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Elements for Assessing/
Structuring Venture Capital
Financing
OVERVIEW
 This is a high level breakdown of elements for venture financing including assessing an
opportunity and elements of structuring a deal.
 The slides below highlight key terms/ concepts and provide additional resources
 This is not meant to be an in-depth discussion/ analysis of each concept but instead
provide new entrepreneurs and investors a brief understanding of each topic and
concept for further study.
 For any comments or additional resources please reach out to me at the contact below:
Nathan J Fink
Email: NathanJFink@gmail.com
LinkedIn: www.linkedin.com/in/njfink
DEAL FUNDING ELEMENTS
 Team: Management, gap analysis, board of directors
 Customer: Customer value proposition, segmentation, acquisition costs
 Product/ Technology: Minimum viable product, roadmap, intellectual property
 Market: Segmentation, go-to-market, barrier to entry, growth
 Competitors: Direct, indirect, point of differentiation
 Financials: Financial statements, unit economics, cash burn, cash requirements
 Risks: Organizational, operational, market, financial
 Deal Structures: Convertible debt, preferred/ common equity, warrants, royalties
 Term Sheet: Key terms
 Valuation: Basic terms to valuations
 Discount Rate: Risk free rate, systematic risk, value added, cash flow, liquidity
StructureAssessment/Diligence
TEAM
Resources
 http://firstround.com/review/What-founders-need-to-know-about-building-
management-teams-before-its-too-late/
 http://www.entrepreneurship.org/KFSebook
 http://www.entrepreneurship.org/Founders-School/Startup-Boards
Key Concepts
 Management: Getting a well balanced
experienced team appropriate for the
company’s stage
 Gap analysis: Understanding the team’s
current capabilities and what is missing to
achieve the next company milestones
 Board of directors: Providing well balanced
and useful direction (technical and
commercial) where each member brings
something different to management.
Team is one of the most important
elements to a successful company
Finding a winning team that works well
together, develops sustainable solutions
and delivers them to market is often
elements of a promising company.
Thinking through a combination of
skills, experience, and culture fit are
important to getting the right team.
Hiring mistakes can cost distraction,
money, and time which are all costly
CUSTOMER
Key Concepts
 Customer value proposition: Articulating
and delivering something the customer needs
that causes actions (purchase/usage)
 Segmentation: Defining the different
customer groups by key qualities, attributes,
and size (E.g. need, geography, etc.)
 Customer acquisition costs: The total cost
associated with finding, obtaining, and
retaining a customer (cost to acquire and
retain customers)
Resources
 http://mjskok.com/resource/building-compelling-value-proposition
 http://steveblank.com/2011/04/04/the-leanlaunch-pad-at-stanford-%E2%80%93-
class-4-customer-hypotheses/
 https://www.cbinsights.com/blog/misinterpretations-cltv-cac-saas-metrics/
Customer Analysis
Customer analysis is about finding and
determining what the customer needs
and how to deliver it in a unique and
sustainable way that’s difficult for
competition to replicate.
The key to successfully understanding
the customer is to continuously engage
the consumer and solicit feedback.
PRODUCT/ TECHNOLOGY
Key Concepts
 Minimum viable product (MVP): A version
of a new product which allows a team to
collect the maximum amount of validated
learning about customers with the least effort
 Roadmap: An outline for developing the
MVP into a commercially ready product
and/or product suite
 Intellectual property: Patents, trademarks,
copyrights, trade secrets, know-how, etc.
Resources
 http://theleanstartup.com/principles
 http://www.ey.com/GL/en/Services/Strategic-Growth-Markets/Center-for-
Entrepreneurship-and-Innovation---Intellectual-property-for-startups
Purpose of a product
The product/ technology is the
solution to the customer need and
requires customer engagement.
The Lean Startup Method
MARKET
Key Concepts
 Segmentation: Breaking down a large market
into targeted/ defined subsets of customers
 Go-to-market: An operational plan of how
to reach the targeted customer segments
 Barriers to Entry: High Barriers to Entry:
“Good if you can get in” Low Barriers to
Entry: “Good if you can stay in”
 Growth: Understanding the market trends
and health of the market participants
Resources
 http://a16z.com/2015/03/06/go-to-market-bootcamp/
 https://www.blueoceanstrategy.com/
 https://hbr.org/1996/11/what-is-strategy
Managing Markets
Market analysis is able to direct efforts
and find near-term adopters and long-
term growth opportunities
Michael Porter 1996
COMPETITORS
Key Concepts
 Direct competitor: Company with the same
products delivered to the same customers
 Indirect competitor: Company with a
substitute product delivered to the same
customer
 Point of differentiation: Key attributes that
are better or differentiated from what
competitors deliver to customers
Resources
 http://steveblank.com/2013/11/08/a-new-way-to-look-at-competitors/
 http://tomtunguz.com/ecosystem-vs-competition/
 http://www.bothsidesofthetable.com/2010/12/26/talking-to-a-vc-about-your-
competitors/
Competitor Analysis
Building an understanding of the broad
competitors and their capabilities are
important for market differentiation.
