New venture financing

1. Copyright (c) 2003 Ziya G.
Boyacigiller
New Venture Financing
Ziya Boyacigiller
Sabanci University
(Based on a Presentation by Andy Rachleff, Benchmark Capital)

2. Make a bet:
1. Give me 1TL each now, and I will give
everyone back 1.25TL (except for one
person) at the end of this presentation.
2. Give me 1TL each now, and I will give back
one of you 10TL next month, and the others
0.25TL.
3. What would you do if I raised amounts by
1000X?
Copyright (c) 2003 Ziya G. Boyacigiller

3. New-Venture Financing
is about managing
high-risk investments
Copyright (c) 2003 Ziya G. Boyacigiller

4. Poker as a Metaphor…
Copyright (c) 2003 Ziya G. Boyacigiller
Wipe Out
Ante
Follow on
Bets
Chips
Cards
Dealt

5. Ziya G. Boyacigiller (c) 2008 5
 In 2000, there were 454 spinoffs, within all American academic institutions, pp57
 In 2000, average was 4.2% spinoffs-to-disclosures ratio within 26
selected universities (~37% of total with spinoffs) in USA. Pp68
 During 1980-1996, MIT spinoffs = 134, went public = 24, 18% public
“spin-off ratio, pp19 & pp30
 Using 4.2% and 18%, we get 0.8%. This means
almost 1 spinoff for 100 disclosures
succeed to go public (IPO). (Note that this ratio is for MIT and is much
higher than non-academic success rates. For example, the rate for most
startup companies is probably over 10 times worse!)
< 3 in 1,000 success rate…

6. “Success Bias”
Idea to IPO
Reviewed plans to IPO
Funded plans to IPO
6 in 1,000,000
60 in 10,000
Less than 1 in 10
Source: Saratoga Venture Finance

7. 7
Venture Capital - Size of the
Market
 US - 2006
 $27.5 bn
 1446 transactions
 $10.5 M average investment
 Europe - 2006
 Euro 4.1 bn
 867 transactions
 Euro 14 M average investment

8. Copyright (c) 2003 Ziya G. Boyacigiller
Venture Capital Food Chain
INSTITUTIONAL
INVESTORS
(Limited Partners – e.g.
Endowments, Pension
Funds, High worth
individuals)
VENTURE
CAPITALISTS
(Finding and Funding
Entrepreneurial Companies)
ENTREPRENEURS
(Starting and Building
Companies)

9. 9
Venture Capital - How the VCs make money?
 Raise “fund” every 2-4 years
 Pension funds, financial institutions, and specialist “fund of fund”
investors, high net-worth individuals/families
 Invest money over 3-5 years
 ~ 1/2 investments lose money
 ~ 1/3 investments break even
 ~ 1/6 investments make (lots of) money
 Very small “management fee” on funds managed
 ~1-2.5% PA
 “Carry”
 ~20-25% x (Total Return-Total Amount Invested)

10. Copyright (c) 2003 Ziya G. Boyacigiller
Asset Allocation for a Limited
Partner

11. Copyright (c) 2003 Ziya G. Boyacigiller
The Trade-off Between Risk &
Return

12. Metric Used: IRR
Copyright (c) 2003 Ziya G. Boyacigiller
IRR  “Internal Rate of Return”
Parameters:
• Initial Investment
• Follow on Investments
• Cash Out
• Time (maximum 10-12 years)
Use Excel built in formula….

13. VC Firms Performance
Kleiner
Perkins
Caufield &
Byers
IRR Sequoia IRR Matrix
Partners
IRR
1992 fund 39%/y 1992 fund 110%/y 1995 fund 223%/y
1994 fund 122%/y 1995 fund 175%/y 1997 fund 516%/y
1996 fund 287%/y 1998 fund 93%/y 2000 fund -30%/y
1999 fund -21%/y 1999 fund -5%/y 2001 fund -39%/y
2000 fund -16%/y 2000 fund -25%/y
Source: Venture Scoreboard

14. VC Returns (as of 3/31/04)
VC Fund Type 1 year 3 year 5 year
Early Seed funding -2.9% -19.8% 47.1%
Balanced funding 20.5% -9.4% 17.5%
Later stage funding 38% -6.0% 7.1%
All venture funds 15.7%* -13.3% 22.0%
Stock Indexes
Nasdaq 48.7% 2.7% -4.1%
S&P 500 32.8% -1.0% -2.6%%
Source: SJMN 7/22/04
* First double digit yearly return since 2000

15. Copyright (c) 2003 Ziya G. Boyacigiller
Which of the following firms
would you rather invest in?
Each invests $1 million per company in 10 companies:
1. One gets 2x their money on all 10.
2. The other loses all their money in 8 and
gets >20x their money on the
remaining 2.

