what vcs look for what vcs get what every entrepreneur ... · what every entrepreneur should know...

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VCs What VCs Look For

What VCs Get What Every Entrepreneur Should Know About VCs

Excell Partners - Overview

•  A Dedicated Upstate NY Seed Fund •  Invests ~$250K-$500K / Round •  4 Current Funds totaling $12M

§ Funds 1 & 2 performance: high top quartile •  Raising New Fund ~$30M

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Management Overview

• National Top 20 Seed-Stage Investor •  50+ investments in 39 companies • Deal flow across NYS •  300+ investment opportunities annually • Supported by UR, RIT, UB, SU and

Cornell University •  1 of only 7 VC firms in NYS to receive

funding from NYS’s Empire State Development Innovate NY Fund

•  1of only 3 VC firms in NYS to manage the Tech Commercialization Fund of the Governor’s $50M Innovation Fund.

•  ONLY VC firm in NYS to manage the MWBE Investment Fund

Rami Katz Ø  COO, Excell Partners Ø  Attorney & MBA Ø  Led the development of 50

business plans that raised more than $40M in funding

Theresa Mazzullo Ø  CEO, Excell Partners Ø  Banker & Entrepreneur Ø  Co-Founded and sold a

Financial Management business

Oded Spindel, PhD Ø  Investment Manager Ø  PhD, Pharmacology Ø  MBA, Simon School

A trained analysts team: •  2 PhDs: life sciences &

engineering •  1 MD •  4 MBAs •  5 Engineers •  2 Sales, Marketing &

Administration

Targeted Investment Stage

Investigation Feasibility Development Introduction Growth Maturity

Seed

Start-up

Early Later Stages Proof of Concept

Valley of Death

Excell Funds

IMPACT CAPITAL

Investment Stages: Current Funds:

•  ~Prototype • Seed, Early, Pre-‐Seed • Pre/At Revenue • Entering Market • Hyper Growth Ready Impact Capital:

Added Focus: • In-‐Revenue • At/Past Break-‐even • Ready to Scale

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VC Value Chain

3. Invest Capital

4. Monitor & Manage Investments

5. Exit

Investments

1. Raise Capital

2. Source Deals

@2012 Excell Partners, Inc., CONFIDENTIAL 11/1/12 Page 8

Venture Capital Exits 1997 -‐ 2013

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

M&A 145 189 228 379 384 365 323 402 446 484 488 417 351 523 490 473 376 IPO 141 78 280 238 37 24 26 82 59 67 91 7 13 70 51 49 81

0

100

200

300

400

500

600

700

Num

ber o

f Issue

s

IPO

M&A

Source: Thomson Reuters/National Venture Capital Association

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What Investors Look For

•  Technology •  Market & Sales Potential •  Ownership / Control •  Competitive Advantage •  Financials •  Returns •  Management •  Relationships – Do we fit? Can We help?

Technology & Market

•  Does your company have a proprietary or differentiated product/service?

•  Offer significant benefits over existing products •  Have a patent or other proprietary protection to increase the barrier

to entry in the market by the competition? •  Does your product address a need/problem in the market?

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Market & Sales Potential

What We Look For:

•  Market Pain / Drivers •  Sales / Contracts •  Sales cycles and decision making process •  Customer Validation

What VCs Look For

•  Examples of Customer Validation § Qualified and easily referenced

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•  Is that need/problem in a rapidly growing market (annual growth rate of 20% or more?)

•  Can your product generate a significant gross profit margin (50%or more)?

•  Is your business plan sound? Is it well thought out? Reasonable? •  Does your company have the potential for growing quickly and

becoming an attractive target for M&A or IPO?

