How to Split the Pie, Raise Money, and Reward Contributors (Idea To IPO)
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04_08_Ravi Belani_VC overview.pptx
- 1. Ravi Belani @rbelani @AlchemistAcc @Ecorner AlchemistAccelerator.com Ravib@stanford.edu Ravi@alchemistaccelerator.com August 2022 Venture Capital Overview: European Innovation Academy Funding Strategy, Company Valuation, & Exit Strategy
- 2. Navigating the VC-Founder Dance
- 3. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 4. Entrepreneurship Lecturer at Stanford ecorner.stanford.edu/ Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director 6 Years as a Venture Capitalist Skype, Baidu, Hotmail, Tesla Me: Twitch (Amazon), Pubmatic Director, Alchemist: B2B-Focused Accelerator AlchemistAccelerator.com
- 5. Rankings of Accelerators By Median Funding of Graduates Based on the latest accelerator ranking from CBInsights ‘Are Startup Accelerators Worth It’ Alchemist has built the #1 Enterprise Accelerator 1 2 3 4 Alchemist Y Combinator Techstars 500 Startups We are the premier venture- backed accelerator dedicated to enterprise startups
- 6. Backed by industry-leading Venture Capitalists & Corporates *All corporations and venture capitalists listed are limited partners and deepen investments in verticals of strategic relevance within the accelerator
- 7. Since January 2013 500+ Startups accelerated 50% $2.1b Total Capital Raised 46 Acquisitions Startups funded after graduation Notable funds that have invested in Alchemist companies
- 8. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 9. Cash is Oxygen
- 10. 3 Sources of Cash: What are the Pros & Cons of Each? Revenue (Customers) Debt (Banks) Equity (Venture Capitalists)
- 11. CrowdFunding Donation Crowdfunding (JustGiving) + Social Impact Initiatives Customer/ Reward Crowdfunding (Kickstarter) + Hardware, Consumer Goods Debt / Lending Crowdfunding (Funding Circle) + Small Business Opportunities, Clear ROI Equity Crowdfunding (Angellist, Microventures, Gust, FundersClub, CircleUp, ICO’s) + Rounding Out Rounds
- 12. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 13. How VC’s Make Money Carry Management Fee
- 14. How much management fee does a VC make in this fund? $500M Fund
- 15. Management Fee Consumers 25% of a Fund $500M Fund $125M Mgmt Fee • 2.5% Per Year For 10 Years • Fund Committed after 3-4 Years • 3 Funds Drawing Management Fee Down on in any given year
- 16. How VC’s Make Money Carry Management Fee
- 17. Case Study of a Young Fund: Kleiner Perkins I (1972) 19 Fund Size $7.5M # of Co’s 17 @ Check Size $450K Return $345M 46x # How much carry did the partners get?
- 18. VC Profit Share: Carry Calculation 20 Fund Returns: $345M - Fund Size: $ 7.5M ----------------------------------- Fund Profit $337.5M X Carry 20% ----------------------------------- Carry $67.5M
- 19. Of Kleiner Perkins’ 17 Investments, 2 were responsible for 90% of returns 21
- 20. VC’s want to return 1/3 of their fund with each investment $500M Fund # of Co’s 30 # Big Winners 1 out of 10 % x = 3 Big Winners in Each Portfolio
- 21. Optimal Ownership is typically between 20 – 40 % VC Ownership VC Return
- 22. Can Make Money Several Ways: Two Case Studies Google: Rising Star Hotmail: Contrarian Bet
- 23. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 24. PRIMARY TERMS Pre-Money Valuation Option Pool Liquidation Preferences Anti-Dilution
- 25. Valuations are a function of fundraising dynamics NOT instrinsics 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 Pre-Money Valuation = Post-Money – Cash Raised 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!)
- 26. 28
- 27. What’s the post? What’s the pre? • $2M given for 25% of the company • $3M given for 25% of the company • $2M given for 20% of the company • $1M given for 40% of the company Post–Money Valuation = Cash Needs of the Company / Ownership Needs of the Fund Pre–Money = Post-Money – Cash Invested
- 28. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 29. WHAT MAKES A SUCCESSFUL NEGOTIATION?
