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2014 Venture Capital Overview by Ravi Belani

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This document provides an overview of venture capital presented by Ravi Belani. It discusses sources of cash for startups including revenue, debt, and equity from venture capitalists. It explains how VCs make money through management fees and carrying a percentage of profits from successful exits. Examples are given of early funds like Kleiner Perkins and individual investments. Key terms in VC deals like valuations, liquidation preferences, and vesting are also covered. The presentation concludes with a section on negotiation tactics.

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Ravi Belani AlchemistAccelerator.Com @Rbelani Ravi.Belani@gmail.cm July 2014 Venture Capital Overview European Innovation Academy Nice, France
SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
Entreprneurship Lecturer at Stanford ETL.Stanford.EDu Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director 6 Years as a Venture Capitalist Skype, Baidu, Hotmail, Tesla Director, Alchemist: B2B-Focused Accelerator AlchemistAccelerator.com
SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
Cash is Oxygen
3 Sources of Cash Revenue (Customers) Debt (Banks) Equity (Venture Capitalists)
SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
How VC’s Make Money Carry Management Fee
Case Study of a Young Fund: Kleiner Perkins I (1972) 9 Fund Size $7.5M # of Co’s 17 @ Check Size $450K Return $345M 46x # Kleiner’s Role Investment Judgment Capital Company Building (Talent, Biz Dev, Mentorship) Control / Governance
Most Funds are looking to return 1/3 of their fund when considering an investment 10 Of Kleiner Perkins’ 17 Investments, 2 were responsible for 90% of returns
Optimal Ownership is typically between 20 – 40 % VC Ownership VC Return
Can Make Money Several Ways: Two Case Studies Google: Rising Star Hotmail: Contrarian Bet
How VC’s Make Money Carry Management Fee
With a Successful First Fund Comes Lots of Cash 14 1972 $7.5M Kleiner Perkins Funds Under Management 2012 $1,430M
Economics are misaligned if Entrepreneur not gunning for big exit 15 How a VC Makes Money • Assume a $500M fund with 10 partners ($50 M / partner) • Two Revenue Sources • Management Fee: 2% / year for 10 years ($1 M / partner) • Carry: 20% of profits • Fund is typically committed after 3 years • But Fund has a 10 year life • At any one point, a General Partner may be drawing down economics on 3 Funds
Economics for a $20m Exit for a Traditional VC vs. Founder Assumptions: $500m VC, Founder owns 25% of biz, VC firms owns 25% 16 VC General Partner Founder Salary $3 million $150 thousand $500m fund x 2% mgmt fee x 20% (share of GP) = $1 million / fund x 3 funds Payout from Exit $160 thousand $5 million $20m acquisition x 25% equity (no part) = $4 million x 20% carry = $800 thousand for fund $20m acquisition x 20% (share of GP) x 25% equity • 30x change for founder • 0.05x change for VC
Economics for a $20m Exit for an Angel VC vs. Founder Assumptions: $20m 1st time VC, Founder owns 25% of biz, VC firms owns 25% 17 VC General Partner Founder Salary $300 thousand $150 thousand $20m fund x 2% mgmt fee x 100% (share of GP) = $300k / fund x 1 fund Payout from Exit $1 million $5 million $20m acquisition x 25% equity (no part) = $5 million x 20% carry = $1m for fund $20m acquisition x 100% (share of GP) x 25% equity • 30x change for founder • 2.5x change for VC (50 times better than a VC)