Technology & Market

Competitive Advantage

What We Look For:

•  Barriers to Entry •  IP & Enforcement •  Control over Price/Supply-Chain/Distribution •  Switching Costs •  Size of Competition

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Financials

What We Look For:

•  Business Model •  Comps •  Margins •  Cap-Ex •  Key Financial Indicators •  Capital Needs •  Overall Logic

Returns

What We Look For:

•  Valuation •  IRR – stage appropriate •  Comps •  Time To Exit •  Capital To Exit •  Dilution

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What Investors Look For--Returns

Investor Type

Risk of failure

IRR Sought Return in

Venture Capital

90%+ 40% -‐ 100% 5 years – 10 years

Factoring 20% -‐ 40% 25% -‐ 40% 1-‐3 Month Bank <10% 8% -‐ 15% 1-‐5 years,

Monthly payments

Ownership / Control

What We Look For:

•  Cap-table– Fully Diluted •  Security Types •  Board •  Compensation – operations vs. exit •  Founders Vs. Employees Vs. Investors •  Decision rights / Dilution

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Management

What We Look For:

•  Industry Experience •  Sales / Biz-Dev / P&L •  Capital Raising •  Complete Team

Single Most Important Thing VCs are Investing In???

YOU!

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Management

•  Integrity •  Passion •  Experience – Serial entrepreneurs are best •  Knowledge- Strong domain expertise, know the market, know the

product. •  Leadership- Skills to get a company going or charisma and

management style to hire the right people •  Commitment- Quitters not allowed •  Coachable- Ability to listen

WHAT VCs GET

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•  Bad Business Plans

¨  Poor PresentaYons

•  Abstract Sales Strategy

•  Biased View of CompeYYon

•  Inaccurate EsYmaYon of Market Size

•  AspiraYonal Revenue ProjecYons •  ValuaYons Bordering on the Delusional •  Esoteric Technology ExplanaYons

• False ExpectaYons of Big VCs

Common Problem Areas

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Poor Technology Explanations

“We have discovered that the host factor APOBEC3G/ CEM15 carries out deamination of cytidine / deoxycytidine to inhibit HIV-1 infectivity by mediating dC-to-dU mutations on minus-strand DNA during reverse transcription.”

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Poor Technology Explanations

The Problem: Too technical. “We have developed hydrogen fuel cells with coated metallic bipolar plate stacks that are corrosion resistant and eliminate fouling of the catalyst.”

The Problem: What have you got? What have you invented?

#1 communication failure of all investor presentations. Recommendation: Don’t get too technical and do not send investors on a verbal fishing expedition to understand what you’ve got / have invented. Must have a simple, clear explanation.

Can Your Grandfather Understand This?

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Crazy Valuations

“The NIH invested $5M in the development of this technology. It’s taken about 8 years to develop. That’s included a portion of my time as a full professor, two post-docs and five graduate students. We’re going to have tremendous market impact. So, I figure the value of the technology/company at launch is between $8-10M. I’ve run this number by some of my advisors and they haven’t blinked, so we must be in the right ballpark. After all, we’re a biotech company.” The Problem: What!?! Hard to continue with conversation. •  Totally clueless and living in delusional world of fuzzy math. Recommendation: For seed and early stage companies, benchmark against current going rates. Recognize that like babies, all seed stage companies look alike.

False Expectations of the Big VCs

“The Boston VCs are really interested.”

The Problem: Think they’re going to leap over traditional path forward and get investment from the “Big Guys” right out of the starting gate but... 1.  Big VCs have $.5B funds or over, investments of $2-20M. Most start-ups aren’t ready to

accept and don’t have valuation to bear it.

2.  If do any seed, prefer to invest locally (MIT/Harvard/Stanford) 3.  In Upstate NY, require “local presence” 4.  Polite, supportive, but “interest” not same as check

Recommendation: Recognize Big VCs for role in capitalization continuum. Assume Big VCs won’t be “first in” and you’ll be on the traditional path.

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Investments By Region

0

200

400

600

800

1,000

1,200

1,400

1,600

0

5

10

15

20

25

Num

ber of Deals

Billion

s

PWC-‐NVCA MoneyTree™ Report Venture Capital Investment by Region

2014

VC Investment Deals

WHAT EVERY ENTREPRENEUR SHOULD KNOW ABOUT VCs

A Reality

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Your Reality

Reality #1

Your probability of getting an interview is low.

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Meeting Probabilities with a VC

•  Direct Mail/mass email 1000:1 •  Indirect referral 100:1 •  Portfolio CEO referral 7:1 •  Personal referral 3:1 •  Limited Partner / Advisor request 1:1

Source: Derby Management

Reality #2

Your probability of getting funded is even lower.