FINANCES
Key Concepts
 Financial statements: Income statement,
balance sheet and cash flow statement
 Unit economics: Understanding revenue,
costs, and allocated overhead to deliver a
single product to the customer
 Cash burn: Gross cash burn is cash out per
month excluding cash in, net cash burn is cash
out per month including cash in
 Cash requirement: Each company should
look to raise/ have 12-24 months of cash on
hand to help them achieve set milestones.
Resources
 http://www.investopedia.com/university/financialstatements/
 http://www.bothsidesofthetable.com/2014/09/28/what-is-the-right-burn-rate-at-a-
startup-company/
 http://blog.openviewpartners.com/refocusing-the-startup-burn-rate-debate/
Seven Line Financial Analysis
RISKS
Key Concepts
 Organizational: Risk the team is not able to
fill gaps and deliver on their plans
 Operational: Company specific risk around
the ability to deliver to customers and partners
 Market: Broader high level shifts in the
market which a company can’t control but will
impact their business
 Financial: Misalignment with expected
financial performance and actual financial
performance.
Resources
 http://tomtunguz.com/breaking-down-a-typical-vcstartup-diligence-process/
Risks
Both investors and early employees will
work to reduce risks and find a strong
risk/ reward profile to fit their needs
DEAL STRUCTURES
 Convertible Note: Debt security that contains
a predefined converted terms. Gets paid before
equity players
 Preferred Equity: Senior equity that has
preferential terms over common equity. Gets
paid before common equity
 Common Equity: Equity that doesn’t contain
any preferences and is paid last. Typically
founders and some employees hold common
equity in the capitalization table
 Warrants: Security issued by the company
providing the right to purchase securities at a
specified price and time.
 Royalties: Payment from the sale or a product/
service that doesn’t include transfer of
ownership
 Capitalization Table: Detail of company
ownership
Resources
 http://www.startupcompan
ylawyer.com/category/conv
ertible-note-bridge-
financing/
 http://www.bothsidesofthet
able.com/2010/08/30/is-
convertible-debt-preferable-
to-equity/
TERM SHEET
Key terms
Pre-money, post money, liquidation preference,
board of directors, protective provisions, drag
along, anti-dilution, pay-to-play, dividends,
redemption rights, conversion, conditions
precedent to financing, vesting, right of first
refusal, voting rights, employee stock option
pool, indemnification, assignment, co-sale
agreement, etc.
Understanding the terms in detail and how
these terms can impact future rounds/
different parties is important before signing
Resources
 http://nvca.org/resources/model-legal-documents/
 http://feld.com/archives/2005/08/term-sheet-series-wrap-up.html
Term-Sheet
A term sheet is issued by investors to a
company and outlines the terms of the
deal (e.g. price, control, etc.)
VALUATION
 Post-money = Pre-money + Investment
 Exit value = Multiple * Exit year metric
 Required return factor = (1+ Discount
Rate)Years to harvest
 Final equity percentage = (Required
return factor * Investment)/ Exit value
 Retention percentage = 100% - Future
expected dilution of ownership
 Retention percentage = Final
percentage/round percentage
 Final percentage = (Required return *
Investment)/Exit Value
 New shares = (Round percentage/(100%-
Round percentage))* Old shares
 Exit share price = Exit value/final total
shares
Resources
 https://www.wsgr.com/WSGR/
Display.aspx?SectionName=practi
ce/venturecapital.htm#
 http://pitchbook.com/news/rep
orts/1h-2015-vc-valuations-
trends-report
DISCOUNT RATES
 Risk Free Rate: Rate earned on an investment with
no default risk. This rate is comprised of an expected
inflation component and a real return component.
 Systematic Risk Premium: Capital Asset Pricing
Model (CAPM) defines this as the sensitivity of the
return to changes in the overall market. Any other
risk can be diversified away.
 Value Added: Venture Capitalists are “active”
investors adding value to the their investments
through assistance in managing, recruiting, and
financing and thus demand additional return in
exchange for services rendered.
 Cash Flow Adjustment: Difference between the
forecasted cash flow and expected cash flow. A high
discount rate is used as a “haircut” to inflated
entrepreneurial forecasts.
 Liquidity Premium: Almost all Venture Capital
investments are “illiquid” securities. Securities of this
type often sell at a discount of 50 % under those of
comparable marketable or liquid securities.
