Business, Law, and Innovation
Start-Ups
(a/k/a What I’m Working On)
Lecture 4
Spring 2014
Professor Adam Dell
The University of Texas School of Law
Stages of Financings
Seed/Angel
Venture Capital
Private Equity
Growth Equity
IPO
PIPE
Stage
Sources
Form
Size
Seed / Angel
Friends & Family, SBC
Common / Loan
$100-2MM
Venture Capital
Institutional Firms
Preferred Stock
$1-10MM
Private Equity
Growth Equity
Institutional Firms
Preferred Stock
Re-Cap
$10-50MM
Icahn ;)
Venture Capital: 6 Simple Questions
Precisely what is the product or service you are offering?
Precisely what is the market you are targeting?
Who are the competitors in this market?
What is the competitive advantage of your offering and
is it sustainable?
What are the economics of the business opportunity?
How will the public markets value this business?
Venture Capital
WHAT’s MISSING FROM THIS LIST??????
Venture Capital
One Simple Truth
Ex. Civitas Learning
I tend to pick sectors and go deep.
I look for new innovations that will cause creative destruction.
And I focus on team.
Very few start-ups come fully baked.
Many pivot and evolve.
If the team is strong and the market is ready, you may have something.
Civitas Learning – The Story
I went on an education jihad.
I met the CEOs of every education technology company I could find.
Came away with a few core beliefs:
The teams in edu generally stink
Content is not the problem
Schools move slowly, unless they have to
The hybrid model (online and offline class) will dominate the market
The incumbents (Pearson, etc.) are not going to let their businesses be
taken away from them. They are acquisitive
Civitas Learning: First Pitch
Overview
Civitas Learning will disrupt the $20B For-Profit
Higher Education Market by partnering with
Community Colleges to provide high quality, white-label
online Associate’s degree programs for less
than half of the annual tuition of currently available
programs.
.
The leadership team combines successful start-up
experience with deep expertise in for-profit
education. Team members have designed,
implemented, and managed the systems used by
leading online universities.
.
Civitas Learning: First Pitch
Austin Ventures, First Round Capital and
Floodgate Capital
Invested $4.0mm into this idea, March 2011
Civitas Learning: Today
Products deliver current, personalized, data-informed
advice to the front lines of higher education. Students,
faculty, advisors, and administrators interact with
these clean, user-friendly apps, which distill deep
analytical insights into straightforward, actionable
guidance. By helping to improve a million small
decisions across a college or university, we enable big
improvements across the institution.
Civitas Learning: Today
Civitas Learning
What questions would you have for the CEO?
Venture Capital: Dynamic Fit Analysis
Sales/
Marketing
Partners
Market
Opportunity
Technology
VC = 
Competition
Team
The
Economics
Value
Proposition
Market
Do you want to ‘be’ in this business?
What is exciting about the opportunity?
Is the market new and rapidly growing?
Value Proposition
How clear is it to the customer the problem you are solving?
How do they do it today?
Is that effective?
People / Management
How well do these people work together?
How well suited are they to compete in the market?
How effective are they at getting to the right answer?
Assess management’s judgment.
Where do they sit within this industry?
How well does management understand the marketplace?
What are the distinctive competencies of management?
Does management have the right characteristics?
What competencies are missing?
How intense is the management team?
Track record, done it before, know how to win, refuses not to win.
Assess their strategy, strengths, and weaknesses.
How are their references?
How will they treat their investors, their partners, their customers?
How well does the CEO understand the details of the business?
How well does the team understand: integrity, honest, commitment?
Sales and Marketing
Are you having to push (evangelical sales) it into market or is there pull (Uber)?
How is it sold? Direct or Indirect?
Over the phone?
How long are the sales cycles?
How in the organization are you selling to?
Who in the organization is benefitting from what you are selling?
How much authority does your “champion” have in the organization?
How will you market to these customers?
How expensive is it to reach these customers?
Can you effectively get to enough of them to make the business scalable?
How much noise in the market from others with similar offerings?
Barriers to Entry
What are the barriers to entry?
Is the ‘process’ patentable?
How defensible is the business?
- Against who?
- Who are likely entrants into the market?
Technology
How difficult is it to build what they’ve built?
How unique is it?
How defensible?
How well can it scale?
How robust is it?
Was it built on standards? Or is it proprietary?
Business Model
What are the average price of a deal?
How long are deals?
What kind of gross margins?
What kind of operating margins can you achieve?
How many customers before you are profitable?
Competitors
Who are the competitors?
What are the substitutes?
What are the barriers to entry?
Who are likely entrants into the market?
Who are the incumbants?
If there are only likely to be a few winners, can we be one of them?
Partners
What partnerships are key to success?
How critical are they for your success?
Are you dependent on them?
Can they put you out of business?
What is the bargaining power of suppliers?
What is the bargaining power of buyers?
Financing Requirements & Exit
How much will it cost to finance the business to cash flow positive?
How well thought out is management’s financing plan?
At what point will you know the economics of the business ‘works’?
How much ownership will I have after all the rounds of financing are done?
Is this company a ‘take public’ kind of opportunity?
How will Wall Street view the cash flow generated by the business?
What kind of operating margins can we achieve?
Who is likely to buy this business if I cant access the public market?
At what multiple?
Venture Capital: Decision Tree
Project Origination
Screen
No
Yes
Market/Strategic
Analysis
Yes
Technology
Analysis
Yes
Business Model
Success Factors
Decision
Yes
Management
Assessment
Yes
Expert Review
Yes
Expert Review
No
Decision
No
Decision
No
Fund
Yes
Decision
Yes
Analyze Need
for Syndicate
Decision
No
All the Pieces Need to Work & Fit Together
Sales/
Marketing
Partners
Market
Opportunity
Technology
VC = 
Competition
Team
The
Economics
Value
Proposition
Product Marketing
as a
Proxy for Venture Capital
If you think carefully about what
venture capitalists look for, you’ll
note that it’s not that dissimilar from
the ever important role of
PRODUCT MARKETING
Product marketing in a business addresses four important
strategic questions:
What products will be offered (i.e., the breadth and depth of the
product line)?
Who will be the target customers (i.e., the boundaries of the
market segments to be served)?
How will the products reach those customers (i.e., the
distribution channels to be used)?
Why will customers prefer our products to those of competitors
(i.e., the distinctive attributes and value to be provided)?
What does the product need to do?
What does it need to have to differentiate from the competition?
Who is going to buy it?
How much will they pay for it?
How can we sell it / position it in the market?