Fundraising in Focus: How Does It Work?

1. Ravi Belani
@rbelani
AlchemistAccelerator.Com
Ravib@stanford.edu
July 2016
Venture Capital Overview:
European Innovation Academy
VC
Funding,
Company
Valua1on,
&
Exit
Strategy

2. Naviga1ng
the
VC-­‐Founder
Dance

3. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

4. Entreprneurship Lecturer at Stanford
ETL.Stanford.EDu
Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director
6 Years as a Venture Capitalist
Skype, Baidu, Hotmail, Tesla
Me: Twitch (Amazon), Pubmatic
Director, Alchemist: B2B-Focused Accelerator
AlchemistAccelerator.com

5. Alchemist: The Leading Enterprise
Accelerator
PLATINUM
Top
US
Accelerator
of
2016
by
MIT
/
Rice
Seed
Accelerator
Rankings
#1
CB Inisghts labeled Alchemist as the
#1 Accelerator based on Alumni Fundraising
(YC was #2, Techstars #3)
12
Alchemist companies have been acquired in the last two years.
PAGE 03
60%
Over 60% of Alchemist companies raise institutional capital within
12 months of Demo Day (35 companies to date, average raise is
$2.1 million).

6. Institutional Investors in Flagship Accelerator Program include:
Alchemist Investors
PAGE 04

7. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

8. Cash is Oxygen

9. 3 Sources of Cash: What are the Pros & Cons of Each?
Revenue (Customers)
Debt (Banks)
Equity (Venture Capitalists)

10. 3 Sources of Cash: What are the Pros & Cons of Each?
Revenue (Customers)
Debt (Banks)
Equity (Venture Capitalists)

11. 3 Sources of Cash: What are the Pros & Cons of Each?
Revenue (Customers)
Debt (Banks)
Equity (Venture Capitalists)

12. CrowdFunding
Donation Crowdfunding (JustGiving)
+ Social Impact Initiatives
Customer/ Reward Crowdfunding (Kickstarter)
+ Hardware, Consumer Goods
Debt / Lending Crowdfunding (Funding Circle)
+ Small Business Opportunities, Clear ROI
Equity Crowdfunding (Angellist, Microventures, Gust,
FundersClub, CircleUp)
+ Rounding Out Rounds

14. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS

15. How VC’s Make Money
Carry
Management Fee

16. Management Fee Consumers 25% of a FundHow much management fee does a VC make in this fund?
$500M
Fund

17. Management Fee Consumers 25% of a FundManagement Fee Can Consume 25% of Fund Principal
$500M
Fund
$125M
Mgmt
Fee
• 2.5%
Per
Year
For
10
Years
• Fund
CommiWed
aXer
3-­‐4
Years
• 3
Funds
Drawing
Management
Fee
Down
on
in
any
given
year

18. How VC’s Make Money
Carry
Management Fee

19. Case
Study
of
a
Young
Fund:
Kleiner
Perkins
I
(1972)
19
Fund
Size
$7.5M
#
of
Co’s
17
@
Check
Size
$450K
Return
$345M
46x
#
How
much
carry
did
the
partners
get?

20. VC
Profit
Share:
Carry
Calcula1on
20
Fund
Returns:
$345M
-­‐ Fund
Size:
$
7.5M
-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐
Fund
Profit
$337.5M
X
Carry
20%
-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐
Carry
$67.5M

21. Of
Kleiner
Perkins’
17
Investments,
2
were
responsible
for
90%
of
returns
21

22. VC’s want to return 1/3 of their fund with each investment
$500M
Fund
#
of
Co’s
30
#
Big
Winners
1
out
of
10
%
x
=
3
Big
Winners
in
Each
Porlolio

23. Can Make Money Several Ways: Two Case Studies
Google: Rising Star
Hotmail: Contrarian Bet

24. Optimal Ownership is typically between 20 – 40 %
VC
Ownership
VC
Return

25. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

26. PRIMARY TERMS
Pre-Money Valuation
Option Pool
Liquidation Preferences
Anti-Dilution

27. Valua1ons
are
a
func1on
of
fundraising
dynamics
NOT
instrinsics
Driven
by
the
ownership
needs
of
the
funds
you
raise
from
and
the
cash
needs
of
the
company
Post–Money
Valua1on
=
Cash
Needs
of
the
Company
/
Ownership
Needs
of
the
Fund
Pre-­‐Money
Valua1on
=
Post-­‐Money
–
Cash
Raised
Larger
Funds
are
Much
More
Sensi1ve
about
Ownership
Needs
than
Cash
Needs!
Series
A
:
Raising
off
of
the
IDEA
Series
B:
Raising
off
of
RESULTS
Trick
is
balancing
the
Series
A
valua1on
to
set
you
up
so
you
can
raise
off
of
Results
in
the
Series
B
at
a
markup
(ideally
3x!)

