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What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
  VC	
  motivations	
  	
  
  Driven	
  by	
  their	
  model	
  
  Impacts	
  their	
  terms	
  and	
  expectations	
  	
  	
  
  Most	
  companies	
  aren’t	
  VC’able	
  	
  
  Just	
  don’t	
  fit	
  the	
  “Big	
  Money”	
  model	
  
  May	
  be	
  good	
  companies	
  and	
  businesses	
  
  But	
  if	
  you	
  are	
  then	
  you’ll	
  be	
  better	
  equipped	
  
than	
  most	
  because	
  of	
  tonight	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)
  1,000	
  companies	
  
  10	
  investments	
  
  2	
  may	
  be	
  widely	
  successful	
  (usually	
  1)	
  
  6	
  “land	
  of	
  the	
  living	
  dead”	
  
  2	
  fail	
  horribly	
  
  Winners	
  to	
  offset	
  my	
  losers	
  	
  
  Start	
  ups	
  10-­‐12x	
  return	
  in	
  5-­‐7	
  years	
  
  Existing	
  companies	
  5-­‐7x	
  in	
  4-­‐5	
  years	
  
  A	
  company	
  that	
  doubles	
  isn’t	
  enough…	
  
  Every	
  opportunity	
  has	
  to	
  have	
  the	
  potential	
  
to	
  be	
  a	
  home	
  run	
  
	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)
  You	
  Tube	
  sold	
  to	
  Google	
  for	
  $1.65	
  Billion	
  
  Sequoia	
  invested	
  $11.5M	
  received	
  $495M	
  
  30%	
  of	
  the	
  company	
  
  43x	
  return	
  
  Great	
  deal!	
  
  6-­‐9	
  months	
  to	
  raise	
  capital	
  
  Several	
  meetings	
  
  Want	
  to	
  get	
  to	
  know	
  you	
  	
  
  Assess	
  your	
  “Say/Do”	
  factor	
  
  Close	
  to	
  truth	
  
▪  Builds	
  confidence	
  
	
  
  Personal	
  Recommendation:	
  	
  	
  
  Get	
  to	
  know	
  the	
  VC	
  	
  
▪  Process	
  (who	
  makes	
  the	
  decision,	
  when	
  &	
  how	
  often)	
  
▪  Where	
  are	
  they	
  in	
  their	
  fund	
  life	
  cycle	
  
▪  What	
  was	
  their	
  last	
  deal	
  
▪  Talk	
  to	
  their	
  existing	
  CEO	
  
▪  Cash	
  available	
  to	
  invest/reserves	
  
  Personal	
  Recommendation:	
  	
  	
  
  Rise	
  above	
  the	
  noise	
  
  Remember	
  the	
  frogs	
  
▪  1,000’s	
  of	
  deals	
  
	
  
	
  
	
  
Have	
  to	
  be	
  able	
  to	
  live	
  with	
  them	
  …	
  
“til	
  exit	
  do	
  you	
  part”	
  
  The	
  term	
  sheet…	
  
	
  
	
  
	
  
  Non-­‐binding	
  offer	
  to	
  invest	
  
  Outlines	
  the	
  general	
  terms	
  and	
  conditions	
  of	
  
investment	
  
  Which	
  may	
  change	
  
  Not	
  the	
  definitive	
  agreement	
  simply	
  a	
  place	
  
to	
  start	
  
  Everyone	
  uses	
  it	
  
  When	
  they	
  issue	
  one	
  in	
  their	
  process	
  
  Non-­‐heart	
  ache	
  	
  
  Company	
  name	
  
  Investors	
  
  How	
  much	
  
  Date	
  	
  
	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
On	
  average	
  it	
  takes	
  about	
  6	
  years	
  for	
  a	
  software	
  company	
  to	
  get	
  to	
  $10	
  million	
  revenue.	
  	