Seed Stage: Concept Exploration: 80%
and Up
Start Up Stage: Commencing
Operations: 50 - 70%
First Stage: Unprofitable Going
Concern: 40 - 60%
Second Stage: Growth of (Profitable)
Going Concern: 30 -50%
Bridge: Carry through IPO: 20 - 35%

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Elements for assessing and structuring venture capital financing

  • 1. Elements for Assessing/ Structuring Venture Capital Financing
  • 2. OVERVIEW  This is a high level breakdown of elements for venture financing including assessing an opportunity and elements of structuring a deal.  The slides below highlight key terms/ concepts and provide additional resources  This is not meant to be an in-depth discussion/ analysis of each concept but instead provide new entrepreneurs and investors a brief understanding of each topic and concept for further study.  For any comments or additional resources please reach out to me at the contact below: Nathan J Fink Email: NathanJFink@gmail.com LinkedIn: www.linkedin.com/in/njfink
  • 3. DEAL FUNDING ELEMENTS  Team: Management, gap analysis, board of directors  Customer: Customer value proposition, segmentation, acquisition costs  Product/ Technology: Minimum viable product, roadmap, intellectual property  Market: Segmentation, go-to-market, barrier to entry, growth  Competitors: Direct, indirect, point of differentiation  Financials: Financial statements, unit economics, cash burn, cash requirements  Risks: Organizational, operational, market, financial  Deal Structures: Convertible debt, preferred/ common equity, warrants, royalties  Term Sheet: Key terms  Valuation: Basic terms to valuations  Discount Rate: Risk free rate, systematic risk, value added, cash flow, liquidity StructureAssessment/Diligence
  • 4. TEAM Resources  http://firstround.com/review/What-founders-need-to-know-about-building- management-teams-before-its-too-late/  http://www.entrepreneurship.org/KFSebook  http://www.entrepreneurship.org/Founders-School/Startup-Boards Key Concepts  Management: Getting a well balanced experienced team appropriate for the company’s stage  Gap analysis: Understanding the team’s current capabilities and what is missing to achieve the next company milestones  Board of directors: Providing well balanced and useful direction (technical and commercial) where each member brings something different to management. Team is one of the most important elements to a successful company Finding a winning team that works well together, develops sustainable solutions and delivers them to market is often elements of a promising company. Thinking through a combination of skills, experience, and culture fit are important to getting the right team. Hiring mistakes can cost distraction, money, and time which are all costly
  • 5. CUSTOMER Key Concepts  Customer value proposition: Articulating and delivering something the customer needs that causes actions (purchase/usage)  Segmentation: Defining the different customer groups by key qualities, attributes, and size (E.g. need, geography, etc.)  Customer acquisition costs: The total cost associated with finding, obtaining, and retaining a customer (cost to acquire and retain customers) Resources  http://mjskok.com/resource/building-compelling-value-proposition  http://steveblank.com/2011/04/04/the-leanlaunch-pad-at-stanford-%E2%80%93- class-4-customer-hypotheses/  https://www.cbinsights.com/blog/misinterpretations-cltv-cac-saas-metrics/ Customer Analysis Customer analysis is about finding and determining what the customer needs and how to deliver it in a unique and sustainable way that’s difficult for competition to replicate. The key to successfully understanding the customer is to continuously engage the consumer and solicit feedback.
  • 6. PRODUCT/ TECHNOLOGY Key Concepts  Minimum viable product (MVP): A version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort  Roadmap: An outline for developing the MVP into a commercially ready product and/or product suite  Intellectual property: Patents, trademarks, copyrights, trade secrets, know-how, etc. Resources  http://theleanstartup.com/principles  http://www.ey.com/GL/en/Services/Strategic-Growth-Markets/Center-for- Entrepreneurship-and-Innovation---Intellectual-property-for-startups Purpose of a product The product/ technology is the solution to the customer need and requires customer engagement. The Lean Startup Method
  • 7. MARKET Key Concepts  Segmentation: Breaking down a large market into targeted/ defined subsets of customers  Go-to-market: An operational plan of how to reach the targeted customer segments  Barriers to Entry: High Barriers to Entry: “Good if you can get in” Low Barriers to Entry: “Good if you can stay in”  Growth: Understanding the market trends and health of the market participants Resources  http://a16z.com/2015/03/06/go-to-market-bootcamp/  https://www.blueoceanstrategy.com/  https://hbr.org/1996/11/what-is-strategy Managing Markets Market analysis is able to direct efforts and find near-term adopters and long- term growth opportunities Michael Porter 1996
  • 8. COMPETITORS Key Concepts  Direct competitor: Company with the same products delivered to the same customers  Indirect competitor: Company with a substitute product delivered to the same customer  Point of differentiation: Key attributes that are better or differentiated from what competitors deliver to customers Resources  http://steveblank.com/2013/11/08/a-new-way-to-look-at-competitors/  http://tomtunguz.com/ecosystem-vs-competition/  http://www.bothsidesofthetable.com/2010/12/26/talking-to-a-vc-about-your- competitors/ Competitor Analysis Building an understanding of the broad competitors and their capabilities are important for market differentiation.
