early stage funding options and expectations_ul

Early Stage Venture Funding Options and Expectations Harish Gandhi [email protected]

M81 Consultants Pvt Ltd

Agenda

• Lifecycle of a startup and need for capital • Options for early stage

• Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ?

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LifeCycle of a Startup

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• Ideation / Concept stage • Initial market feedback • Market Sizing

•  Feasibility stage: Product dev. , value proposition •  Early Customer Feedback •  Select hires

•  Market Validation stage: BD, fine tune biz model, partnerships •  Product Commercial, Some revenue •  Customer Feedback •  Early product diversification • Team Build out

•  Growth: Scalability, Teams, Process, Profitability •  Market Validated •  Biz model validated •  Product diversification

Maturity

Time

•  Focus Execution •  Financial predictability •  Risk management

Do you want to be in this

business

• What is this business?

• Is it feasible? • Do atleast a few relevant “others” believe this?

• No Going Back !

• Market Feedback

• Re-work the model, value proposition

• How do I grow faster

• Adjacencies • Beat the “crap” out of the competition


LifeCycle of a Startup & Funding

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• Ideation / Concept stage • Initial market feedback • Market Sizing

•  Feasibility stage: Product dev. , value proposition •  Early Customer Feedback •  Select hires

•  Market Validation stage: BD, fine tune biz model, partnerships •  Product Commercial, Some revenue •  Customer Feedback •  Early product diversification • Team Build out

•  Growth: Scalability, Teams, Process, Profitability •  Market Validated •  Biz model validated •  Product diversification

Maturity

Time

•  Focus Execution •  Financial predictability •  Risk management

IPO F F & F Angels

Seed Early VC Growth VC PE

Bank Financing

Source of Funds

Rs 10L-30L 50L – 5 Cr US$ 1–5m US$ 10 – 25m US$ 20M+ M81 Consultants Pvt Ltd

Agenda

• Lifecycle of a startup and need for capital • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ?

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Venture Economics • Venture fund invested over 3-4 years • Money returned to investors (LPs) 7- 10 years • Typical return 2.5x – 3.5X (IRR 18% – 25%) • Few super hits, few writeoffs • Model works with significant stakes & large exits

• Expectations of return from each investment • Vary by stage of VC • Early stage VCs

• Return expectation 7 – 10X or higher • For Ser A VC min $40 to $50m exit

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Types of Venture Funds / Which VC to pick ?

Types of VCs •  Stage of Investment (correlates with Ticket Size) •  Sector Focus •  Corporate VCs

Picking a VC •  Sector, Stage •  Investment Cycle of fund •  Ability to provide reserves for future investment •  Philosophy • Non-monetary Contribution – “Value Addition”

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What can you expect from a Venture Fund

• Other than money (acceleration of growth) •  Assistance /Sounding board for actions, strategies •  Large Network for customer contacts, advisors •  Active assistance in hiring senior members of team •  Appointment of Board members, Advisors •  Corporate Governance •  Credibility •  - again – varies by stage of VC

• On the Flip side - •  Lower level of freedom (spending, reporting, governance, speed (?)) •  Decisions being made by a balanced board rather than founder •  Lower equity holding (but potentially much higher value)

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Agenda

• Lifecycle of a Startup and need for capital • Venture Economics • What do Venture funds look for ? • Venture Investment process • Dealing with Term sheets • What happens post funding ?

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Early Stage: Venture Fundable businesses

• Team •  Early stage - risky

• Large Market •  Nascent market but rapidly growing and potential to be large •  Large existing market with a disruptive play or discontinuity

• Scalable •  Build the business efficiently and quickly

• Strong Value Proposition •  Why you will win

• Defensible •  Differentiability (IP) •  Defensible first mover advantage

• Exits (IPO, Trade Sale)

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Team

• Relevant Experience •  Domain •  Functional

• Passion (strong belief, risk taking, ambition)

• Young !!!

