Ravi Belani
@rbelani
AlchemistAccelerator.Com
January 2018
Venture Capital Overview:
Arab Innovation Academy
Funding Strategy, Company Valuation, & Exit Strategy
Navigating the VC-Founder Dance
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
Entreprneurship Lecturer at Stanford
ecorner.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
#1: Alchemist
#2: Ycombinator
#3: Techstars
#4: 500 Startups
PAG 4
Alchemist Tops CB Insights’ 2016 Rankings of Accelerators Based on Median Funding Levels
Source: https://www.cbinsights.com/blog/top-accelerators-follow-on-funding-rates/
Institutional Investors in Flagship Accelerator Program include:
Alchemist Investors
PAGE 04
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
Cash is Oxygen
3 Sources of Cash: What are the Pros & Cons of Each?
Revenue (Customers)
Debt (Banks)
Equity (Venture Capitalists)
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, ICO’s)
+ Rounding Out Rounds
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
How VC’s Make Money
Carry
Management Fee
How much management fee does a VC make in this fund?
$500M Fund
Management Fee Consumers 25% of a Fund
$500M Fund $125M Mgmt Fee
• 2.5% Per Year For 10 Years
• Fund Committed after 3-4 Years
• 3 Funds Drawing Management Fee Down on in any given year
How VC’s Make Money
Carry
Management Fee
Case Study of a Young Fund: Kleiner Perkins I (1972)
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Fund Size$7.5M
# of Co’s17 @
Check Size$450K
Return$345M
46x
#
How much carry did the partners get?
VC Profit Share: Carry Calculation
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Fund Returns: $345M
- Fund Size: $ 7.5M-----------------------------------Fund Profit $337.5M
X Carry 20%-----------------------------------Carry $67.5M
Of Kleiner Perkins’ 17 Investments, 2 were responsible for 90% of returns
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VC’s want to return 1/3 of their fund with each investment
$500M Fund
# of Co’s30
#Big Winners1 out of 10
%
x =3 Big Winners in Each Portfolio
Can Make Money Several Ways: Two Case Studies
Google: Rising Star
Hotmail: Contrarian Bet
Optimal Ownership is typically between 20 – 40 %
VC Ownership
VCReturn
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
PRIMARY TERMS
Pre-Money Valuation
Option Pool
Liquidation Preferences
Anti-Dilution
Valuations are a function 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 Valuation = Cash Needs of the Company / Ownership Needs of the Fund
Pre-Money Valuation = Post-Money – Cash Raised
Larger Funds are Much More Sensitive about Ownership Needs than Cash Needs!
Series A : Raising off of the IDEASeries B: Raising off of RESULTS
Trick is balancing the Series A valuation to set you up so you can raise off of Results in the Series B at a markup (ideally 3x!)
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 Valuation = Cash Needs of the Company / Ownership Needs of the Fund
Pre–Money =Post-Money – Cash Invested
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
WHAT MAKES A SUCCESSFUL NEGOTIATION?
NEGOTIATIONS 101: DOES A ZOPA EXIST?
BATNA: Best Alternative to a Negotiated Agreement
ZOPA: Zone of Possible Agreement
Alternative to Sell: $1 Alternative to Buy: $8
Capture Value: How do you know how big the ZOPA is?
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA
Negotiations Generate Value in 2 Phases
Create Value: Focus on Interests, Not Positions
Capture Value: Understand the Other Person’s BATNA first
Create Value
Create Value
Capture Value: Focus on the Other Person’s BATNA First
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
Negotiation Exercise: Count Off!
Negotiation Exercise: Go Here (Don’t Read the Other)
http://bit.ly/EIAFounder1
2 http://bit.ly/EIAVC
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure
Employee Pool
• Employee Pools typically come out of the PRE-MONEY – that is YOUR Total Dilution 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 Valuation?• What percent of the company do you own afterwards?
VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure
Board Composition & 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?
VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure
Liquidation Preferences
Why does Preferred Exist?
Check for:• Multiples?• Participating vs Non- participating• Senior or Pari-Passu
What’s this?
Liquidation Preferences
Why does Preferred Exist?
Check for:• Multiples?• Participating vs Non- participating• Senior or Pari-Passu
What’s this?
Liquidation Rights
Exit Value
Payout
Draw the payouts to:
• Investors• Founders
Assuming a
•$3.5m exit•$10.5m exit•$20m exit•$100m exit
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
Exits
• Go Public• Be Acquired• Remain an Ongoing Concern• Go Bankrupt
Billion-Dollar Unicorns
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50
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Exit Valuations
Create Value: Revenue, Growth, Margins
Capture Value: Drive a good negotiation
Create Value
Capture Value: Market Timing
Capture Value: Negotiations
Increasing the # of Suitors Increases Your BATNA
FINAL THOUGHTS
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The future will be far more surprising than most observers realize. – Ray Kurzweil
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10 Years – Variability to NASDAQ > 100%
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10 Years – Variability to NASDAQ > 150%
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10 Years – Variability to NASDAQ > 300%
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10 Years – Variability to NASDAQ > 400%
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10 Years – Variability to NASDAQ > 1000%
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FOUNDERS ARE HEROES.They think non-linearly. Angels: Your Job is to FIND THEM.
Thank You!
Ravi Belani
@rbelani
Ravi Belani203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860