LAUNCHING YOUR STARTUP
Understanding Venture Financing
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008
Launching Your Startup
Understanding Venture Financing
A Primer on Venture Capital
Financing Your Venture
Other Startup Considerations
Raising Venture Capital
The Transition from Idea to Execution
Business Planning
Peace and Prosperity Through Science and Collaboration
www.crdf.org
My Background
28 years in technology-related ventures in all
capacities
Founder / CEO, venture capital firm
Founder / CEO, early Internet company
Corporate finance / M&A, global investment bank
Technology marketing
Programmer / engineer
Owner / inventor of 14 issued and pending
patents worldwide
Education
Bachelor of Industrial and Systems Engineering,
Georgia Institute of Technology
Master of Business Administration,
Amos Tuck School at Dartmouth College
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Impact of U.S. Small Businesses
25.8 million U.S. businesses
“Small” businesses represent:
99.9% of total businesses
50% of the private work force
41% of high tech jobs
75% of net new jobs
41% of private sales
52% of private sector output
97% of all U.S. exporters with 29% of export value
Produce 13-14x patents per employee (and
2x likely to be among the 1% most cited)
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Impact of Venture-Backed Companies
In the U.S.:
$1.8 trillion in revenue in 2003 (9.6% of all sales)
10.1 million jobs in 2003 (9.4% of employment)
600,000 new net jobs from 2000-2003
In Europe:
1.0 million jobs in 2004
630,000 new net jobs created from 2000-2004
Highest growth rates in biotech, health care and
medical devices
Largest absolute growth in university spin-offs
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Impact of U.S. Universities
Established > 4,100 new companies since
1980, 2/3 of which were still operating
Executed > 30,000 active technology
transfer licenses (including > 4,500 in 2003),
generating > $1.3 billion in license income
Launched > 2,200 new commercial products
between 1998-2003
Performed > $30 billion of R&D in 2001
Filed 8,000 U.S. patent applications in 2003
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What is Venture Capital?
A cash investment made by
professional, institutionally backed
investors to emerging growth
businesses
Generally made as cash in exchange
for equity (ownership) in the investee
company
Usually high risk, but with the potential
for above-average returns
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U.S. Venture Capital Market
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European Venture Capital Market
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Types of Venture Capital
Private
Professionally
managed
Return on investment
focused
May bring network,
business advice,
credibility, etc.
Corporate
Manage risk
Distribution networks
Product R&D
Operational skills
Spin-outs
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Academic
Intellectual property
Spin-outs
Government
Create new jobs and
grow economy
Offer cash, tax
incentives, in-kind
Stem brain-drain
Angels
Network, business
advice, credibility, etc.
Live vicariously
The 3Fs
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Venture Capital Investment Criteria
Management Team
Track record
Relevancy
Bet on the jockey, not the horse!
Concept
Solves real problem
Favorable market dynamics
Disruptive
Unfair advantages & sustainable
competitive advantages
Proper capitalization
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The Venture Capital Numbers Game
Receive 1000s of business plans each
year
Read 100s of plans
Meet with dozens of companies
Fund a handful
Portfolio expectations:
60% die or go nowhere (living dead)
30% yield 2-4x in 4-7 years
10% (hopefully 20%) are tremendous successes
(e.g., 10x, 100x, 1000x!)
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How Venture Capital Funds Work
General partners (GPs) manage the fund
Capital comes from institutional “limited
partners” (LPs)
Singularly focused: ROI
GPs get an annual fee
Once LPs get investment back, GPs get a
portion of the profits
LPs get the remaining profits
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Venture Capital Economics
LP 3
LP 1
LP 4
LP 2
GP
2%
$100
Management
VC Fund IX, L.P.
$10
Portfolio
Company 1
Portfolio
Company 2
Portfolio
Company 3
$10
$10
$10
$10
Portfolio
Company 4
$10
$10
$10
$10
Portfolio
Company 5
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$10
Portfolio
Company 10
Portfolio
Company 9
Portfolio
Company 8
Portfolio
Company 7
Portfolio
Company 6
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Venture Capital Economics
LP 3
LP 1
LP 4
LP 2
GP
$180
$20
VC Fund IX, L.P.
