new venture financing, 2003,ziya boyacigiller

New Venture Financing

2003

This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com

Copyright (c) 2003 Ziya G. Boyacigiller

New Venture Financing

Ziya Boyacigiller Sabanci University

(Based on a Presentation by Andy Rachleff, Benchmark Capital)

Make a bet:

1. Give me 10TL each now, and I will give everyone back 11TL (except for one person randomly) at the end of this presentation.

2. Give me 10TL each now, and I will give back one of you randomly 65TL next month, and the others 1TL.


New-Venture Financing is about managing high-risk investments


Poker as a Metaphor…


Wipe Out

Ante

Follow on Bets

Chips

Cards Dealt

Ziya G. Boyacigiller (c) 2008 6

In 2000, there were 454 spinoffs, within all American academic institutions, pp57

In 2000, average was 4.2% spinoffs-to-disclosures ratio within 26 selected universities (~37% of total with spinoffs) in USA. Pp68

During 1980-1996, MIT spinoffs = 134, went public = 24, 18% public “spin-off ratio, pp19 & pp30

Using 4.2% and 18%, we get 0.3%. This means

only 3 spinoffs for each 1,000 disclosures

succeed to go public (IPO). (Note that this ratio is for MIT and is much higher than non-academic success rates. For example, the rate for most startup companies is probably over 10 times worse!)

< 3 in 1,000 success rate…

“Success Bias”

Idea to IPO

Reviewed plans to IPO

Funded plans to IPO

6 in 1,000,000

60 in 10,000

Less than 1 in 10

Source: Saratoga Venture Finance

8

Venture Capital - Size of the Market

US - 2006 $27.5 bn 1446 transactions $10.5 M average investment

Europe - 2006 Euro 4.1 bn 867 transactions Euro 14 M average investment


Venture Capital Food Chain

INSTITUTIONAL INVESTORS

(Limited Partners – e.g.

Endowments, Pension Funds, High worth individuals)

VENTURE CAPITALISTS

(Finding and Funding

Entrepreneurial Companies)

ENTREPRENEURS

(Starting and Building

Companies)

10

Venture Capital - How the VCs make money?

Raise “fund” every 2-4 years Pension funds, financial institutions, and specialist

“fund of fund” investors, high net-worth individuals/families

Invest money over 3-5 years ~ 1/2 investments lose money ~ 1/3 investments break even ~ 1/6 investments make (hope lots of) money

Very small “management fee” on funds managed ~1-2.5% PA

“Carry” ~20-25% x (Total Return-Total Amount Invested)


Asset Allocation for a Limited Partner


The Trade-off Between Risk & Return

Metric Used: IRR


IRR “Internal Rate of Return”

Parameters:• Initial Investment• Follow on Investments• Cash Out• Time (maximum 10-12 years)

Use Excel built in formula….

VC Firms Performance

Kleiner Perkins Caufield & Byers

IRR Sequoia IRR Matrix Partners

IRR

1992 fund 39%/y 1992 fund 110%/y 1995 fund 223%/y

1994 fund 122%/y 1995 fund 175%/y 1997 fund 516%/y

1996 fund 287%/y 1998 fund 93%/y 2000 fund -30%/y

1999 fund -21%/y 1999 fund -5%/y 2001 fund -39%/y

2000 fund -16%/y 2000 fund -25%/y

Source: Venture Scoreboard

VC Returns (as of 3/31/04)

VC Fund Type 1 year 3 year 5 year

Early Seed funding -2.9% -19.8% 47.1%

Balanced funding 20.5% -9.4% 17.5%

Later stage funding 38% -6.0% 7.1%

All venture funds 15.7%* -13.3% 22.0%

Stock Indexes

Nasdaq 48.7% 2.7% -4.1%

S&P 500 32.8% -1.0% -2.6%%

Source: SJMN 7/22/04

* First double digit yearly return since 2000


Which of the following firms would you rather invest in?

Each invests $1 million per company in 10 companies:

1. One gets 2x their money on all 10.

2. The other loses all their money in 8 and gets >20x their money on the remaining 2.


Summary of the Investment Business


How do you find Right/Non-Consensus?


How can you recognize vision?

•Early insight into technology inflection point (disruptive innovation)

•The Napkin test

Single most important determinant of success that overwhelms all else is the choice of industry.



Buffet’s Law of Startup Success

•When a great management team meets a lousy market market wins

•When a lousy management team meets a great market market wins

•When a great management team meets a great market something special happens

Execution “Effect of Management Team”



Capital Intensity

•Least Amount of Money = Most Attractive Business

•Minimize Capital Required by

High gross margins (Unfair advantage)

Rapid escape velocity (Product/Market fit)


How do Valuation & Terms get established?

•Look at milestones achieved(aynasi istir kisinin, lafa bakilmaz…)(credibility is delivering what you

promise…)

•Look at comparables(It’s just like buying a house…)

•Then it’s up to supply & demand


Milestones Chart to CF+


Term SheetTERM SHEET

FOR SERIES A PREFERRED STOCK FINANCING OF[Insert Company Name], INC.

[ __, 200_]

This Term Sheet summarizes the principal terms of the Series A Preferred Stock

Financing of [___________], Inc., a [Delaware] corporation (the “Company”). In consideration of the time and expense devoted and to be devoted by the Investors with respect to this investment, the No Shop/Confidentiality and Counsel and Expenses provisions of this Term Sheet shall be binding obligations of the Company whether or not the financing is consummated. No other legally binding obligations will be created until definitive agreements are executed and delivered by all parties. This Term Sheet is not a commitment to invest, and is conditioned on the completion of due diligence, legal review and documentation that is satisfactory to the Investors. This Term Sheet shall be governed in all respects by the laws of the [State of Delaware].


It is all about the pie…

50%

10%

Ref: Golden Horn Ventures 31

Reasons to Raise VCUnique

Product or Concept

Excellent Development Capability

Large Potential Market

Opportunity

Intense Competition Likely

Need to Move Rapidly

Implications

VC Funding Supports:

• Capital

• Network

• Experience & Expertise

• Credibility & PR


What VCs Don’t Look For

•Another Microsoft!

•Do you think they care if you build a long-term great company (beyond their holding period)?

- No benefit to IRR or distributions

- Impacts their reputation


Who is the ideal funding source?

Potential Market Size

Ideal Funding Source

Small Bootstrap or Angel

Unclear Bootstrap or Angel then VC

Large Venture Capital


How should you choose among Venture Capitalists / Investors

•Industry experience / perspective

•Recruiting help (network)

•Partnering/Contacts

•Brand/Credibility

•Price/Stage

•Funding Required

•Location

•Chemistry


Who should you ask for advice?

•Successful Entrepreneurs

•Top deal lawyers

•Investment bankers

•Frequent advisors to the VCs

- Professors- Angel Investors

•Inovent

•Endeavor

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