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VC stats suggest that for every hundred opportuni4es assessed …

40 15 5 3100

More than half rejected ader 20 minute scan

or conversaYon

40% might make it to a longer review e.g. hour mee(ng

15% are invesYgated in-‐depth; due diligence

Only 5% deemed

“investable” and engaged

in negoYaYon

Less than 3% agree on

terms and an investment is

made

Most fail here!

VC stats suggest that for every hundred opportuni4es assessed …

40 15 5 3100

Ref: Pratt’s Guide to Venture Capital Sources, 1997, pp 23-28

Reality #2 Facts: •  For every 100 business plans that come to a VC firm, only 10 will get a

serious look and only 1 will be funded •  In any given day/week a VC may review 3-5 presentations and 2-3

business plans •  You are only one in a string of “hopefuls” just like yourself •  In 15-20 minutes the VC has to evaluate the management team, the

concept, the marketplace, the fit to the VC firm etc. Reality : •  You are competing with a VC’s single biggest asset. . .his time. Respect it

and use it wisely. The quality of your presentation is critical. Communicate well!

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Classic VC Reaction #1

What they say: “ I like your company, but my partners didn’t.” [Guy Kawasaki]

What they mean to say is: No

Translated: This is a classic good cop/bad cop ploy. The VC may actually think you have something but for some reason(s) has reservations and is not convinced enough to risk being the champion for it internally. If he really did believe in you, your technology and/or the market potential he would make it happen.

Reality : This is as close to a “no” as you will get from a VC. Unless something significant changes, it is best to move on. Don’t waste your time trying to convince him.


What they say: “If you get a lead, we will follow.” [Guy Kawasaki]

What they mean to say is: Conditional No

Translated: “Banks will lend you money if you can prove you don’t need it.” [Mark Twain] VCs are much like banks.

Reality : The best position you can be in is to have more than one VC interested in your technology when you go in for an interview.

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What they say: “Call me when it works” [T. Mazzullo] What they mean to say is: Not in this time zone!

Translated: “Why are you here? There is nothing to invest in. You have no team, no prototype, no beta testing results and no customer interest. I am looking at a person with a concept.”

Reality : VCs are all about managing risk. Proven teams, proven technologies, proven markets reduce risk and increase the odds for success. If you show up too early you may have a hard time getting back in the door again. Think before you rush out making calls on VCs.


What they say: “Show me some traction and we’ll invest.” [Guy Kawasaki]

What they mean to say is: Not today

Translated: This VC is hedging his bet on the “What if” theory. “What if lightening strikes and 3 weeks from now this schmuck gets a $5 million contract from Boeing.”

Reality : A large customer order or LOI indicates market validation of your technology, which speaks volumes to a VC.

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What they say: “We like early stage investing.” [Guy Kawasaki]

What they mean to say is: We like early stage investing if we can get something for nothing!

Translated: A VC’s definition of early stage is investing $1 million in YouTube in 2005 for 30% of the company and collecting $500 million on the sale in 2006.

Reality : VCs want to invest in proven technologies, proven teams and proven markets. Unless you meet that definition, don’t believe them when they tell you this. See statistics which support this.

Investments by Stage

$1B

$[VALUE]B

$19B

$12B

0

500

1,000

1,500

2,000

2,500

0

5

10

15

20

25

Startup/Seed Early Stage Expansion Stage Later Stage

Num

ber of Deals

USD

Billions

Stages

PWC-‐NVCA MoneyTree™ Report Venture Capital Investment by Stage

2011-‐2014

VC Investment Deals

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Is There Life After Rejection?

•  Don’t give up •  VCs expect entrepreneurs to be persistent •  Understanding the “Reality ” can help •  Only go back if you have achieved meaningful milestones, otherwise you

lose credibility

Conclusion: You Get What You Give

•  Avoid miscommunication ■  Be honest ■  Be data driven ■  Be realistic

•  Understand the statistics ■  Know the odds ■  Know the investor

•  Create excitement ■  Deliver a memorable presentation

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Got $eed?

Thank you!

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