Financing a Start-Up Presentation by Brian Goncher, Deloitte Venture Capital Group University of California, Berkeley February 8, 2006
Financing a Start-Up
Presentation by Brian Goncher, Deloitte Venture Capital GroupUniversity of California, BerkeleyFebruary 8, 2006
Copyright © 2004 Deloitte Development LLC. All rights reserved. 1
Agenda
PART I
Venture Capital Trends
PART II
Creating Financial Projections
Valuation Techniques
Capitalization
Exits
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PART I
•Deloitte’s Venture Capital Group•Venture Capital in 2005•Valuation Trends•Term Sheet Trends•IPO's and Acquisitions
Deloitte’s Accelerator Program
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Venture Capital Virtuous Cycle
Company Funded
Company Grows
Company Goes Public
Venture Capital Relationships
Deloitte Venture Capital Team
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Success Story: Techwell
Techwell founded in 1997, raised 5 rounds of funding
Techwell has annual sales of $50M+ and grew 100% in the past year
Public Offering in Q4 2005
Techwell Investors Include Technology Crossover Ventures
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Venture Capital Relationships
• Silicon Valley VCs– Accel Partners– August Capital– Bay Partners– Benchmark Capital– Charter Venture Capital– ComVentures– Doll Capital Management– Draper Fisher Jurvetson– Focus Ventures– Foundation Capital– Granite Ventures– Hummer Winblad– Kleiner Perkins Caufield & Byers– Lightspeed Venture Partners– Mayfield Fund– Menlo Ventures– Mobius Venture Capital– Mohr Davidow– Outlook Ventures– Redpoint Ventures
– Sequoia Capital– Spectrum Equity Investors– Technology Crossover Ventures– US Venture Partners– VantagePoint Venture Partners– Walden– Woodside– Worldview Technology Partners
• National VCs– Apax Partners– Battery Ventures– Canaan Partners– Greylock Partners– Morganthaler Ventures– New Enterprise Associates– Oak Investment Partners– Summit Partners– TA– Venrock
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* All available through Deloitte Accelerator online
Deloitte Accelerator™ Services
A C C E L E R A T O R P A C K A G E
Audit*
Tax* Human Resources*
Business Advisory Events & Services
B E N E F I T SCEO Development – fundraising, financial management, corporate
governance, leadership, team building, sales process,
networking and resources
B E N E F I T SImproved controls and reporting procedures
B E N E F I T SCompliance and
cost-savings strategies
B E N E F I T SCompliance,
HR Best Practices and Recruiter Network
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Tangible Deliverables
Business Advisory Events & Services
• Critical Success Factors for CEOs – 300 CEOs and 50+ VCs; review macro funding/industry trends; VC/colleague networking
• CEO Development Workshops – Small group hands-on workshops focused on coaching and mentoring CEOs, providing valuable best practices training on fundraising, personal and team development
• Investor Forum- CEOs of both early stage and late stage tech companies pitch to 50+ VCs
• Balanced Schedule - 22 events scheduled for 2005
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Tangible Deliverables
Audit
• Internal Accounting Control Checklist
• Revenue Recognition Policies & Procedures
• Option Valuation Model• Account Reconciliation
Templates• Financial Statement Closing
Checklist• Audit Readiness Guide• Sample Audit Committee
Charters and Checklist
• Financial Literacy Quiz• Audit Committee Resource Guide• Financing & Risk Management
Service Cycles for Emerging Companies
• GSC Guidebooks• IQ Series• Audit Committee Brief• Controller’s Monthly Closing
Checklist• New Templates & Best Practices
Released on A Regular Basis
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Tangible Deliverables
• Multistate Income/Franchise Tax, Sales & Use Tax, and Property Tax Checklist
• International Tax Review• R&D Tax Credit Overview• Tax Compliance Due Date Calendar• Tax News & Views Newsletter• DBriefs Webcasts• CSM Ideas for Emerging Companies• New Templates & Best Practices Released on A Regular Basis
Tax
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Tangible Deliverables
• Critical Legal, Labor & Compliance Issues• Sample HR Internal Policies Guidebook• Sample HR Employee Manual• Employee Personnel File Checklist• Executive Recruiter Network• Executive Compensation Newsletter• GSC Guidebooks, Including “Stock Options for
Growing Companies”• Human Capital IQ Newsletter• New Templates & Best Practices Released on A
Regular Basis
Human Resources
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Venture Capital in 2005