Portfolio
Company 1
Portfolio
Company 10
Portfolio
Company 2
$100
$35
Portfolio
Company 3
Portfolio
Company 4
$40
$25
Portfolio
Company 5
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Portfolio
Company 9
Portfolio
Company 8
Portfolio
Company 7
Portfolio
Company 6
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Financing Your Venture
Not all startups require external funding
Cash flow comes ultimately and most
importantly from customers, NOT from
investors
Benefits of external funding
Cash
–
–
–
–
Faster growth
Staying power
Competitive positioning
Credibility
Value-add investors
– Credibility
– Customer/partner introductions (“Keiretsu” effect)
– Management expertise
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Financing Options
Non-Equity
Equity
Personal funds
Venture capital
Personal debt
Angels
Grants and awards
The “3Fs” –
Customer pre-sales
Friends, Family and
Venture leasing
Fools
Receivables
Corporate direct
financing
investment
Business loans
In-kind
Equity is the most
contributions
expensive form of capital!
Joint ventures
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Major Financing Questions
How much?
When?
From where / whom?
What terms?
Security
Valuation
Control
Timing
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Raise Money from a Position of Strength
Have cash in the bank
Prepare to build your company without
any outside investment (bootstrap)
Seek to secure multiple competing
offers
Raise money when you can, not when
you have to (Sun Tzu – “In times of
war, prepare for peace”)
Have a call to action
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Seek True Value-Added Investors
Understand your business
Operating experience
Domain and/or geographic experience
Rolodex / network
Relevant portfolio
Relevant limited partners (in your
space)
Deep pockets / courage to stay the
course
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Fundraising Process
Investor
Presentations
0
1
2
3
4
5
6
7
8
Business Plan
Submissions
9
Final
Documentation
10
11
12
13
14
15
Term Sheet
Negotiations
16
17
18
Funding
Budget 4-5 months, or more
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LAUNCHING YOUR STARTUP
Understanding Venture Financing
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008
LAUNCHING YOUR STARTUP
Raising Venture Capital
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008
Launching Your Startup
Understanding Venture Financing
A Primer on Venture Capital
Financing Your Venture
Other Startup Considerations
Raising Venture Capital
The Transition from Idea to Execution
Business Planning
Peace and Prosperity Through Science and Collaboration
www.crdf.org
Lifecycle of a Startup
Conception /
Invention
Launch
Seed Stage
Expansion Phase
Formation /
incorporation
Market research
Product research
Growth Stage
Exit
Post-Exit
Early Stage
Product development
Team formation
Infrastructure build-out
Peace and Prosperity Through Science and Collaboration
www.crdf.org
Lifecycle of a Startup
Conception /
Invention
Launch
Seed Stage
Expansion Phase
Formation /
incorporation
Market research
Product research
Growth Stage
Exit
Post-Exit
Early Stage
Product development
Team formation
Infrastructure build-out
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www.crdf.org
Startup Fundamentals
Solid foundation =
best chance of
funding your venture
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Pour a Solid Foundation
Market-driven concept
Talk to prospective customers
Assess market and competition
Resolve legal issues upfront
Satisfy prior employment obligations
Incorporate properly
Check intellectual property rights
Spin-out cleanly
Form a solid team
Management, board, advisors, professionals
Teamwork begets success
If possible, kick-start the business
Spin-out / acquisition
Key customer
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Be Market-Driven!
Purchase decisions are based on
relationships – understand your customers
Understand and model your customers’
economic benefit:
How are they currently solving the problem?
How will their work processes change by using your
product?
What is their economic benefit / ROI?
Your product / service must be better, faster
and cheaper
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Protect Your Assets!
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Cash Flow is Your Life Blood!
CFIMITYM
Cash flow comes ultimately and most
importantly from customers, not from
investors
Profit is not cash flow
Capitalize properly
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Business Planning
“The plan is useless; it’s the planning
that’s important.”
