Many technology ventures are focused on securing funds from venture capitalists (VCs). This lecture focuses on understanding the motivation of private venture capital firms and how it affects the structure of their term sheets and legal agreements. We explore common pitfalls in dealing with VCs, as well as success stories regarding VC investment.
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
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
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).
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
$5,000
Non-‐arms
length
transactions
….
29. Monthly
prepared
financial
provided
20-‐30
days
from
month
end
Quarterly
financials
Analysis
vs.
budgets
Board
material
Yearly
operating
plan
(30
days
prior
to
beginning
of
fiscal
year)
30. Founder
restrictions
Drag
Along
VCs
need
exit
Tag
Along
I
can
sell
a
portion
if
you
can
31. Friends
and
family
Move
to
5
2
investor
2
founder
1
independent
Expect
material
in
advance
of
meeting
Only
a
meeting
if
the
VC
is
there
▪ Defer
once
32. Founders
Employees
Consultants
Students/universities/research
organizations
etc
Avoid
convoluted
IP
structures
Only
going
to
be
unwound
34. Ensure
one
common
motivator
Need
to
attract
talent
15%-‐20%
(low
as
10%)
New
CEO
New
executives
Board
members
Non-‐VC
Pre-‐$
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”