18 Vinod Khosla’s Scorecard: The Beauty of Small Numbers (And Board Seats) Initialinvestment: $100kto$1M,board Date Jul-95 Jun-96 Apr-97 Sep-98 Oct-98 Apr-99 Jun-00 Jan-01 Apr-95 May-96 Jul-96 May-97 Apr-98 May-98 Jul-98 Mar-99 Sep-99 Nov-99 Dec-99 Dec-99 Dec-99 Jan-00 Mar-00 Aug-00 Nov-00 Jul-01 Company Name Excite (@home) Juniper Cerent (Cisco) Corio Siara (Redback) Asera Centrata Infinera Concentric (XO) Viant Cybermedia Extreme Networks Silicon Spice (Broadcom) Corvis Lightera (Ciena) CoSine BBO Zaplet Valiant Zambeel OnFiber Coreon Kymata (Alcatel) Cenix SS8 Kovio Red = Board Seat < $1M (n=8) > $1M (n=18) On board (n=16) Not on board (n=10) Aggregate Return* 192.7 x 4.5 x 70.8 x 8.0 x Success Rate* 100% 67% 88% 60% * Numbers include current private companies at cost of fmv Initialinvestment: $2.5mto$16M Takeaways – Attention matters – Board responsibility = better due diligence – Quick money makers don’t work – Too many passive deals last few years – One seed per year works for Khosla
Venture Capital Is Bottlenecked in Scaling by Partner’s Time, Top 10 Performing Funds of All Time < $250m 19
SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
TERMS
Valuations: Just ONE term… Pre-Money vs. Post Money Valuations in Early Raises are NOT based on intrinsic value. They are driven by the ownership needs of the funds you raise from and the cash needs of the company Post – Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund Larger Funds are Much More Sensitive about Ownership Needs than Cash Needs! Series A : Raising off of the IDEA Series B: Raising off of RESULTS Trick is balancing the Series A valuation to set you up so you can raise off of Results in the Series B at a markup (ideally 3x!)
What’s the post?
What’s the post?
Employee Pool • Employee Pools typically come out of the PRE-MONEY – that is YOUR Total Dilution is the NEW INVESTOR’s money PLUS the Employee Pool • Can always expand the employee pool later – and when you do, all will be diluted equally. Try to minimize the employee pool to what’s absolutely needed. • Exercise: You own 40% of a company. A VC wants to put in $2m for 25% of your company, and requires a 20% employee pool PRE-MONEY. • What’s the Post-Money Valuation? • What percent of the company do you own afterwards?
Board Composition & CEO Role How many, and what’s the split between preferred, common, and independents? When is the independent important? How do you fire a board member?
Liquidation Preferences Why does Preferred Exist? Check for: • Multiples? • Participating vs Non- participating • Senior or Pari-Passu What’s this?
Liquidation Rights Exit Value Payout Draw the payouts to: • Investors • Founders Assuming a •$3.5m exit •$10.5m exit •$20m exit •$100m exit
Anti-Dilution Rights Why does it exist? Check to make sure there isn’t “Full Ratchet” Anti Dilution
Vesting & Change of Control • Have you been put on a vesting schedule? • What happens if you get acquired? •Single Trigger vs. Double Trigger
TERMS
CEO’s Role
Protective Provisions / Control Rights Special rights given to investors to exert control over mgmt
Pro Rata / Preemption Rights •Check for any “Super Pro Rata” Rights
Cosale Rights: * May want to carve out some co-sale immunity
SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
NEGOTIATIONS
NEGOTIATIONS 101 BATNA: Best Alternative to a Negotiated Agreement ZOPA: Zone of Possible Agreement Alternative to Sell: $1 Alternative to Buy: $8
Negotiations Generate Value in 2 Phases Create Value Capture Value
Create Value
Create Value
Capture Value: How do you know how big the ZOPA is? Alternative to Sell: $1 Alternative to Buy: $8 ZOPA
SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
Negotiation Exercise: Count Off!
Negotiation Exercise: Go Here (Don’t Read the Other) http://bit.ly/EIAFounder1 2 http://bit.ly/EIAVC
Thank You! Ravi Belani @rbelani Ravi Belani 203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860 Ravi@alchemistaccelerator.com