General Dwight D. Eisenhower,
on the success of his D-Day invasion plan
The process of uncovering and
identifying what creates and drives
value in your business, and the risks
involved
A business plan is an output of the
business planning process
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Output of the Business Planning Process
Business plan (narrative)
Pro forma financial statements
PowerPoint pitch (12-13 pages)
Elevator pitch (1-2 minutes)
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A Business Plan…
Describes all the critical internal and
external elements and strategies for
guiding the direction of your company
Communicates how you will create
sustainable value
Identifies risks and uncertainties and
communicates how you will manage
them
Describes the company’s structure,
objectives and future plans
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Uses of a Business Plan (Internal)
Refining your product
/ service strategy
Motivating and
focusing employees
Identifying key
customers
Analyzing capital
budgeting decisions
Identifying
milestones and
timelines
Facilitating new
product development
Helping set
objectives &
performance metrics
Managing risk and
uncertainty
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Integrating new
acquisitions
Facilitating restarts,
restructuring and
turnarounds
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Uses of a Business Plan (External)
Attracting key employees
Educating potential investors
Arranging strategic alliances
Obtaining large contracts with strategic
customers
Facilitating mergers and acquisitions
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The 12-13 Page PowerPoint Pitch
1. Summary (1)
Mission statement
What is the idea?
How will it create
value?
Timeline / milestones
Expected results
Specific request (e.g.,
$)
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The Mission Statement
To create [value/EVA]
by [product/service] for/to [customer(s)] by…
Strategic
Objective 1
Strategic
Objective 2
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Strategic
Objective 3
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The Mission Statement
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Mission Statement Example
To be Ukraine’s leading producer of “Aclass” widgets to the _______ sector by:
Securing exclusive purchase contracts with 3 of
the top 10 customers of A-class widgets in
Ukraine;
Creating proprietary manufacturing methods for
the highest yield of A-class widgets; and
Building a world-class team of research &
development scientists and engineers.
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The 12-13 Page PowerPoint Pitch
1. Summary (1)
Mission statement
What is the idea?
How will it create
value?
Timeline / milestones
Expected results
Specific request (e.g.,
$)
2. Market Overview (2)
Substantiation of need
The opportunity (size,
trends, etc.)
Markey validation
Identification of
prospective customers
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Major Pain Points
What is the major pain your customers
face currently and/or in the future?
Cost
Convenience
Growth
Focus
Time-to-market
Regulatory compliance
Why are alternative products/services
not addressing the pain (fully)?
Why won’t this change?
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Favorable Market Dynamics
The market is large for our product/service:
Size stat 1
Size stat 2
Size stat 3
The market is growing for our product /
service:
Growth stat 1
Growth stat 2
Growth stat 3
Market trends favor us:
Trend 1
Trend 2
Trend 3
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The 12-13 Page PowerPoint Pitch
1. Summary (1)
Mission statement
What is the idea?
How will it create
value?
Timeline / milestones
Expected results
Specific request (e.g.,
$)
2. Market Overview (2)
Substantiation of need
The opportunity (size,
trends, etc.)
Markey validation
Identification of
prospective customers
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3. Description of
Product / Service
(2)
Overview of product /
service, including highlevel technology
description
Specific value
proposition (including
qualitative &
quantitative customer
benefits)
Correlate product /
service features &
benefits with market
needs
Value chain dynamics
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The 12-13 Page PowerPoint Pitch
4. Operating Plan (2)
Production /
manufacturing
Marketing / distribution
Sales & marketing plan
5. Competitive
Environment (2)
Sustainable
competitive advantages
Alternatives
Competition (existing
and potential
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What’s Proprietary About Your Idea?
