This document discusses securing early stage funding. It provides an overview of how venture capital works, including that venture capital firms invest funds from limited partners and aim to profit from IPOs or acquisitions within 10 years. It describes how to raise money by giving yourself options, creating scarcity, and raising funds when not needed. Examples are given of raising money from friends and family or venture capital firms. The document emphasizes matching the offer to funder needs and that raising venture capital requires demonstrating necessity while other options also exist.
2. Overview
How does VC work?
A snapshot of venture capital: then and now
How to raise money
Examples in raising money:
– Friends and family
– Venture capital
– Large scale financing
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3. A Primer on Venture Capital
Venture capital firms are managed by a General Partner
The General Partner invests funds from Limited Partners
Funds have a ten year life with a limited number of extensions
The General Partner receives is compensated by a management fee and carry
– Management fees cover salary and expenses
– Carry is a percent of the profits
– Most partnerships have to pay back the LPs and the fees before the General
Partner can share in the profits
Incentives vary based on fund size and number of partners
– Small funds are typically driven by carry only
– Large funds can be driven by fees
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4. How Venture Capital Works
The General Partner invest from the fund into a number of
companies defined by the strategy
Typically, subsequent rounds are required after an investment
by a given VC
– Existing investors are driven to increase share price and
reduce dilution
– VCs are motivated to ‘enhance’ the fundraise
– The single biggest value of a VC is reducing the cost of
capital
Venture capitalists only make a profit upon an IPO or M&A
Fund life may influence exit behavior
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5. Understanding the VC Incentives
2 and 20
– Management fees provide for salaries (2% per year)
– After the LPs are repaid, 20% of profits (the carry) are split by the GP in a pre-
defined manner
VCs are eager to return the fund
VCs are eager to get disproportionate returns
Strategies define the motivation
– Spray and pray
– Targeted bets
– Portfolio plays
Venture capitalists bet on people, trends, IP, and the potential to ‘create value’
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8. What Happens to Venture Backed Companies
Remember: Entrepreneurs Build Companies…VCs just fund them
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9. The Venture Industry Is Now in Challenging
Times
Vintage Year Mean Return (%)
1999 -1.79
2000 -1.83
2001 0.38
2002 0.83
2003 3.20
2004 3.19
2005 -0.46
2006 -1.74
2007 -0.95
2008 2.20
2009 2.17
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10. Snapshot on venture backed M&A
Acquisition volume has decreased, and remains down
– Transactions over last 10 years are reduced compared to the
90’s boom
– Volume has been decreasing on a quarterly basis since 2007
The average age to acquisition has increased, and remains high
M&A Transactions since 2000 Time from Equity financing to M&A
8
534 507 524 526
491
460
$98.3 440 6.6
$100 410 421 450 6.1
385
6.0
6
5.4 5.5
5.1
$75 298
$61.1 4.6
300
4 3.7
$50
$37.7 2.8
$27.7 $31.5 2.5
$26.9 150
$24.0 2.1
$25 $19.0 $17.7 2
$12.1 $14.0
$0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q- 0
3Q'10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-
Amount Paid ($B) Number of Transactions 3Q'10
Source: Dow Jones VentureSource Source: Dow Jones VentureSource 10
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11. IPOs in a mixed environment
IPOs have returned
– 2010 activity is the highest since 2007
– Data is trending higher
IPOs have an evolving character
– Higher valuation
– Flat/less money raised
IPOs since 2000 IPO sizes since 2000
205 $500
200
$350
$25
$395 $300
$400 $383
$367
$20 $19.0 150 $250
$309
$300 $275 $284
$200
$15 $229
100 $226 $227
79 $202
$200 $150
67 $166
$10
56
44 $7.5 $80 $75 $80 $100
50 $76
$5.0 32 $56 $65 $56
$5 $100 $51 $50 $52 $54
23 20 23 $3.7
$2.3 $50
7 8 $2.3
$1.7 $1.6 $1.5
$0 0 $0 $0
$0.6 $0.9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-
3Q'10 3Q'10
Amount Raised ($B) Venture-Backed IPOs Median Pre-Valuation at IPO ($M) Median Amount Raised at IPO ($M)
Source: Dow Jones VentureSource Source: Dow Jones VentureSource 11
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12. IPO exits are taking longer
The amount of time to IPO has consistently risen
The amount of equity financing prior to IPO is markedly
increased
The increase in median valuation does not compensate for the
increased time and money prior to IPOs
Time from equity financing to IPO Money raised prior to IPO
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8.7 8.8
$75 $73 $72
7.9
8 $65
6.8 $57 $58
6.2 $55 $55
$51
6 5.7 5.7 5.7 $48
$50 $44
$43
4.6
4 3.6
3.1
$25
2
$0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-
3Q'10
3Q'10
Source: Dow Jones VentureSource Source: Dow Jones VentureSource 12
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13. The ecosystem is responding
Entrepreneurs are responding to the changes
Firms are focusing their efforts
$85.5
$80
$60
$42.5
$40.1
$40
$31.2
$28.7 $28.6
$19.0 $18.9
$20 $13.5
$10.4 $9.2
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-
3Q'10 13
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14. How To Raise Money
3 Rules:
– Give yourself options
– Create scarcity
– Raise money when you don’t need to
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15. Give Yourself Options
Options give you flexibility in any negotiation
Allows you to better match with your goals
Flexibility is essential to create options
Be creative and aggressive
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16. Example 1: Wellstone Filters
Based on the development on dialdehyde starches as effective
binders of AGEs
– Removes 96% carcinogens
– Removes 94% tar
– Removes 10% nicotine
Initially commercialized to remove carcinogens from cigarettes
Funded by angel investment, brought public within 12 months
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17. Create Scarcity
People want what they cant have
Investors need to be compelled to have something
If they feel they can get something at any time, they will wait
Only 3 in 1000 deals a VC sees get funded—scarcity and
essentialness are differentiating
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18. LS9: Building a better biofuel
High-quality, low-cost drop-in fuels and sustainable
chemicals for large and growing markets
Any Most Unique Drop-in
renewable efficient one-step infrastructure
feedstock conversion process compatibility
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19. Fatty Acid Biosynthesis:
The Best Route to Hydrocarbons
Metabolic Modeling
Fatty Acid Biosynthesis
Preferred pathway
90% energetic efficiency
Commercial productivity
Well characterized
Structurally diverse
Immiscible
Carboxylic Hydrocarbon chain
acid
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20. Synthetic Pathways Enable One Step Conversions
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21. Clear Path to Commercialization
Product
Revenue
Break Ground on
Commercial Plant
Increasing Value
Demonstration
Scale Production
Pilot Plant
Success
2009 2010 2012 2013 and
beyond
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26. Raise Money When You Don’t Need To
Give your self options
Give yourself leverage
Give your self time
Give yourself opportunity
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30. Summary
Raising money is about matching your offer to funder needs
Venture capital is a potent source of capital, but not the only one
Raise money from venture capitalists requires creating the
sense of need
There is no one way to get there
Once you get investment, interests are generally aligned
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