Download - Venture Capital Considerations
David Shore
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Presentation begins at 6:00pm
[email protected] 484-0070
Financing Growth
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Who I Am
• David Shore• Partner, Stirling Mercantile Corporation
– Local Investment Bank– Mid market M&A, financings– My focus is on private equity for growing
companies
• Formerly with CIBC, a few startups• BCAF investment committee, ASI BAB
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Topics – A La Carte
VC vs. IPO vs. Debt?
What VCs look for and what you should look for from a VC
Resources required for private financings
Preparation for the first pitch
VC Term Sheets
Valuations and Uses of Funds
Elevator Pitch Tips
Typical Questions
Financial Projections
One In Ten
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VC vs. IPO vs. Debt?
VC IPO DebtPrep
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VC vs. IPO vs. Debt?
VC IPO DebtPrep Horrendous
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VC vs. IPO vs. Debt?
VC IPO DebtPrep Horrendous Horrendous
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VC vs. IPO vs. Debt?
VC IPO DebtPrep Horrendous Horrendous Not so bad
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VC vs. IPO vs. Debt?
VC IPO DebtPrepDilution
Horrendous Horrendous
HorrendousBetter Valuation
Not so badNone
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VC vs. IPO vs. Debt?
VC IPO DebtPrepDilutionChange Ops?
Horrendous HorrendousControl
HorrendousBetter ValuationReporting, etc.
Not so badNoneNot much
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VC vs. IPO vs. Debt?
VC IPO DebtPrepDilutionChange Ops?Profitable?
Horrendous HorrendousControlMaybe
HorrendousBetter ValuationReporting, etc.Probably not
Not so badNoneNot muchAbsolutely
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VC vs. IPO vs. Debt?
VC IPO DebtPrepDilutionChange Ops?Profitable?Management
Horrendous HorrendousControlMaybeWhatever is needed
HorrendousBetter ValuationReporting, etc.Probably notOn your own
Not so badNoneNot muchAbsolutelyOn your own
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What VCs look for
• A great team
• Market Size of $1 billion +
• Defendable IP
• World class domain expertise
• Motivation
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What you should look for from a VC
• Board members
• C-level management
• Synergies with other investees
• Sales to other investees
• Money
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Resources required for private financings
• Time – likely 6 to 12 months
• Dedication to the process
• Complete business plan, model, HR plan
• Due diligence binders
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Preparation for the first pitch
• Make your introductory statement – of what you do – crystal clear (to anybody)
• Have a concise PPT that would take about 20 minutes to run through without interruptions
• Have tight answers to typical questions and “Gotcha” questions
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VC Term Sheets
• Liquidation preference
• Preferred shares
• Veto on fundamental changes
• No shop
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Valuations and Uses of Funds
• Valuations are based on ROI of about 40% for the fund (but one in ten make up for the rest). $2 to $5 million, pre money is typical today
• Funds for marketing - 50%, development -30%, working capital - 20%
• Not to take out debt or management
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Elevator Pitch Tips
• Everyone in the company has to be able to give it to their grandmother
• Start with a pain statement, like “The [target market] is suffering from an inability to do [something], because of [this and that].”
• Follow that with a value proposition, like “Our team, with x0 years of experience in this have developed a solution that will be much better/faster/cheaper than existing solutions”.
• Finish with a result like “We are confident we can build a company with $x million in sales in five years.
• Focus on why the customer will need to buy
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Typical Questions
Number 10How much funding is required and where will this round get you?Number 9How many clients do you need to get to profitability? What is your sales
cycle?Number 8Who is your competition and why will you do better than them. (Don’t
simply say we are smarter than them!)Number 7How big is your market? What do you project sales to be in your 5th
year?Number 6What are your key financial assumptions like price, take-up, client ROI,
use of investment capital, etc?
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Typical Questions
Number 5
What is your intellectual property (IP) and barriers to competition? How will you sustain your competitive advantages?
Number 4
What are your greatest risks and how do you plan to mitigate them?
Number 3
What problem are you solving and how does the client measure the value of that solution?
Number 2
Who are your clients? (The only one with a vote as to whether or not a product has merit is the client.)