Competitive Advantages
Proprietary IPR
Exclusive distribution
Exclusive content / sources
Proprietary manufacturing
Proprietary integration
Installed base / customer contracts
Unparalleled capital structure
Unparalleled scale, scope and/or focus
Team with unique expertise and/or access
First mover advantage
Distinguish between momentary and
sustainable
Must correlate to strategic objectives
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The 12-13 Page PowerPoint Pitch
4. Operating Plan (2)
Production /
manufacturing
Marketing / distribution
Sales & marketing plan
5. Competitive
Environment (2)
Sustainable
competitive advantages
Alternatives
Competition (existing
and potential
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6. The Team (1)
Management expertise
& relevance
Board, advisors,
professionals & others
Identify key hiring
needs
7. Financials (1-2)
Pro forma snapshot
Key metrics / drivers
Funding requirements
(optional)
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Financial Projections
(in thousands)
2007
Revenue driver 1 (1)
Revenue driver 2 (2)
Cost driver 1 (3)
Net Revenue
2008
2009
2010
Key is to
understand
drivers and
assumptions
since…
– Cost of Sales (4)
= Gross Profit
Numbers will
prove wrong!
– SG&A (5)
= Pre-tax Income (Loss)
Notes
(1) Assumption 1
(2) Assumption 2
(3) Assumption 3
(4) Assumption 4
(5) Assumption 5
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Funding Requirements
Does your venture need external financing?
How much & when?
Venture capital, debt, etc.
Capital structure considerations
Options plans, etc.
Position vis-à-vis in-kind contributions
Use of proceeds; e.g.:
Staff
$200,000
Technology & IPR development
150,000
Equipment & facilities
200,000
Other legal, operations, SG&A and misc.
100,000
Reserve (net of cash on hand)
100,000
Total
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$750,000
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The 12-13 Page PowerPoint Pitch
4. Operating Plan (2)
Production /
manufacturing
Marketing / distribution
Sales & marketing plan
5. Competitive
Environment (2)
Sustainable
competitive advantages
Alternatives
Competition (existing
and potential
6. The Team (1)
Management expertise
& relevance
Board, advisors,
professionals & others
Identify key hiring
needs
7. Financials (1-2)
Pro forma snapshot
Key metrics / drivers
Funding requirements
(optional)
8. Road Map (1)
Major accomplishments
90-day plan
Horizon
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The 12-13 Page PowerPoint Pitch
9. Appendix (as long as you want)
Market details (e.g., surveys)
Product details
Operating & financial details
Résumés (CVs)
Articles / research reports
Patents & IPRs
Key contracts
Brochures
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The Elevator Pitch
One of the most important “outputs” of
business planning
Convinces the “target person” to schedule a
longer meeting with you
Empowers and enables the “target person”
to convince other appropriate people to
become interested in your idea
Resonates, demonstrates sincerity
Communicates a sense of value, empathy
and urgency
No more than 1-2 minutes!
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Part I Summary
Pour a solid foundation
Protect your strategic assets (like IPRs)
Value is in the business planning, not
the business plan
Be concise and to the point with pitch
materials
Be top-down customer-driven, not
bottom-up product-driven
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Fundraising Lessons
Network to gains access to VCs
Don’t get hung-up on confidentiality
Be persistent
Be humble yet confident, and always
courteous and professional
Embrace and learn from rejection
Be greedy in the long-run (any % of
something > 100% of nothing!)
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Believe In Your Idea!
“We don't like their sound, and guitar music is on the way out.”
Decca Recording Co., rejecting the Beatles in 1962
“The wireless music box has no imaginable commercial value.”
David Sarnoff Associates, in rejecting a proposal for investment in the radio in the 1920s
“Who the hell wants to copy a document on plain paper?”
National Inventors Council, as told in 1940 to Chester Carlson, founder of XEROX
“There’s never going to be a market for the telephone, and
therefore we have declined the offer to take a license.”
Chairman of Western Union, in its annual report from the late 1800s
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Attributes of a Successful Entrepreneur
Problem solver
High integrity
Decisive
Critical path doer
Leader & motivator
Impatient / bias
toward action (with
analysis)
Humble
Passionate
Persistent
Optimistic
Professional
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Rejoices in others’
victories
Focused on the
long-term goal
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and … Just Do It!
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Closing thoughts…
Focus on the long-run
What goes around comes around
Friendships last longer than jobs
Don’t let greed blind the objective
Make the most of the experience
Listen & learn
Failure or rejection is what you make of it
Entrepreneurship is a lifestyle choice
Balance your risk & return
Seize opportunities
Life’s short, have fun!
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LAUNCHING YOUR STARTUP
Raising Venture Capital
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008