• Ability to Sell, Hire and Inspire

• Execution capability •  Business and Operational Experience 11

Team Market Value Proposition

Scalable Defensible


Scalable : Capital

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Input: Effort, Capital

Output: Revenue, Profits Technology Facilitates

Capital Efficiency


Scalable Defensible


Biz Model Scalability: Case Study

Enterprise Software: Scalability Barriers •  Small Ticket Price •  Fragmented market, Competition •  Technical sale , Long Sales Cycle •  Demanding Customer, Customization

What would be interesting - Large ticket Price - Channel / distribution - Upsell / Cross Sell; Recurring revenues - Strong demand (regulation, compliance)


Scalable Defensible


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Value Proposition

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»  Is there a genuine need for the product / service?

»  How is it being addressed today ?

» Who is best positioned to fulfill this need ?

» Why will the customer select you, continue to use your service/product ? »  Cheaper, Better, Faster


Scalable Defensible


Defensible •  Intellectual Property (Nice but not critical) •  Installed Base – Platform Play •  Installed Base – deep entrenchment, hard to remove •  First to Market - if Network effect (sometimes scale) •  Specialized knowledge / Resources

•  NOT PRICE (unless sustainable cost advantage)


Scalable Defensible


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Less likely to be Venture Fundable

• Entrepreneur •  Lack of experience / knowledge in related area •  Lack of sales and operational experience in founding team •  Mindset: Always prioritizes profits over growth •  Mindset: Reluctant to divest equity (or only limited amounts) •  Mindset: Not open to feedback, change

• Market •  Small Market / aiming to build a 20 Cr company in 5 yrs •  Uncertain Business model, Scalability challenges

• Differentiability and Competition •  Me too product / service

• Capital Requirement •  Risk of consuming too much capital (other than E-Commerce !)

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When to Approach an early stage Venture Fund ?

•  VC unlikely to make a bet on multiple risk factors •  Team •  Technology and Product risk •  Competitive Risk •  Market and Business Model risk •  Exit Risk

•  Product ready / close to being ready & customer traction •  Some validation of assumptions, business model, market size •  Presence of Business and Operations guy on team

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Agenda

• Lifecycle of a business and need for capital • Options for early stage capital (cover types of VCs)


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Investment Process

Deal Identification / Preliminary Analysis

Deal Validation

Due Diligence

& Closure

Issue of Term Sheet

Typically 1% of deals get through the funnel

30 – 45 days

30 - 45 days

15 days

Prelim Market Analysis Discussion : Internal + External

Experts

Deep Dive: Team, Market, DIfferentiation

Fact Validation. Accounting & Legal Diligence

Background checks Minimum durations

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Deal Validation – Decision Parameters & Challenges

Team

Market Size

Differentiator

-- Teams are enthusiastic and passionate -- Often lacks experience in functions like marketing,

distribution and finance

Key – Ability to bring right talent on board

-- Early stage businesses lacks established business models -- Uncertainty on Pricing, Customer Behavior

Key – Customer References, Experts Opinion, Detailed analysis

based on demographics, existing solutions and similar businesses in other markets

-- Competition is not very clear -- Lack of IP

Key – Identify key success factors in the business


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Due Diligence and Closure

•  A fact validation process • Not a decision making process •  However; deals can break at Due Diligence level too •  Accounting, Legal Due Diligence and Background checks – Typically these are done by third parties with active involvement of Canaan’s team

Process of validating business facts, company structure, financials etc


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Agenda



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Dealing with Term Sheets

•  Valuation •  Type of Equity (Preferred vs common) •  Board Participation •  Liquidation Preference •  Conversion and Anti Dilution Provision •  ROFR – Right of First Refusal, Co-Sale •  Redemption •  Affirmative Rights and Information Rights •  ESOP

Letter of Intent to invest in a given opportunity on specific terms and conditions


Agenda



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What happens post funding?

Early Stage •  Constitution of a BOD, Monthly Board Meetings •  Establishment of milestones (revenue, customer wins, product roadmap)

•  Validation of key assumptions •  Business model fine tuning •  Assistance in Hiring As business grows: •  Focus on Profitable growth •  Focus on Execution •  High scrutiny of financials – top line, bottom line •  Risk Management •  Internal Audits

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What if Funding discussion doesn’t work out ?

•  Know why • Not in area of interest ? • Missing something critical? Adapt if you agree

• Try other VCs

• Stay in touch and provide updates on progress

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Thank You [email protected]


early stage funding options and expectations_ul

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