16. Copyright (c) 2003 Ziya G. Boyacigiller
Summary of the Investment
Business

17. Copyright (c) 2003 Ziya G. Boyacigiller
How do you find
Right/Non-Consensus?

18. Copyright (c) 2003 Ziya G. Boyacigiller
How can you recognize
vision?
•Early insight into technology
inflection point (disruptive
innovation)
•The Napkin test

19. Single most important
determinant of success
that overwhelms all else is
the choice of industry.
Copyright (c) 2003 Ziya G. Boyacigiller

20. Copyright (c) 2003 Ziya G. Boyacigiller
Second Most Important Determinant of
Success is the Effect of Management
Team
•When a great management team meets
a lousy market market wins
•When a lousy management team meets
a great market market wins
•When a great management team meets
a great market something special
happens

21. Execution  “Effect of Management Team”
Copyright (c) 2003 Ziya G. Boyacigiller

22. Copyright (c) 2003 Ziya G. Boyacigiller
Capital Intensity
•Least Amount of Money = Most Attractive Business
•Minimize Capital Required by
High gross margins (Unfair advantage)
monopoly
Rapid escape velocity (Product/Market fit)
importance=high, satisfaction=low

23. Copyright (c) 2003 Ziya G. Boyacigiller
How do Valuation & Terms
get established?
•Look at milestones achieved
YDY (aynasi istir kisinin, lafa bakilmaz…)
DWYSYWD (credibility is doing what you promise…)
•Look at comparables
(It’s just like buying a house…)
•Then it’s up to supply & demand

24. Copyright (c) 2003 Ziya G. Boyacigiller
Milestones Chart to CF+

25. Copyright (c) 2003 Ziya G. Boyacigiller
Term Sheet
TERM SHEET
FOR SERIES A PREFERRED STOCK FINANCING OF
[Insert Company Name], INC.
[ __, 200_]
This Term Sheet summarizes the principal terms of the Series A Preferred Stock
Financing of [___________], Inc., a [Delaware] corporation (the “Company”). In
consideration of the time and expense devoted and to be devoted by the Investors with
respect to this investment, the No Shop/Confidentiality and Counsel and Expenses
provisions of this Term Sheet shall be binding obligations of the Company whether or
not the financing is consummated. No other legally binding obligations will be created
until definitive agreements are executed and delivered by all parties. This Term Sheet is
not a commitment to invest, and is conditioned on the completion of due diligence, legal
review and documentation that is satisfactory to the Investors. This Term Sheet shall be
governed in all respects by the laws of the [State of Delaware].

26. Copyright (c) 2003 Ziya G. Boyacigiller
It is all about the pie…
50%
10%

27. Copyright (c) 2003 Ziya G. Boyacigiller

28. Copyright (c) 2003 Ziya G. Boyacigiller

29. Copyright (c) 2003 Ziya G. Boyacigiller

30. Ref: Golden Horn Ventures 30
Reasons to Raise VC
Unique Product
or Concept
Excellent
Development
Capability
Large Potential
Market
Opportunity
Intense Competition Likely Need to Move Rapidly
Implications
VC Funding Supports:
• Capital
• Network
• Experience & Expertise
• Credibility & PR

31. Copyright (c) 2003 Ziya G. Boyacigiller
What VCs Don’t Look For
•Another Microsoft!
•Do you think they care if you
build a long-term great company
(beyond their holding period)?
- No benefit to IRR or distributions
- Impacts their reputation

32. Copyright (c) 2003 Ziya G. Boyacigiller
Who is the ideal
funding source?
Potential
Market Size
Ideal Funding
Source
Small Bootstrap or Angel
Unclear Bootstrap or Angel then VC
Large Venture Capital

33. Copyright (c) 2003 Ziya G. Boyacigiller
How should you choose among
Venture Capitalists / Investors
•Industry experience / perspective
•Recruiting help (network)
•Partnering/Contacts
•Brand/Credibility
•Price/Stage
•Funding Required
•Location
•Chemistry

34. Copyright (c) 2003 Ziya G. Boyacigiller
Who should you ask for advice?
•Successful Entrepreneurs
•Top deal lawyers
•Investment bankers
•Frequent advisors to the VCs
- Professors
- Angel Investors
•Inovent
•Endeavor