•Fundraising •Investment Trends•Valuation •Term Sheets•Exits
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Fundraising Trends
•Accelerated fundraising-$6B in Q2 2005•Large funds raising record amounts
–Menlo Ventures ($1.2B)–August Capital ($550M)–Mohr Davidow ($400M)–Blue Run Ventures ($188M)
•New Funds entering market–Elevation Partners ($1B)–Agenda Capital (TBD)–Spark Capital ($250M)–Shasta Ventures ($210M)
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Fundraising in 2005Commitments to Venture Capital Funds
$83.5
$3.0
$17.7
$9.4$13.1
$50.5
$58.8
$26.9
$17.1$12.7
$7.0$5.4
$0
$20
$40
$60
$80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Fund
s Ra
ised
($B
)
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Median Fund Size Increases Median VC Fund Size (for funds greater than $20M)
$185
$160
$100
$75
$105$100$110
$97
$76$83
$67$53
$0
$50
$100
$150
$200
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Med
ian
Fund
Siz
e ($
M)
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Half of Funds Closed > $100M Allocation of Fund Size by Number of Funds Raised per Vintage Year
10%16% 25%21%
25%
25%
75% 70%
50%
2%0%
20%
40%
60%
80%
100%
1995 1997 1999 2001 2003 1Q05
Under $100M
$100M-$249M
$250M-$499M
$500M-$999M
$1B+
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Investing Trends
•Steady investment from VCs in Silicon Valley-200 deals/qtr
•New activity among seed and angel investors•“Boomer” group finally matures•Valuations increasing•Bi-polar world of newbies and serial entrepreneurs
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18
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Am
oun t
I nve
sted
($B
) Num
ber of Deals
Deal Flow and Investment in 1Q’05Deal Flow and Equity into Venture-Backed Companies
Source: Dow Jones VentureOne/Ernst &Young
$6.4 $9.2$13.1
$17.9
$49.6
$36.2
$21.9 $19.0 $20.9
$94.7
$4.6
474
2153
1315
19122211
2547
4595
6295
3248
23562114
$0
$25
$50
$75
$100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
0
1,000
2,000
3,000
4,000
5,000
6,000
Amount Invested ($B) Number of Deals
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Investment Activity in 1Q’05 Deal Flow and Equity into Venture-Backed Companies
Am
oun t
I nve
sted
($B
) Num
ber of Deals
Source: Dow Jones VentureOne/Ernst &Young
$4.6$5.0$4.8
$5.7$5.5$5.3
$4.8$4.5$4.4$5.0$4.8
$6.4$5.9 474
543504
585
521
591
500521502538
570
650598
$0
$2
$4
$6
$8
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05
0
150
300
450
600
Amount Invested ($B) Number of Deals
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Early and Later Stage Rounds Prevail in 1Q’05Deal Flow Allocation by Round Class
% o
f T o
tal V
C R o
unds
*Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young
0%
20%
40%
60%
80%
100%
1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05
Restart
Later
Second
First
Seed*30%
32%
34%
4%
*33%
40%
19%
*36%
8%
29%
39%
10%
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Financing Sizes Pick Up in 1Q’05Median Amount Invested by Round Class , VC Only
Med
ian
Am
ount
Inve
ste d
($ M
)
Source: Dow Jones VentureOne/Ernst &Young
$10.0$10.0
$8.2$7.1
$4.5
$6.0
$0.7$1.5
$0
$2
$4
$6
$8
$10
$12
$14
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05
Later Round Second Round First Round Seed Round
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Amount Invested in Rounds at Late 90’s LevelsMedian Amount Invested by Round Class (Annual) , VC Only
Med
ian
Am
ount
Inve
ste d
($ M
)
Source: Dow Jones VentureOne/Ernst &Young
$5.0
$10.0
$4.0
$8.2
$2.9
$6.0
$1.0 $0.7$0
$5
$10
$15
$20
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Later Round Second Round First Round Seed Round
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More Investors Go It Alone in 1Q’05Number of Investors Per Round
Source: Dow Jones VentureOne/Ernst &Young
30% 34% 31%
22% 23% 20%
16%
19%
16%
9%15%
16%
23%30%
18%
0%
20%
40%
60%
80%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
5+ Investors
4 Investors
3 Investors
2 Investors
1 Investor
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Valuation Trends
•Higher Median Valuations–In Q4 2004, 60% up rounds–In Q1 2003, 80% flat or down rounds
•More competition for deals•Greater ability to fund without a syndicate•Exits continue to improve
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Valuations On Upward TrendMedian Premoney Valuation by Year
$15.0$13.0
$10.0$10.7
$16.0
$25.5
$21.1
$15.5
$12.9$11.1
$9.3$10.0
$0
$5
$10
$15
$20
$25
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Med
ian
Prem
o ne y
Val
uati
on (
$ M)
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1Q’05 Valuations Highest Since 2001Median Premoney Valuation
