven track records Established networks for alliances and partnerships

– Disadvantages Competition for venture funding Difficult to grab attention of VC firms

Local or Regional funding– Advantages

Smaller portfolios More time can be spent on your company

– Disadvantage Risk of lower valuation due to lack of competition among VC’s in the local

area

http://estartuphelp.com/vcregion.html

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Stages of Venture FundingStages of Venture Funding

Sweat Equity StageFriends and Family StageAngel Investor StageSeed StageEarly StageExpansion Stage FinancingLater Stages

http://estartuphelp.com/vcstages.html

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What Venture Capitalists look What Venture Capitalists look for in a Start-Upfor in a Start-Up

Substantial Market Size Market Positioning Superior Management team A combination of vision and implementation Participants and enablers of principal electronic

commerce transactions Aggregators of commercial buyers and sellers, and market

makers for others Marketing models that exploit one-to-one opportunities

http://estartuphelp.com/vcwhat.html

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What Venture Capitalists look What Venture Capitalists look for in a Start-Upfor in a Start-Up

Software enabled internet based value added services

Partnership’s, Alliances and EndorsementsDistance from VC’s

http://estartuphelp.com/vcwhat.html

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Selecting a Venture Capital Selecting a Venture Capital FirmFirm

What companies has the firm been involved in the past and how well have they done

What was the firm’s relationship with those companies, did the VC’s add value to the business with their experience and expertise.

Can they help you improve your valuation during the IPO or acquisition process

Do they have connections to help you build partnerships and alliances with the important players in the industry.

What stage do they finance, are you at that stage.

http://estartuphelp.com/vcresearch.html

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Why are profits scare or non-existent in the Internet space ?

Why is there so uncertainty about Internet Business models ?

When will some order emerge from the chaos of doing business on the web ?

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

The factors that make Internet attractive business venture are the same that make it treacherous :– Low barriers to entry– Low switching costs for customers– No “ moat around the castle” to protect profitabilitySome of the money losing dot-coms are still in heavy

investment or land grab phase, in an effort to capture customer base thinking one day it will pay off. They go IPO’s in this investment phase rather than waiting until they show a profit

Historically most businesses require 3 to 5 years before reaching profitability

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Does that make the Internet a “No-Profit Zone”– Absolutely Not.

Successful Internet Business models like AOL, Yahoo, E-bay show that there is money to be made on Internet even to-day by thinking Business First, Design second and Digital third

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

A unique and robust on-line value proposition for your customers is essential

A customer you cannot monetize = 0 Advertising offers a sustainable value mechanism

only if you can deliver either a well-defined niche audience or a true mass audience

The business fundamentals are more important than ever

Evolve fast or fail

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Business models, in the most basic sense is the method of doing business by which the company can sustain itself I.e generate revenues.

Brokerage – they bring buyers and sellers to-gether and charges fee for each transaction– Buy/Sell – Etrade– Market Exchange – Metalsite or Chemical Exchange– Vertical Web Community – Verical Net– Buyer Aggregator – Mobshop– Distributor – NECX– Virtual Mall – Yahoo Store

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Brokerage– Metamediary – Amazon’s zshop– Auction Broker – Ebay– Reverse Auction – Priceline– Classifieds

Advertising : Extension of traditional media broadcasting model– Generalized, Personalized, Specialized, Free Model

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Infomediary Model – data about consumers and their buying habits are collected, analyzed and sold. – Netzero

Merchant Model – the e-tailers, sales bassed on list price or auctions– Virtual – Amazon– Catalog – levenger– Surf and Turf – Gap, Lands End– Bit Vendor - EyeWire

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Manufacturer Model – Dell,Cisco– Negative Working Capital– Choice boards– 10X Productivity

Capital Cost Cycle

Subscription Model – Wall St. Journal

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Inktomi v/s Akamai or Selling a Product v/S Selling a Service.

Selling a Product– Traditionally results in lower fixed costs and wider profit

margins– Can take advantage of sales generated when third parties

create related applications– Requires a field sales force, which would significantly add

to the cost of doing business– May limit the potential customer base, because smaller

companies can’t afford the purchase of specialized product.

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Revenues, Expenses and Revenues, Expenses and ProfitabilityProfitability

Selling a Service– Eliminates manufacturing and distribution costs and

generates a recurring revenue stream– Attracts customers because of lower up-fornt cpaital

expenditures and a shorter deployement process– Can be expensive because fixed costs to run a network for

customers increase as the business grows.Traditionally results in lower fixed costs and wider profit margins

– Can be easily replicated by other companies with large worldwide networks in place, which could result in a price war.

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PitchPitch

“In baseball, they say, pitching is 90% of the

game.For start ups pitching may be even more

important”(Red Herring's "Venture Capital Post Script”)

What is a pitch?Types?

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Presentation/PitchPresentation/Pitch

Pitch: “A pitch is a presentation one makes to a VC about the idea, implementation etc to seek finances to turn the idea into a profit making company”

Types of Pitches One or two line summaries Elevator pitch 10-15 minute pitch

Full one hour pitch

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Top ten pitching techniques by Top ten pitching techniques by Lim(Kiva S/W)&Polar(I/Pro)Lim(Kiva S/W)&Polar(I/Pro)

Focus, Focus, FocusKnow your VC

(e.g.) Exodus Communications

Ditch your business plan instead 20 slide power point presentations

Keep it simpleGet Visual

(Red Herring's "Venture Capital Post Script”)

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Top ten techniques by Top ten techniques by Lim&PolarLim&Polar

Team upPush the buttonsFind the top dogGet a commitmentMove on (Red Herring's "Venture Capital Post Script”)

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PitchPitch Preparing for the pitch

