mexico-silicon valley speech.ppt
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Getting Money from VCs and Angels
Thomas J. Toy
PacRim Venture Partners
January 27, 2005
Introduction
January 27, 2005 3
Introducing PacRim Venture Partners
Silicon Valley Venture Capital Firm founded in 1999
Invest in early stage Information Technology companies generally in Silicon Valley– Focus areas: Telecom, Software including internet, semiconductor
food chain
Always invest via syndicates of venture capital firms
Willing to be lead investor or active participant
Look to provide value-add to accelerate growth
January 27, 2005 4
Introducing Tom Toy
PacRim Venture Partners: Co-founder and Managing Director (1999-present)
Technology Funding: Partner and Managing Director of Corporate Finance (1987-1999)
Bank of America: Vice President in Corporate Banking (1979-1987)
Northwestern University: B.A., M.M. (MBA)
Boards of Directors: UTStarcom (Nasdaq: UTSI), White Electronic Designs (Nasdaq: WEDC), several private companies
San Francisco State University MBA Lecturer; Myelin Repair Foundation Business Advisory Board; San Francisco Chamber of Commerce The Job Forum Regular Panelist
The Fundraising Dance
January 27, 2005 6
The Start-Up’s Financial Food Chain
Boot Strap
Angel Investors
Venture Capital
Venture Debt
Corporate Partners
Commercial Bank Debt
Public Markets
Mergers & Acquisitions
January 27, 2005 7
The Fundraising Dance
The business plan
Targeting the “right” investors
Finding an “In”
Due diligence
The role of syndicates
Termsheets, negotiations, documentation
Life after the investment
January 27, 2005 8
The Business Plan
Business plan: 25-40 written pages (plus financials); full description about the business– Executive Summary: one page summary with complete information
about the company – Management– Market/sales strategy/competition– Technology/Product– Financials– Any regulatory issues
Two purposes– Strategic road map– Marketing document
Be focused
Lots of resources to assist
January 27, 2005 9
The “Venture Funnel” Reality
First Contact: 100 Companies
Initial Diligence: 30 Companies
Due Diligence: 5 Companies
1 Company Funded
Commitment: 2 Companies
January 27, 2005 10
Angel Investors
Given the “Venture Funnel Reality”, try Angels first……..
Angels are a huge segment in the U.S.
So who are Angels?– Everyone that you know—friends, family, business friends, friends
of friends, friends of friends of friends, etc…..
How do you find the Angels?– Networking, networking, networking
Advantages and disadvantages with Angels
January 27, 2005 11
Targeting the “Right” VCs
Once you decide that you want venture capital money……..
Target the right VCs so that you don’t waste time and resources
VCs have specific focuses; – Stage– Industry– Geography– Funding needs– Leader or follower– Quality of money– Sufficiency of money– A “spiritual match”
January 27, 2005 12
Establishing First Contact: The More Personal, The Better
Established funding sources receive many, many unsolicited contacts
As a quick way to prioritize, personal introductions are sorted to the top– Other VCs– Other portfolio companies– Industry friends– Bankers, lawyers, accountants
In Silicon Valley, unsolicited contacts are often ignored
In other environments, they may be more welcome– Smaller business communities– Very specific niches
You get one “shot”; make it count!
January 27, 2005 13
The “Elevator Pitch”
First contact often includes an “elevator pitch” – a brief description of the concept or idea
The elevator pitch should contain no more than 3 sentences and some supporting information
It helps orient the investor and quickly sort out ideas that may be of interest
Elevator pitch example: “Epinions.com is a web site that helps people make buying decisions. The content is provided by consumers themselves and experts as they contribute reviews. When consumers actually purchase, Epinions receives a fee from the merchant for referring the sale. The team includes several Netscape founders and an early Yahoo employee. The site is launched, and we’ve got about 1 million visitors a month.”
January 27, 2005 14
The Presentation Gives the Entrepreneur’s View
The presentation should be 15 – 30 powerpoint slides describing the idea and the company
It should contain at a high level all of the information the VC needs to know to make an investment– Concept– Team– Market problem & market size– Product/solution– Competitors/positioning– Financials– Financial needs
January 27, 2005 15
The Next Step: VC’s Initial (Quick) Diligence
The investor gets up to speed on the market– The VC’s personal knowledge about the sector– Friends who may know the market– Google
Perhaps a few quick checks on the management team– Any overlaps are helpful
Perhaps a short discussion with the VC’s partners
Goal: come to a quick decision on whether it is a real opportunity ASSUMING everything the entrepreneur says checks out
January 27, 2005 16
Due Diligence: Categories
Once the VC gets truly interested, due diligence begins……..