$15.0
$12.0
$13.3$13.8
$12.2$12.0
$10.1$9.1
$10.0$10.3$10.0
$12.3
$10.9
$0
$5
$10
$15
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05
Med
ian
Pre m
one y
Val
uati
o n (
$M)
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2nd and Later Stage Valuations Dip in 1Q’05Median Premoney Valuations by Round Class (All Industries)
$31
$24
$12$12
$7$5
$3$3$0
$10
$20
$30
$40
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05
Later Stage Second Round First Round Seed Round
Med
ian
Pre m
one y
Val
uati
o n (
$M)
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Term Sheet Trends
•Use of senior liquidation preferences decreasing (especially multiples)
•Full ratchet anti-dilution is unusual•Pay to play is still in use•Number of corporate reorgs for post A financings has dropped
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Exit Trends
•M&A has greatly improved•IPO's are sparse, but still happening
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M&As Remain Primary Exit OptionPercentage Breakdown of Venture Backed Liquidity Events: IPO vs. M&A
0% 20% 40% 60% 80% 100%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1Q05
IPOs M&As
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M&A Activity Steady in 1Q ’05Transactions and Amount Paid in M&As
$7.1
$22.7
$13.0$10.8
$21.8
$98.1
$43.1
$14.8$12.7
$26.0
$10.1
79
393
335
380402
458
304
253232
197162
$0
$20
$40
$60
$80
$100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
0
150
300
450
Amount Paid ($B) Number of Transactions
Am
ount
Pai
d ($
B)N
umber of Transactions
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Gains from M&A Exits Pick Up Median Amount Paid in M&As vs. Median Amount Raised Prior to M&A
$19$21
$24
$17$15$10$11$7$6$6$5
$60
$40
$23$18
$26
$100
$55
$31$33$40
$25
$0
$25
$50
$75
$100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
$0
$25
$50
$75
$100
Median Equity Raised Prior to M&A Median Amount Paid ($M)
Med
ian
Am
ount
Rai
sed
P rio
r to
M&
A (
$M)
Median A
mount Paid ($M
)
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60% of 1Q’05 M&As Initially Financed in ’99-’01Median Time From Initial Equity Funding to M&A
5.2
4.6
3.6
2.7
2.02.4
2.83.03.5
4.7
4.0
0
2
4
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Num
ber
o f Y
ears
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IPO Activity Slows in 1Q’05Deals and Amount Raised Through IPOs
$1.6 $1.4
$5.0
$0.4$1.8
$19.2$19.5
$3.7$4.6
$8.7
$5.0
8
67
222022
202
250
68
120
216
144
$0
$5
$10
$15
$20
$25
$30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
0
50
100
150
200
250
Amount Raised ($B) Venture-Backed IPOs
Am
ount
Rai
sed
($B)
Venture-Backed IPO
s
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Fewest Venture-Backed IPOs in Six QuartersDeals and Total Amount Raised Through IPOs
$0.2
$0.7
$0.4
$0.03
$0.4$0.4
$0.8
$1.4
$1.2
$0.4
$1.7
$0.9
8
14
19
24
10
14
6
2
6
1
9
4
$0.0
$0.3
$0.6
$0.9
$1.2
$1.5
$1.8
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05
0
5
10
15
20
25
Amount Raised ($B) Venture-Backed IPOs
Am
ount
Rai
sed
($B)
Venture-Backed IPOs
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Half of 1Q’05 IPOs from Vintage Years ’99-’00 Median Time From Initial Equity Funding to IPO
4.9
5.75.7
3.6
4.5
3.12.92.8
3.1
3.5
4.1
0
1
2
3
4
5
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Num
ber
of Y
ears
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IPOS in 2004 and 2005
IPOs in Calendar '05(by Effective Date)
Six Months Ended June 30, 2005 and the 12 Months Ended December 31, 2004
0
5
10
15
20
25
30
35
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
20052004
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PART II
•The Fundraising Process•Tools for Financing your Company•Financial Modeling•Valuation Techniques•Capitalization•Exits
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Preparing to Fundraise
•Sales Mindset•Sales Process•Sales Tool Kit
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Sales Process
Prepare Approach Term Sheet
1 to 2 Months 1 to 3 Months 1 to 2 Months
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Sales Process (Prepare)
Prepare
1 to 2 Months
Key Elements include:•Create Runway (or Perceived Runway)
•Get Current Investor Commitment
•Scrub The #s
•Align The Organization
•Define Your Objective
•Define Roles & Responsibilities
•Prepare Sales Tool Kit
•Identify Targets
•Create Scarcity Value
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Sales Process (Approach)
Approach
1 to 3 Months
Key Elements include:•Get Referrals
•First Meeting
•Subsequent Meetings
•All-Partners Meeting
•Consultant Meetings