Number 1
Who is on your management team – who has “been there and done that”?
“Gotcha” questions
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Financial Projections
• Typically 60 month models with full set financials
• Have all assumptions easy to find and test
• Show prior actuals if you have them
• Focus on first 2 years – from a cash flow perspective
• Example
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One in Ten
40% return on a fund, which lasts about 7 to 10 years
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One in Ten
Some make a break-even or make a modest gain. Others die.
$40m
$100m
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“Gotcha” questions
• What is your addressable market size?…followed by questions about the revenues of
competitors. Does it add up?
• Who’s your competition?– Don’t say “we don’t have any”– How will you eat their lunch?
• Are you willing to step aside when the time is right?– Plateaus, delegation, priorities
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(CAD $000s) % of Revenue2004 2005 2006 2007 2008 2009
New Clients 63 81 88 162 236Cumulative Clients 23 63 144 232 394 630
RevenuesFull Service 1,032 65%
Premium 2,000 34% 2,500 24% 12,500 60% 25,000 60% 35,000 58%Large 1,500 25% 2,100 20% 2,300 11% 3,000 7% 4,300 7%Medium 150 3% 1,000 10% 400 2% 0 0% 0 0%Small 640 11% 100 1% 0 0% 0 0% 0 0%
Self Service 229 14% 300 5% 600 6% 800 4% 1,000 2% 2,100 3%Enterprise Licence 330 21% 900 15% 3,600 34% 3,600 17% 10,800 26% 15,300 25%Enterprise Licence Recurring 0 0% 450 8% 600 6% 1,200 6% 1,800 4% 3,600 6%
Gross Revenues 1,592 100% 5,940 100% 10,500 100% 20,800 100% 41,600 100% 60,300 100%
Cost of SalesHosting, licenses and services 413 26% 891 15% 1,575 15% 3,120 15% 6,240 15% 9,045 15%
Total 413 26% 891 15% 1,575 15% 3,120 15% 6,240 15% 9,045 15%0
Gross Profit 1,179 74% 5,049 85% 8,925 85% 17,680 85% 35,360 85% 51,255 85%
Selling, General and AdministrativeGeneral & administration 445 28% 596 10% 1,050 10% 2,080 10% 4,160 10% 6,030 10%Research & development 88 6% 894 15% 1,575 15% 3,120 15% 6,240 15% 9,045 15%Selling, marketing and partnerships 438 28% 2,650 45% 4,200 40% 8,320 40% 16,640 40% 24,120 40%Grants (expense recoveries) 0 0% 0 0% 0 0% 0 0% 0 0% 0 0%
Total 971 61% 4,140 70% 6,825 65% 13,520 65% 27,040 65% 39,195 65%
EBITDA 208 13% 909 15% 2,100 20% 4,160 20% 8,320 20% 12,060 20%
Total Assets 1,940 4,172 8,592 17,692 30,125Cash from Financing Activities 500 0 0 0 0
Headcount by CategoryCost Of Sales 1 4% 6 12% 12 13% 23 12% 34 10%General & administration 3 12% 4 8% 10 11% 28 16% 58 17%Research & development 4 16% 10 20% 24 26% 58 32% 106 31%Selling, marketing and partnerships 17 68% 32 61% 47 50% 72 40% 146 42%
Total Headcount 25 100% 52 100% 93 100% 181 100% 344 100%Revenue per person 238 200 223 229 175
Headcount ExpensesCost Of Sales 35 1% 339 8% 890 10% 1,682 9% 2,673 7%General & administration 336 14% 463 11% 805 9% 1,900 10% 3,870 10%Research & development 388 16% 602 14% 1,638 18% 4,443 24% 8,492 22%Selling, marketing and partnerships 1,646 68% 2,903 67% 5,601 63% 10,196 56% 22,801 60%
Total Headcount Expense 2,405 100% 4,307 100% 8,933 100% 18,221 100% 37,835 100%
Potential Value3 revenue multiple 17,497 30,785 60,531 124,800 180,900 4 revenue multiple 23,437 41,285 81,331 166,400 241,200
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