Knowledgeable about your industry/sector Knowledge about major events, competitors in

industry/sector Learn about the VC firm well in advance Learn about the equipment at the place of the presentation <= 1 hour Attire – formal, semi-formal Rehearse

(http://www.estartuphelp.com)

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More techniquesMore techniques Making the pitch

Short and efficient Attendance – CEO, executive members must Very crucial first few minutes Answer questions in your area of expertise Show vision for your idea – continue with or without

their money Audition for a possible IPO road show Listen to them Emphasize the things to be remembered

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PitchPitch

Ending the pitch Business card, hand outs, executive summary and

business plan NDA – Good but not absolutely necessary

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PitchPitch

After the pitch Success – phone converstaions, emails Possible second meeting with partners –> serious contender Agree to fund – fortunate .01% of entrepreneurs Employ good lawyers Caution until the deal is closed Issues – valuation, dividing the pie, term sheet, legal docs, intellectual property, employees

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PitchPitch

Example Success storiesHotmail (sold for 400m to Microsoft)Juniper( backed by Kleiner Perkins Caufield

and Buyers, 69b market cap)Sycamore Networks (400m from Williams)

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PitchPitch

Successful pitch doesn’t guarantee successful company!

Living.com (backed by Benchmark, Amazon, Starbucks)

Pets.comWhat do you do if your pitch fails?

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PitchPitch

……MOVE ON! Don’t spend too much time re-writing the business

plan or pitch Make sure the idea is worth the efforts

– (e.g.) Infoseer, Link-VTC

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Valuing the companyValuing the company Assets and liabilities Revenues or market share P/E ratio EPS Multiples of expected earnings, potential growth Market leaders – incredible valuations Second largest - half the first Etc VC chasing after first funding Go with the VC who you are comfortable with than with VC

with best valuation for the company

(http://www.estartuphelp.com)

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Dividing the pieDividing the pie Common model Founders 30% (3 million

shares) VP operations 15% (1.5 m shares) VP marketing 15% (1.5 m

shares) Stock options (Employees) 20% (2 m shares) VC’s 20% (2m shares)

(http://www.estartuphelp.com)

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ModelsModels Professor Theroux model

The idea– patents etc

The execution– formation, long term

The money– good idea, more investors, less % - more often

remains largest %

(http://www.estartuphelp.com)

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BeforeBefore

– "If [investors] had spent two hours listening to a team present [their company], the opportunity cost of not investing was so great that they just threw money at the situation anyway”

Quincy Smith, partner at The Barksdale Group.

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NowNow

– ”In the wake of the fall-out in the e-commerce sector, firms are combing through their portfolios, facing stark choices about which companies to continue financing”

(http://www.ft.com: “Start-up funds adopt more global focus”)

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Investment Score CardInvestment Score Card

Scorecard for U.S. Internet-Related Deals $1.326 Billion Month to Date

$9.790 Billion Year to Date

2000- $71.493 Billion in funding• 2000-March $21.114 Billion in funding

2001- $9.790 Billion in funding

http://www.vclinks.com

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Monthly VC FundingMonthly VC FundingChanges in Funding

0

5

10

Month

$ (B

illio

n)

Fundings 3 4 5 6 7 8 7 6 7 5 6 5 6 4 3 5 3 2

ON D J F MA MJ J A S ON D J F M

http://www.vclinks.com

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To IPO or Not to IPOTo IPO or Not to IPO

• Technology IPO may remain nonexistent into the second quarter and probably well into the second half of this year

• 'Nobody would take their company public in today's environment unless they had no choice,' says Bruce Pollock, chief financial officer for Wavesplitter, ‘And we do have some choices’

• Including wavesplitter, 8 other companies elected to forgo the IPO plan since last Friday.

http://www.herring.com

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To IPO or Not to IPOTo IPO or Not to IPO• Loudcloud IPO on March 8, ‘01. Won’t reach profitability until end of 2003 but had to go for IPO because they were running short of options.

• Last funding was for $120 million in June 2000.

• Current burn rate is $10-12 million per month

• Reverse 2-for-1 stock split, increase offering from $10-25 mil shares.

• Reduce offering price from $10-12 to $6

• Market capitalization from $1.2 billion to $450 million

• Total expected IPO in 1st QTR are 13.

•First 6 tech IPO at 10.3% below offering

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To IPO or Not to IPOTo IPO or Not to IPOTech Wreck

-70%

-56%-59%

-51%

-44%

-60%-63%

-52%

-35%

-54%

-75%

-81%

-73%-71%

-64%

% o

f P

ric

e s

inc

e M

arc

h 9

, 20

00

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Survival of thE Fit E-stSurvival of thE Fit E-stIn E-TimesIn E-Times

• What caused the downfall of E-Business

•Overspending

•Over expansion

• Not paying attention to Cash flow and profitability

• How to survive?

•Cutting back across the board?

• Understand where cost cutting is required and areas where need to continue to spend

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The Income StatementThe Income StatementRevenues

Sales $5,000

ExpensesSalaries $2,500Rent 300Utilities 100

Total Expenses 2,900

Net Income $2,100

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Revenue & ExpensesRevenue & Expenses

What the income statement does for you?– Quick assessment of company’s expenses and

revenue– With Balance sheet a way to measure how

solvent is your company. Do you have enough money to pay your bills Measure by quick ratio ( quick assets/liabilities)

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Finance & AccountingFinance & Accounting

Not just numbersHelp understand

– What works, what does not– Areas of strength and weakness– Watch your inventories– Keep an eye on margins– Cash Flow

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IncomeIncomeNet

RevenuesNet

IncomeEarnings /

Share

$2,759

$3,753

$4,649

'98 '99 '00

$708

$953

$1,146

'98 '99 '00

$1.21

$1.57

$1.88

'98 '99 '00