•Customer Meetings
•Due Diligence
•Site Visit
•Term Sheet (or Pass)
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Sales Process (Term Sheet)
Term Sheet
1 to 2 Months
Key Elements include:•Negotiate
•Draw Legal Documents
•Signature
•Pre-Close Review
•Close
•Confirm $ Deposited
•Due Diligence IS Still Happening!
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Financing your Company
•Be realistic on timing and pricing•Become a great writer and spreadsheet jock•Plan your approach using all resources•Practice, practice, practice•The first term sheet is often the best
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Financing Tool Kit
•Elevator Pitch•Story/Demo•Presentation•Executive Summary•Business Plan•Due Diligence Package
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Elevator Pitch
• Definition– 2-3 sentences that defines the market, customer,
problem/solution and uniqueness of the business– Place on slide one (display as brief bullets with a
graphic)• Framework
– What market are you in? – What urgent problem are you solving?– What is the size of the opportunity? – Why will you win (differentiation, barriers to
entry, unfair advantage)? – Where is the validation (customers, investors,
etc.)?
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Elevator Pitch• Example
Diamond develops proprietary thin film diamond products and equipment that dramatically improve heat dissipation on microprocessors, solving one of the highest priority pain points in the industry.
We address growing markets that will exceed $1.5B by 2006 and will become the dominant supplier with the best team having the most comprehensive patent position in the industry. Intel is our largest current investor, and we are actively engaged with other top target customers and partners who provide very strong references.
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Building the Executive Summary
•Primary Uses– Initial introduction to investors (may accompany
introductory email)– Prepares investors for meeting
•Best Practices– Text derived from your presentation– Drill down in key areas, but be concise– Highlight external validation– Less than 5 pages– Use as tool to sell the team
•Supporting Materials– Business plan, sales pipeline, IP roadmap,
competitive landscape, etc.– Make available only as appropriate (avoid material
overload)
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Executive Summary Outline
• Definition– 3-5 pp text document which includes all the
elements of a business plan• Outline
– Business Definition/Company Purpose– Business/Technology Problem– Company/Product Solution– Market Trends/Size /Growth– Competitive Assessment/Point-of-Difference– Product/Technology/IP– Sales/Distribution– Team/BOD– Financials
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Business Plan Outline
• Definition– 10-20 pp text document with before appendices
• Outline– Executive Summary (3-5 pages)– Business Overview and Strategy (1-2 pages)– Technology and Product (3-5 pages)– Market and Competition (3-5 pages)– Sales and Marketing (3-5 pages)– Management and Board (3-5 pages)– Financial Summary (2-3 pages)
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Appendices
•Full management resumes•Annual Financial Projections•Product Information•Market Studies
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Financial Modeling
•It is forecasting, not a budgeting, tool•Work on the financial model together with the presentation and executive summary
•Do not provide more detail than the plan•Use sensitivity analysis, but present the “expected case”
•Refer to assumptions throughout the plan•Check for mistakes and “reasonableness”•Get help
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Creating Financial Projections
•Create a revenue model•Plan New Hires•Estimate any Significant One-Time Costs•Use only annual income statement and balance sheet
•Prepare monthly or quarterly cash flow forecast until breakeven
•Don’t sweat the details
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Revenue Model
•Build a specific revenue model that mirrors your industry
•Compare with industry standards, highlight any differences
•Prepare the model from the “bottoms up”•Do not over estimate first year revenue•Do make a 5 year forecast•Know the way revenue is recorded for your industry
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Headcount
•80% of all early year expenses are headcount related
•Make sure you are reasonable with salaries•Match additions of people with company milestones
•Don’t forget taxes, benefits and recruiting expenses