28. What’s
the
post?
What’s
the
pre?
• $2M
given
for
25%
of
the
company
• $3M
given
for
25%
of
the
company
• $2M
given
for
20%
of
the
company
• $1M
given
for
40%
of
the
company
Post–Money
Valua1on
=
Cash
Needs
of
the
Company
/
Ownership
Needs
of
the
Fund
Pre–Money
=
Post-­‐Money
–
Cash
Invested

29. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

30. WHAT MAKES A SUCCESSFUL NEGOTIATION?

31. NEGOTIATIONS 101: DOES A ZOPA EXIST?
BATNA:
Best
Alterna1ve
to
a
Nego1ated
Agreement
ZOPA:
Zone
of
Possible
Agreement
Alterna1ve
to
Sell:
$1
Alterna1ve
to
Buy:
$8

32. Capture Value: How do you know how big the ZOPA is?
Alterna1ve
to
Sell:
$1
Alterna1ve
to
Buy:
$8
ZOPA

33. Negotiations Generate Value in 2 Phases
Create
Value:
Focus
on
Interests,
Not
Posi1ons
Capture
Value:
Understand
the
Other
Person’s
BATNA
first

34. Create Value

35. Create Value

36. Capture Value: Focus on the Other Person’s BATNA First
Alterna1ve
to
Sell:
$1
Alterna1ve
to
Buy:
$8
ZOPA

37. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

38. Negotiation Exercise: Count Off!

39. Negotiation Exercise: Go Here (Don’t Read the Other)
hWp://bit.ly/EIAFounder
1
2
hWp://bit.ly/EIAVC

40. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
FINAL THOUGHTS

41. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

42. Employee
Pool
•
Employee
Pools
typically
come
out
of
the
PRE-­‐MONEY
–
that
is
YOUR
Total
Dilu1on
is
the
NEW
INVESTOR’s
money
PLUS
the
Employee
Pool
•
Can
always
expand
the
employee
pool
later
–
and
when
you
do,
all
will
be
diluted
equally.
Try
to
minimize
the
employee
pool
to
what’s
absolutely
needed.
•
Exercise:
You
own
40%
of
a
company.
A
VC
wants
to
put
in
$2m
for
25%
of
your
company,
and
requires
a
20%
employee
pool
PRE-­‐MONEY.
•
What’s
the
Post-­‐Money
Valua1on?
•
What
percent
of
the
company
do
you
own
aXerwards?

43. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

44. Board
Composi1on
&
CEO
Role
How
many,
and
what’s
the
split
between
preferred,
common,
and
independents?
When
is
the
independent
important?
How
do
you
fire
a
board
member?

45. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

46. Liquida1on
Preferences
Why
does
Preferred
Exist?
Check
for:
•
Mul1ples?
•
Par1cipa1ng
vs
Non-­‐
par1cipa1ng
•
Senior
or
Pari-­‐Passu
What’s
this?

47. Liquida1on
Preferences
Why
does
Preferred
Exist?
Check
for:
•
Mul1ples?
•
Par1cipa1ng
vs
Non-­‐
par1cipa1ng
•
Senior
or
Pari-­‐Passu
What’s
this?

48. Liquida1on
Rights
Exit
Value
Payout
Draw
the
payouts
to:
•
Investors
•
Founders
Assuming
a
• $3.5m
exit
• $10.5m
exit
• $20m
exit
• $100m
exit

49. TERMS: OTHER PRIMARY TERMS
Final Thoughts
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE

50. 50
10
Years
–
Variability
to
NASDAQ
>
100%

51. 51
10
Years
–
Variability
to
NASDAQ
>
150%

52. 52
10
Years
–
Variability
to
NASDAQ
>
300%

53. 10
Years
–
Variability
to
NASDAQ
>
400%

54. 54
10
Years
–
Variability
to
NASDAQ
>
1000%

55. 55
FOUNDERS
ARE
HEROES.
They
think
non-­‐linearly.
Angels:
Your
Job
is
to
FIND
THEM.

56. Thank You!
Ravi Belani
@rbelani
Ravi Belani
203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860
Ravi@alchemistaccelerator.com