  
Far	
  more	
  realistic	
  to	
  get	
  to	
  $50M	
  in	
  10	
  years	
  (50%	
  growth	
  rate	
  from	
  years	
  6	
  to	
  10).	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
What do VCs want? - Entrepreneurship 101 (2013/2014)
  Accrue	
  
  Price	
  +	
  dividend	
  convert	
  
	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)
  Protects	
  an	
  investor	
  from	
  down	
  round	
  
  As	
  if	
  their	
  investment	
  had	
  been	
  done	
  at	
  the	
  
current	
  lower	
  price	
  
  Keeps	
  the	
  investor	
  whole	
  in	
  bad	
  times	
  
  Full-­‐ratchet	
  
  Weighted	
  average	
  
  VC	
  can	
  ask	
  to	
  have	
  the	
  company	
  buy	
  back	
  
shares	
  
  Life	
  of	
  the	
  fund	
  
  Investors	
  in	
  funds	
  want	
  their	
  money	
  back	
  
  Outcome:	
  
  Forces	
  a	
  sale	
  
  Get	
  minimum	
  investment	
  back	
  (P+dividends)	
  
	
  
  60-­‐66	
  2/3%	
  
  Change	
  nature	
  of	
  the	
  business	
  (acquire/divest)	
  
  Change	
  capital	
  structure/articles	
  	
  
▪  Default	
  approval	
  over	
  future	
  financing	
  
  Approve	
  business	
  plan/operating	
  plan	
  
  Change	
  in	
  key	
  employees	
  (defined	
  term)	
  
  Creation	
  of	
  ESOP	
  
  Unbudgeted	
  expenditure	
  in	
  excess	
  of	
  $5,000	
  
  Non-­‐arms	
  length	
  transactions	
  
  ….	
  
  Monthly	
  prepared	
  financial	
  provided	
  	
  
  20-­‐30	
  days	
  from	
  month	
  end	
  
  Quarterly	
  financials	
  	
  
  Analysis	
  vs.	
  budgets	
  
  Board	
  material	
  	
  
  Yearly	
  operating	
  plan	
  	
  
  (30	
  days	
  prior	
  to	
  beginning	
  of	
  fiscal	
  year)	
  
  Founder	
  restrictions	
  
  Drag	
  Along	
  
  VCs	
  need	
  exit	
  
  Tag	
  Along	
  
  I	
  can	
  sell	
  a	
  portion	
  if	
  you	
  can	
  
  Friends	
  and	
  family	
  
  Move	
  to	
  5	
  
  2	
  investor	
  
  2	
  founder	
  
  1	
  independent	
  
  Expect	
  material	
  in	
  advance	
  of	
  meeting	
  
  Only	
  a	
  meeting	
  if	
  the	
  VC	
  is	
  there	
  
▪  Defer	
  once	
  
	
  
  Founders	
  
  Employees	
  
  Consultants	
  
  Students/universities/research	
  organizations	
  
etc	
  	
  
  Avoid	
  convoluted	
  IP	
  structures	
  
  Only	
  going	
  to	
  be	
  unwound	
  
  Non-­‐competition	
  
  Non-­‐solicitation	
  
  Customers	
  
  Employees	
  	
  
  IP	
  Assignment	
  
  Ensure	
  one	
  common	
  motivator	
  	
  
  Need	
  to	
  attract	
  talent	
  
  15%-­‐20%	
  (low	
  as	
  10%)	
  
  New	
  CEO	
  
  New	
  executives	
  
  Board	
  members	
  
  Non-­‐VC	
  
  Pre-­‐$	
  
  Dilutive	
  to	
  you	
  
  Power	
  of	
  “OPM”	
  
  Get	
  to	
  know	
  your	
  VC	
  	
  
  Won’t	
  matter	
  in	
  good	
  times	
  
  Can’t	
  tell	
  you	
  what	
  to	
  do	
  but	
  prevent	
  you	
  from	
  
doing	
  things	
  
  Acceptance	
  &	
  Exclusivity	
  
  Deadline	
  for	
  acceptance	
  
  Use	
  the	
  time	
  to	
  negotiate	
  with	
  other	
  parties	
  
  No	
  “shop”	
  	
  
	
  
	
  
 
Be	
  careful	
  what	
  you	
  ask	
  for	
  …don’t	
  send	
  the	
  
wrong	
  message	
  	
  
What do VCs want? - Entrepreneurship 101 (2013/2014)

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What do VCs want? - Entrepreneurship 101 (2013/2014)

