Overview of the venture capital funding process

1. January 2015
Introduction to Venture Financing
Douglas Abrams

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Douglas Abrams
About the facilitator
 Wharton MBA
 JP Morgan – Vice President
IB Technology, GM Internet Marketing
 Parallax Capital Mgmt – Co-founder and MD
Private Equity
 Extream Ventures – Co-founder and MD
S$20 million seed fund
 Expara – Founder and MD
IDM Ventures Incubator, advisory, training
 NUS – Adjunct Associate Professor, Business
School, Entrepreneurship, Sasin – Visiting
Professor, Venture Capital

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Douglas Abrams
VC mindset
 Risk and return are highly correlated
 You cannot increase return without taking more risk
Return
Risk
Potential outcomes

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Douglas Abrams
Key elements for success
• Solving a painful problem for customers – Value proposition
• Developing an innovative product – Innovation
• Customers and competitors – Market identification and analysis
• Reaching customers – Marketing, sales and distribution strategy
• Competing when others enter - Sustainable competitive advantage
• Make money – Business model and financial plan
• Team – A team or B team

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Douglas Abrams
Key venture finance terms
 Business model
 Financial projections
 Valuation
 Funding required and equity offered
 Use of Proceeds
 Exit Strategy and ROI
 Cap table

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Douglas Abrams
Company valuation methods
 Price to earnings (p/e)
 Dividend yield
 Multiple of book value
 Comparables
 Discounted Cash Flow (DCF)
 VC method

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Douglas Abrams
How much equity does the investor receive?
 Pre-money valuation
– Amount invested by VC ÷ (Agreed pre-money value of business
+ Amount invested by VC)
– $3MM pre + 1 MM VC = 25% VC equity
 Post-money valuation
– Amount invested by VC ÷ post-money valuation
– $4MM post = 25% VC equity

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Douglas Abrams
How do VCs make money?
 Trade sale – sell to
another company
 IPO – sell to the
public through listing
on an exchange

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Douglas Abrams
Stages and sources of funds
Founder’s
Capital
Seed/
Angel
Series
A, B, C
Mezzanine Pre-IPO IPO
VC hurdle rates 60-100% 40-60% 20% Why are these rates so high?
OM
F,F&F
Incubators
corporations
government
Customers, suppliers,
strategic partners
VCs, Banks for VC loans

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Douglas Abrams
Calculate investor’s ROI including dilution

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Douglas Abrams
Key elements of a venture deal
 Board of directors
 Protective provisions
 Drag-along agreement
 Conversion
Control
 Price-per-share
 Valuation
 Amount of financing
 Liquidation preference
 Vesting
 Options pool
 Anti-dilution
 Pay-to-play
Economics

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Douglas Abrams
Contact us
 Douglas Abrams
 Expara, Expara IDM Ventures
– dka@expara.com
– www.expara.com
 Block 71 Ayer Rajah Crescent
 #$02-10/11 S139951
 65-9780-5381