1. Presentation/business plan
2. Management team
3. Market/competitors/customer references
4. Technology/Product
5. Investors
6. Financials/return calculations
7. Any regulatory or legal issues
8. Three other elements: credibility factors, points of excellence, common sense
January 27, 2005 17
Due Diligence: Checking All Facts
Check out the facts presented by the entrepreneur– Checking trustworthiness of entrepreneur– Any mis-statement, no matter how small, may kill a deal at this
stage
Check out opinions held by the entrepreneur
Find information the entrepreneur may/may not know– Other companies being funded in the space?– Shifts in strategy on the part of big players?
Goal: find any knowable reasons why this may not be a good investment
January 27, 2005 18
The Role of Venture Syndicates
Why desired?
Build in some extra time for forming the syndicate
January 27, 2005 19
Termsheets, Negotiations, Documentation
Be realistic
Talk with/work with some experienced people (such as Pillsbury Winthrop)
January 27, 2005 20
Life after the Investment
What you get from VCs:– Money– Active involvement– Value-add
The entrepreneur needs to have done his/her due diligence to know what he/she is getting
Thank You!
Discussion
Appendix:
Due Diligence
January 27, 2005 24
Management Team Due Diligence
Resumes for each key member of the management team
At least 3 references; investors are always good references for other investors
Expect the investor to do further checking beyond the provided references
The investor will likely want to spend enough time with the team so as to “know” them
Goals– Find proven ability to execute– Find proven credibility (full disclosure on all facts, good and bad)– Find good contacts & network– Find no credibility showstoppers; most entrepreneurs are GREAT at
presenting as if they have more ability than they actually do
January 27, 2005 25
Market/Competitors Due Diligence
Analyst reports & calculations of addressable market size & growth
Customer, analyst, and market expert interviews to understand market drivers & success criteria
Key questions– What’s changing to allow a new entrant/technology?– Who else is competing in the market?– What makes this company better/different than the others?
Goals– Believe the company has a differentiated
technology/product/service with a good chance of achieving the scale necessary for a good exit
– Believe that it is possible to exit the investment profitably (e.g., multiple potential buyers, attractive public comparables
January 27, 2005 26
Customer References Due Diligence
Sales pipeline (if selling to companies or through distributors)
Key customer statistics & trends (if selling direct or via own web site)
Customer references – be sensitive to how it may impact your business– Actual buyers– Potential buyers– Potential customer contacts you’ve used for market research
Goal: Verify that customers…– …are where the company claims they are in the pipeline– …are willing to pay enough for the service/product– …put that product/service at the top of their list– …are representative of the target market– …are satisfied with the company’s performance
January 27, 2005 27
Technology/Product Due Diligence
Review of IP (patents, trade secrets) or product rights
Technical review by an expert in the area (e.g., senior software person to review an enterprise software, chip designer to review new chip designs, etc.)
Goals– Ensure the technology or product can do what is claimed; verify
“secret sauce”– Ensure that good development standards & practices are in place so
that technology or product development can scale with company– Test expertise of key technical/product team members
January 27, 2005 28
Financials/Return Calculation Due Diligence Financials should be full financials for 5 years
– Costs & Revenues – Income statement & balance sheet
All assumptions should be carefully documented– No, we don’t really expect year 5 to be accurate…– …but the assumptions you use help us understand the business
The investor will create its own return calculation based on valuation comparables
Goals– IRR should be over 70% a year for early, 50% for mid, and 30% for
late stage companies– Financials should be fully thought out and match financials from
other companies in the industry– There should be no hidden liabilities or claims on the company
(e.g., don’t want to finance debt repayment!)
January 27, 2005 29
Company Structure Due Diligence
Complete cap table – all investors, their ownership, and all outstanding options/warrants
Phone calls with key past/present/future investors to ensure:– Compatible investment goals – Willingness for future support– Understanding of relationships and skills of the management team– Understanding of ownership structure (e.g., differing interests for
different investors or series of stock that could potentially damage your investment)
Organization chart review
January 27, 2005 30
Legal Due Diligence
Review of past legal documents (contracts, financing, etc.) for potential problems
Involve lawyers in generating (or review of) financing documents & reviewing patent claims
Goals– Ensure both sides understand & agree on mutually acceptable terms– Avoid any hidden “gotchas” in existing legal documents