  • 5.   VC  motivations       Driven  by  their  model     Impacts  their  terms  and  expectations         Most  companies  aren’t  VC’able       Just  don’t  fit  the  “Big  Money”  model     May  be  good  companies  and  businesses     But  if  you  are  then  you’ll  be  better  equipped   than  most  because  of  tonight  
  • 7.   1,000  companies     10  investments     2  may  be  widely  successful  (usually  1)     6  “land  of  the  living  dead”     2  fail  horribly     Winners  to  offset  my  losers       Start  ups  10-­‐12x  return  in  5-­‐7  years     Existing  companies  5-­‐7x  in  4-­‐5  years  
  • 8.   A  company  that  doubles  isn’t  enough…     Every  opportunity  has  to  have  the  potential   to  be  a  home  run    
  • 10.   You  Tube  sold  to  Google  for  $1.65  Billion     Sequoia  invested  $11.5M  received  $495M     30%  of  the  company     43x  return     Great  deal!  
  • 11.   6-­‐9  months  to  raise  capital     Several  meetings     Want  to  get  to  know  you       Assess  your  “Say/Do”  factor     Close  to  truth   ▪  Builds  confidence    
  • 12.   Personal  Recommendation:         Get  to  know  the  VC     ▪  Process  (who  makes  the  decision,  when  &  how  often)   ▪  Where  are  they  in  their  fund  life  cycle   ▪  What  was  their  last  deal   ▪  Talk  to  their  existing  CEO   ▪  Cash  available  to  invest/reserves  
  • 13.   Personal  Recommendation:         Rise  above  the  noise     Remember  the  frogs   ▪  1,000’s  of  deals        
  • 14. Have  to  be  able  to  live  with  them  …   “til  exit  do  you  part”  
  • 15.   The  term  sheet…        
  • 16.   Non-­‐binding  offer  to  invest     Outlines  the  general  terms  and  conditions  of   investment     Which  may  change     Not  the  definitive  agreement  simply  a  place   to  start     Everyone  uses  it     When  they  issue  one  in  their  process  
  • 17.   Non-­‐heart  ache       Company  name     Investors     How  much     Date      
  • 20. On  average  it  takes  about  6  years  for  a  software  company  to  get  to  $10  million  revenue.     Far  more  realistic  to  get  to  $50M  in  10  years  (50%  growth  rate  from  years  6  to  10).  
  • 24.   Accrue     Price  +  dividend  convert    
  • 26.   Protects  an  investor  from  down  round     As  if  their  investment  had  been  done  at  the   current  lower  price     Keeps  the  investor  whole  in  bad  times     Full-­‐ratchet     Weighted  average  
  • 27.   VC  can  ask  to  have  the  company  buy  back   shares     Life  of  the  fund     Investors  in  funds  want  their  money  back     Outcome:     Forces  a  sale     Get  minimum  investment  back  (P+dividends)    
  • 28.   60-­‐66  2/3%     Change  nature  of  the  business  (acquire/divest)     Change  capital  structure/articles     ▪  Default  approval  over  future  financing     Approve  business  plan/operating  plan     Change  in  key  employees  (defined  term)     Creation  of  ESOP     Unbudgeted  expenditure  in  excess  of  $5,000     Non-­‐arms  length  transactions     ….  
  • 29.   Monthly  prepared  financial  provided       20-­‐30  days  from  month  end     Quarterly  financials       Analysis  vs.  budgets     Board  material       Yearly  operating  plan       (30  days  prior  to  beginning  of  fiscal  year)  
  • 30.   Founder  restrictions     Drag  Along     VCs  need  exit     Tag  Along     I  can  sell  a  portion  if  you  can  
  • 31.   Friends  and  family     Move  to  5     2  investor     2  founder     1  independent     Expect  material  in  advance  of  meeting     Only  a  meeting  if  the  VC  is  there   ▪  Defer  once    
  • 32.   Founders     Employees     Consultants     Students/universities/research  organizations   etc       Avoid  convoluted  IP  structures     Only  going  to  be  unwound  
  • 33.   Non-­‐competition     Non-­‐solicitation     Customers     Employees       IP  Assignment  
  • 34.   Ensure  one  common  motivator       Need  to  attract  talent     15%-­‐20%  (low  as  10%)     New  CEO     New  executives     Board  members     Non-­‐VC     Pre-­‐$     Dilutive  to  you  
  • 35.   Power  of  “OPM”     Get  to  know  your  VC       Won’t  matter  in  good  times     Can’t  tell  you  what  to  do  but  prevent  you  from   doing  things  
  • 36.   Acceptance  &  Exclusivity     Deadline  for  acceptance     Use  the  time  to  negotiate  with  other  parties     No  “shop”        
  • 37.   Be  careful  what  you  ask  for  …don’t  send  the   wrong  message