- 30. NEGOTIATIONS 101: DOES A ZOPA EXIST? BATNA: Best Alternative to a Negotiated Agreement ZOPA: Zone of Possible Agreement Alternative to Sell: $1 Alternative to Buy: $8
- 31. Capture Value: How do you know how big the ZOPA is? Alternative to Sell: $1 Alternative to Buy: $8 ZOPA
- 32. Negotiations Generate Value in 2 Phases Create Value: Focus on Interests, Not Positions Capture Value: Understand the Other Person’s BATNA first
- 33. Create Value
- 34. Create Value
- 35. Capture Value: Focus on the Other Person’s BATNA First Alternative to Sell: $1 Alternative to Buy: $8 ZOPA
- 36. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 37. Negotiation Exercise: Count Off! Buyers & Sellers
- 38. Negotiation Exercise: Go Here (Don’t Read the Other) http://bit.ly/EIAFounder 1 2 http://bit.ly/EIAVC
- 39. Best VC Outcome? Best Founder Outcome?
- 40. Founder’s BATNA $0.5m for 40% = $1.25M Post - $0.5m $ Raised = $0.75M Pre
- 41. Investor’s BATNA $2m for 17.5% = $11.4M Post - $2m $ Raised = $9.4M Pre
- 42. WIDE ZOPA $0.75M Founders will “sell” at a pre-money of: $9.4M Investors will “buy” at a pre-money of: WIDE ZOPA : $0.75M - $9.4M
- 43. Thank You! Ravi Belani @rbelani Ravi Belani 203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860 Ravi@alchemistaccelerator.com
- 44. SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE TERMS: OTHER PRIMARY TERMS EXIT STRATEGY
- 45. VALUATION IS JUST ONE TERM Pre-Money Valuation Option Pool Liquidation Preferences Board Structure
- 46. 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?
- 47. VALUATION IS JUST ONE TERM Pre-Money Valuation Option Pool Liquidation Preferences Board Structure
- 48. 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?
- 49. VALUATION IS JUST ONE TERM Pre-Money Valuation Option Pool Liquidation Preferences Board Structure
- 50. Liquidation Preferences Why does Preferred Exist? Check for: • Multiples? • Participating vs Non- participating • Senior or Pari-Passu What’s this?
- 51. Liquidation Preferences Why does Preferred Exist? Check for: • Multiples? • Participating vs Non- participating • Senior or Pari-Passu What’s this?
- 52. Liquidation Rights Exit Value Payout Draw the payouts to: • Investors • Founders Assuming a •$3.5m exit •$10.5m exit •$20m exit •$100m exit
- 53. TERMS: OTHER PRIMARY TERMS EXIT STRATEGY SOURCES OF CASH AGENDA INTRODUCTION HOW VC’s MAKE MONEY TERMS: VALUATIONS NEGOTIATIONS 101 EXERCISE
- 54. Exits • Go Public • Be Acquired • Remain an Ongoing Concern • Go Bankrupt
- 55. Billion-Dollar Unicorns 57
- 56. 58
- 57. 59
- 58. Exit Valuations Create Value: Revenue, Growth, Margins Capture Value: Drive a good negotiation
- 59. Create Value
- 60. Capture Value: Market Timing
- 61. Capture Value: Negotiations Increasing the # of Suitors Increases Your BATNA
- 62. FINAL THOUGHTS 64 The future will be far more surprising than most observers realize. – Ray Kurzweil
- 63. 65 10 Years – Variability to NASDAQ > 100%
- 64. 66 10 Years – Variability to NASDAQ > 150%
- 65. 67 10 Years – Variability to NASDAQ > 300%
- 66. 6 10 Years – Variability to NASDAQ > 400%
- 67. 69 10 Years – Variability to NASDAQ > 1000%
- 68. 70 FOUNDERS ARE HEROES. They think non-linearly. Angels: Your Job is to FIND THEM.
- 69. Thank You! Ravi Belani @rbelani Ravi Belani 203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860 Ravi@alchemistaccelerator.com