More Related Content

2014 Venture Capital Overview by Ravi Belani

  • 1. Ravi Belani AlchemistAccelerator.Com @Rbelani Ravi.Belani@gmail.cm July 2014 Venture Capital Overview European Innovation Academy Nice, France
  • 2. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
  • 3. Entreprneurship Lecturer at Stanford ETL.Stanford.EDu Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director 6 Years as a Venture Capitalist Skype, Baidu, Hotmail, Tesla Director, Alchemist: B2B-Focused Accelerator AlchemistAccelerator.com
  • 4. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
  • 6. 3 Sources of Cash Revenue (Customers) Debt (Banks) Equity (Venture Capitalists)
  • 7. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
  • 8. How VC’s Make Money Carry Management Fee
  • 9. Case Study of a Young Fund: Kleiner Perkins I (1972) 9 Fund Size $7.5M # of Co’s 17 @ Check Size $450K Return $345M 46x # Kleiner’s Role Investment Judgment Capital Company Building (Talent, Biz Dev, Mentorship) Control / Governance
  • 10. Most Funds are looking to return 1/3 of their fund when considering an investment 10 Of Kleiner Perkins’ 17 Investments, 2 were responsible for 90% of returns
  • 11. Optimal Ownership is typically between 20 – 40 % VC Ownership VC Return
  • 12. Can Make Money Several Ways: Two Case Studies Google: Rising Star Hotmail: Contrarian Bet
  • 13. How VC’s Make Money Carry Management Fee
  • 14. With a Successful First Fund Comes Lots of Cash 14 1972 $7.5M Kleiner Perkins Funds Under Management 2012 $1,430M
  • 15. Economics are misaligned if Entrepreneur not gunning for big exit 15 How a VC Makes Money • Assume a $500M fund with 10 partners ($50 M / partner) • Two Revenue Sources • Management Fee: 2% / year for 10 years ($1 M / partner) • Carry: 20% of profits • Fund is typically committed after 3 years • But Fund has a 10 year life • At any one point, a General Partner may be drawing down economics on 3 Funds
  • 16. Economics for a $20m Exit for a Traditional VC vs. Founder Assumptions: $500m VC, Founder owns 25% of biz, VC firms owns 25% 16 VC General Partner Founder Salary $3 million $150 thousand $500m fund x 2% mgmt fee x 20% (share of GP) = $1 million / fund x 3 funds Payout from Exit $160 thousand $5 million $20m acquisition x 25% equity (no part) = $4 million x 20% carry = $800 thousand for fund $20m acquisition x 20% (share of GP) x 25% equity • 30x change for founder • 0.05x change for VC
  • 17. Economics for a $20m Exit for an Angel VC vs. Founder Assumptions: $20m 1st time VC, Founder owns 25% of biz, VC firms owns 25% 17 VC General Partner Founder Salary $300 thousand $150 thousand $20m fund x 2% mgmt fee x 100% (share of GP) = $300k / fund x 1 fund Payout from Exit $1 million $5 million $20m acquisition x 25% equity (no part) = $5 million x 20% carry = $1m for fund $20m acquisition x 100% (share of GP) x 25% equity • 30x change for founder • 2.5x change for VC (50 times better than a VC)
  • 18. 18 Vinod Khosla’s Scorecard: The Beauty of Small Numbers (And Board Seats) Initialinvestment: $100kto$1M,board Date Jul-95 Jun-96 Apr-97 Sep-98 Oct-98 Apr-99 Jun-00 Jan-01 Apr-95 May-96 Jul-96 May-97 Apr-98 May-98 Jul-98 Mar-99 Sep-99 Nov-99 Dec-99 Dec-99 Dec-99 Jan-00 Mar-00 Aug-00 Nov-00 Jul-01 Company Name Excite (@home) Juniper Cerent (Cisco) Corio Siara (Redback) Asera Centrata Infinera Concentric (XO) Viant Cybermedia Extreme Networks Silicon Spice (Broadcom) Corvis Lightera (Ciena) CoSine BBO Zaplet Valiant Zambeel OnFiber Coreon Kymata (Alcatel) Cenix SS8 Kovio Red = Board Seat < $1M (n=8) > $1M (n=18) On board (n=16) Not on board (n=10) Aggregate Return* 192.7 x 4.5 x 70.8 x 8.0 x Success Rate* 100% 67% 88% 60% * Numbers include current private companies at cost of fmv Initialinvestment: $2.5mto$16M Takeaways – Attention matters – Board responsibility = better due diligence – Quick money makers don’t work – Too many passive deals last few years – One seed per year works for Khosla
  • 19. Venture Capital Is Bottlenecked in Scaling by Partner’s Time, Top 10 Performing Funds of All Time < $250m 19
  • 20. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
  • 21. TERMS
  • 22. Valuations: Just ONE term… Pre-Money vs. Post Money Valuations in Early Raises are NOT based on intrinsic value. They are driven by the ownership needs of the funds you raise from and the cash needs of the company Post – Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund Larger Funds are Much More Sensitive about Ownership Needs than Cash Needs! Series A : Raising off of the IDEA Series B: Raising off of RESULTS Trick is balancing the Series A valuation to set you up so you can raise off of Results in the Series B at a markup (ideally 3x!)
  • 25. Employee Pool • Employee Pools typically come out of the PRE-MONEY – that is YOUR Total Dilution is the NEW INVESTOR’s money PLUS the Employee Pool • Can always expand the employee pool later – and when you do, all will be diluted equally. Try to minimize the employee pool to what’s absolutely needed. • Exercise: You own 40% of a company. A VC wants to put in $2m for 25% of your company, and requires a 20% employee pool PRE-MONEY. • What’s the Post-Money Valuation? • What percent of the company do you own afterwards?
  • 26. Board Composition & CEO Role How many, and what’s the split between preferred, common, and independents? When is the independent important? How do you fire a board member?
  • 27. Liquidation Preferences Why does Preferred Exist? Check for: • Multiples? • Participating vs Non- participating • Senior or Pari-Passu What’s this?
  • 28. Liquidation Rights Exit Value Payout Draw the payouts to: • Investors • Founders Assuming a •$3.5m exit •$10.5m exit •$20m exit •$100m exit
  • 29. Anti-Dilution Rights Why does it exist? Check to make sure there isn’t “Full Ratchet” Anti Dilution
  • 30. Vesting & Change of Control • Have you been put on a vesting schedule? • What happens if you get acquired? •Single Trigger vs. Double Trigger
  • 31. TERMS
  • 33. Protective Provisions / Control Rights Special rights given to investors to exert control over mgmt
  • 34. Pro Rata / Preemption Rights •Check for any “Super Pro Rata” Rights
  • 35. Cosale Rights: * May want to carve out some co-sale immunity
  • 36. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
  • 38. NEGOTIATIONS 101 BATNA: Best Alternative to a Negotiated Agreement ZOPA: Zone of Possible Agreement Alternative to Sell: $1 Alternative to Buy: $8
  • 39. Negotiations Generate Value in 2 Phases Create Value Capture Value
  • 42. Capture Value: How do you know how big the ZOPA is? Alternative to Sell: $1 Alternative to Buy: $8 ZOPA
  • 43. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS NEGOTIATIONS 101 EXERCISE
  • 45. Negotiation Exercise: Go Here (Don’t Read the Other) http://bit.ly/EIAFounder1 2 http://bit.ly/EIAVC
  • 46. Thank You! Ravi Belani @rbelani Ravi Belani 203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860 Ravi@alchemistaccelerator.com