  • 9. FINANCES Key Concepts  Financial statements: Income statement, balance sheet and cash flow statement  Unit economics: Understanding revenue, costs, and allocated overhead to deliver a single product to the customer  Cash burn: Gross cash burn is cash out per month excluding cash in, net cash burn is cash out per month including cash in  Cash requirement: Each company should look to raise/ have 12-24 months of cash on hand to help them achieve set milestones. Resources  http://www.investopedia.com/university/financialstatements/  http://www.bothsidesofthetable.com/2014/09/28/what-is-the-right-burn-rate-at-a- startup-company/  http://blog.openviewpartners.com/refocusing-the-startup-burn-rate-debate/ Seven Line Financial Analysis
  • 10. RISKS Key Concepts  Organizational: Risk the team is not able to fill gaps and deliver on their plans  Operational: Company specific risk around the ability to deliver to customers and partners  Market: Broader high level shifts in the market which a company can’t control but will impact their business  Financial: Misalignment with expected financial performance and actual financial performance. Resources  http://tomtunguz.com/breaking-down-a-typical-vcstartup-diligence-process/ Risks Both investors and early employees will work to reduce risks and find a strong risk/ reward profile to fit their needs
  • 11. DEAL STRUCTURES  Convertible Note: Debt security that contains a predefined converted terms. Gets paid before equity players  Preferred Equity: Senior equity that has preferential terms over common equity. Gets paid before common equity  Common Equity: Equity that doesn’t contain any preferences and is paid last. Typically founders and some employees hold common equity in the capitalization table  Warrants: Security issued by the company providing the right to purchase securities at a specified price and time.  Royalties: Payment from the sale or a product/ service that doesn’t include transfer of ownership  Capitalization Table: Detail of company ownership Resources  http://www.startupcompan ylawyer.com/category/conv ertible-note-bridge- financing/  http://www.bothsidesofthet able.com/2010/08/30/is- convertible-debt-preferable- to-equity/
  • 12. TERM SHEET Key terms Pre-money, post money, liquidation preference, board of directors, protective provisions, drag along, anti-dilution, pay-to-play, dividends, redemption rights, conversion, conditions precedent to financing, vesting, right of first refusal, voting rights, employee stock option pool, indemnification, assignment, co-sale agreement, etc. Understanding the terms in detail and how these terms can impact future rounds/ different parties is important before signing Resources  http://nvca.org/resources/model-legal-documents/  http://feld.com/archives/2005/08/term-sheet-series-wrap-up.html Term-Sheet A term sheet is issued by investors to a company and outlines the terms of the deal (e.g. price, control, etc.)
  • 13. VALUATION  Post-money = Pre-money + Investment  Exit value = Multiple * Exit year metric  Required return factor = (1+ Discount Rate)Years to harvest  Final equity percentage = (Required return factor * Investment)/ Exit value  Retention percentage = 100% - Future expected dilution of ownership  Retention percentage = Final percentage/round percentage  Final percentage = (Required return * Investment)/Exit Value  New shares = (Round percentage/(100%- Round percentage))* Old shares  Exit share price = Exit value/final total shares Resources  https://www.wsgr.com/WSGR/ Display.aspx?SectionName=practi ce/venturecapital.htm#  http://pitchbook.com/news/rep orts/1h-2015-vc-valuations- trends-report
  • 14. DISCOUNT RATES  Risk Free Rate: Rate earned on an investment with no default risk. This rate is comprised of an expected inflation component and a real return component.  Systematic Risk Premium: Capital Asset Pricing Model (CAPM) defines this as the sensitivity of the return to changes in the overall market. Any other risk can be diversified away.  Value Added: Venture Capitalists are “active” investors adding value to the their investments through assistance in managing, recruiting, and financing and thus demand additional return in exchange for services rendered.  Cash Flow Adjustment: Difference between the forecasted cash flow and expected cash flow. A high discount rate is used as a “haircut” to inflated entrepreneurial forecasts.  Liquidity Premium: Almost all Venture Capital investments are “illiquid” securities. Securities of this type often sell at a discount of 50 % under those of comparable marketable or liquid securities. Seed Stage: Concept Exploration: 80% and Up Start Up Stage: Commencing Operations: 50 - 70% First Stage: Unprofitable Going Concern: 40 - 60% Second Stage: Growth of (Profitable) Going Concern: 30 -50% Bridge: Carry through IPO: 20 - 35%