This document provides an overview of venture capital funding. It discusses how VC funds make money through management fees and carried interest. It covers key deal terms like pre-money valuation, option pools, liquidation preferences, and board composition. The document also examines negotiations between founders and VCs. It explores exit strategies like IPOs and acquisitions. The overall content aims to help founders navigate relationships with VCs and understand the mechanics of raising institutional funding.

1. Ravi Belani
@rbelani
AlchemistAccelerator.Com
Ravib@stanford.edu
July 2016
Venture Capital Overview:
European Innovation Academy
VC Funding, 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. 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
Me: Twitch (Amazon), Pubmatic
Director, Alchemist: B2B-Focused Accelerator
AlchemistAccelerator.com

5. Alchemist: The Leading Enterprise
Accelerator
PLATINUM
Top US Accelerator of 2016 by MIT / Rice Seed
Accelerator Rankings
#1
CB Inisghts labeled Alchemist as the #1 Accelerator based on
Alumni Fundraising
(YC was #2, Techstars #3)
12 Alchemist companies have been acquired in the last two years.
PAGE 03
60%
Over 60% of Alchemist companies raise institutional capital within
12 months of Demo Day (35 companies to date, average raise is
$2.1 million).

6. Institutional Investors in Flagship Accelerator Program include:
Alchemist Investors
PAGE 04

7. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

8. Cash is Oxygen

9. 3 Sources of Cash: What are the Pros & Cons of Each?
Revenue (Customers)
Debt (Banks)
Equity (Venture Capitalists)

10. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

11. How VC’s Make Money
Carry
Management Fee

12. Management Fee Consumers 25% of a FundHow much management fee does a VC make in this fund?
$500M Fund

13. Management Fee Consumers 25% of a FundManagement Fee Can Consume 25% of Fund Principal
$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

14. How VC’s Make Money
Carry
Management Fee

15. Case Study of a Young Fund:
Kleiner Perkins I (1972)
15
Fund Size
$7.5M
# of Co’s
17 @
Check Size
$450K
Return
$345M
46x
#
How much carry did the partners get?

16. VC Profit Share: Carry Calculation
16
Fund Returns: $345M
- Fund Size: $ 7.5M
-----------------------------------
Fund Profit $337.5M
X Carry 20%
-----------------------------------
Carry $67.5M

17. Of Kleiner Perkins’ 17 Investments, 2
were responsible for 90% of returns
17

18. 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

19. Can Make Money Several Ways: Two Case Studies
Google: Rising Star
Hotmail: Contrarian Bet

20. Optimal Ownership is typically between 20 – 40 %
VC Ownership
VC
Return

21. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

22. PRIMARY TERMS
Pre-Money Valuation
Option Pool
Liquidation Preferences
Anti-Dilution

23. 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!)

24. 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

25. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

26. WHAT MAKES A SUCCESSFUL NEGOTIATION?

27. 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

28. Capture Value: How do you know how big the ZOPA is?
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA

29. Negotiations Generate Value in 2 Phases
Create Value: Focus on Interests, Not
Positions
Capture Value: Understand the
Other Person’s BATNA first

30. Create Value

31. Create Value

32. Capture Value: Focus on the Other Person’s BATNA First
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA

33. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

34. Negotiation Exercise: Count Off!

35. Negotiation Exercise: Go Here (Don’t Read the Other)
http://bit.ly/EIAFounder1
2 http://bit.ly/EIAVC

36. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

37. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

38. 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?

39. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

40. 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?

41. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

42. Liquidation Preferences
Why does Preferred Exist?
Check for:
• Multiples?
• Participating vs Non- participating
• Senior or Pari-Passu
What’s this?

43. Liquidation Preferences
Why does Preferred Exist?
Check for:
• Multiples?
• Participating vs Non- participating
• Senior or Pari-Passu
What’s this?

44. Liquidation Rights
Exit Value
Payout
Draw the payouts to:
• Investors
• Founders
Assuming a
•$3.5m exit
•$10.5m exit
•$20m exit
•$100m exit

45. TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE

46. Exits
• Go Public
• Be Acquired
• Remain an Ongoing Concern
• Go Bankrupt

47. Billion-Dollar Unicorns
47

48. 48

49. 49

50. Exit Valuations
Create Value: Revenue, Growth,
Margins
Capture Value: Drive a good
negotiation

51. Create Value

52. Capture Value: Market Timing

53. Capture Value: Negotiations
Increasing the # of Suitors Increases Your BATNA

54. FINAL THOUGHTS
54
The future will be far more surprising than most observers
realize. – Ray Kurzweil

55. 55
10 Years – Variability to NASDAQ > 100%

56. 56
10 Years – Variability to NASDAQ > 150%

57. 57
10 Years – Variability to NASDAQ > 300%

58. 10 Years – Variability to NASDAQ > 400%

59. 59
10 Years – Variability to NASDAQ > 1000%

60. 60
FOUNDERS ARE HEROES.
They think non-linearly. Angels: Your Job is to FIND THEM.

61. Thank You!
Ravi Belani
@rbelani
Ravi Belani
203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860
Ravi@alchemistaccelerator.com