•Build a sales commission model, if necessary•Index salaries to inflation and add bonuses
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Other Expenses
•Don’t sweat the other expenses•Make sure rent increases as needed•Watch consulting and professional services•Begin taxes at the appropriate time
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Balance Sheet
•Do create a balance sheet •Use industry standards for AR and AP assumptions (typically 60 days and 30 days)
•Include financing assumptions on your balance sheet
•Make sure it balances (the balancing item is cash)
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Cash Flow Statements
•A Flow of Funds statement is typical and easiest
•Use the Receipts and Disbursements statement if you are brave
•Cash flow statements are derived from the income statement and balance sheet
•Do not make changes on the cash flow statement
•Show monthly or quarterly cash flows until breakeven in the appendix or as backup slide
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Charts and Tables
•In the presentation or business plan, use charts and tables to highlight–Revenue (esp. as compared to competitors)–Sales and distribution model (to explain those
90% gross margins)–Five year annual summary
•Other charts and graphs can show key events to next funding round, cash flow breakeven or the cash flow cycle
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Valuation Techniques
•Comparables (as in real estate)•Discounted Cash Flows (DCF)•Return on Investment•Other rules of thumb
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Post and Pre Money
•You know the pre-money valuation when you have an offer to purchase stock
•Post money is simply the amount of money you have raised divided by the portion of the company you sold to raise it–For example, in a seed round you raise $2M and
give up 40% of the company–The post money is $5M ($2M/40%) and the pre
money is $3M ($5M - $2M)
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Capitalization-Founders Round
•Before first financing is founders round–Founders vs. early employees–Typically split common stock among the founders–Low per share price
•Cap Table shows 4M shares at $.01 per share•Post money valuation is $40,000
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Capitalization-Seed or A Round
•First outside financing•Typically is funded by angels•Often completed as a note to convert into equity when a VC participates
•Investors purchased 1.5M shares at $.50 per share which is 27% of the company (1.5/5.5)
•The company then established a stock option plan of 1M shares, diluting the investors by 4% to 23%
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Capitalization-Series B
•Second round of outside financing •Usually completed after a significant milestone is reached
•The company raised $2.5M at $.62 per share, a 24% increase from the prior round
•The post money valuation is now $6.5M ($2.5M raised divided by 38%)
•The company again added to the stock option plan, diluting the Series B investors by 6% to 32%
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Capitalization-Series C and Later
•The typical life span of a company is 5-7years before an IPO or acquisition
•Usually there are 3 rounds of funding•The last round before an exit is called the mezzanine round
•The company raised $4M for 29% of the company for a post money valuation of $14M
•The company did not add any shares to the stock option plan
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IPO or Acquisition
•In the Acquisition scenario, the company sold all of its shares for $75M in cash
•In the IPO scenario, the company sold $35M of common stock for 15% of the company for a post money valuation of $238M (3x the acquisition price)
•All of the preferred stock was converted to common stock
•Which would you choose?
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Choosing an Exit
•Prepare for an IPO–Build a great management team–Put business systems in place to support rapid
growth–Act like a public company
•Do business development as if an acquisition was likely–More than 80% of exits are by acquisition–Cash in the bank can be better than an IPO–Work with business partners that can acquire you–“Dual track” is a popular tool for maximizing value
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Summary
•Create a great demo and presentation•Use the executive summary to market your company
•Make the financial projections work with the assumptions in your pitch
•Practice your pitch with an experienced audience
•Keep revising your plan and projections as you grow
•Good luck
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