VENTURE CAPITAL

Dominic ShaullMichael Jordan

VENTURE CAPITAL

WHAT IS IT? A BRIEF HISTORY OF VENTURE CAPITAL

NEED FOR FUNDING

ADVANTAGES AND DISADVATANGES

SOURCES OF FUNDING

ALTERNATIVE PATHWAYS

VENTURE CAPITAL

WHAT IS VENTURE CAPITAL?Way to obtain money and experience for a business via

the private equity of Venture Capitalists (individuals willing to invest in a start up)

If money is not obtained through VC, it will have to be obtained from one of the following:Bank Loans, personal savings, or boot legging (Use of

company’s profits early-on to grow)

VENTURE CAPITAL

THE HISTORY OF VENTURE CAPITALSome of the first Venture Capitalist include the following:

Vanderbilts Whitneys Rockefellers Warburgs

VC in the first half of the 20th century was the domain of wealthy individuals and families

The Small Business Investment Act of 1958 was the first step toward a professionally-managed venture capital industry Officially allowed for the licensing of private "Small Business

Investment Companies” Considered as the first venture capital firm

VENTURE CAPITALTHE HISTORY OF VENTURE CAPITALIn 1960s and 1970s, VC firms focused their

investment on starting and expanding companies Companies were primarily exploiting

breakthroughs in electronic, medical, or data-processing technology

In the 1980s, the industry was hampered by sharply declining returns and certain venture firms began posting losses for the first time

The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987

NASDAQ Composite Index

VENTURE CAPITALTHE HISTORY OF VENTURE CAPITALThe late 1990s were a boom time for VC, they benefited from a

huge surge of interest in the Internet and other computer technologies Initial public offerings of stock for technology and other growth

companies were in abundance and venture firms were reaping large returns

In the 2000s VC funding has spread widely through the medical field Many start-ups have become centered around early disease

detection and prevention

VENTURE CAPITALFAILURE Failure – Amp’D Mobile (2007)

Raised 360 million, crashed into bankruptcy Lax on customer credit check

Had 90 days to make payment instead of 30 like Verizon80,000 of company’s 175,000 customers were unable to

pay billsBurned companies such as MTV Networks, Columbia

Capital Equity Partners, Highland Capital Partners

2010 Investments in Industry In Millions of Dollars

VENTURE CAPITAL

Other

Healthcare Services

Electronic/Instrumentation

Consumer Products and Service

Networking and Equipment

Semiconductors

IT services

Software

Biotechnology

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93.8133141.4152.4171.1175.2

205.7245.8

321.3413.9

755.41034.6

1282.21296.1

[1]

VENTURE CAPITAL

WHY DO YOU NEED VENTURE CAPITAL?New companies are often too small and lacking in

experience to raise the money needed to produce a new product Examples of Startup Costs:

Continuation of R&DEmployee Salaries and BenefitsManufacturing and Production CostsPatent FeesVenture capitalists bring much needed capital to

the companies but also bring often needed financial expertise

VENTURE CAPITAL

WHY VENTURE CAPITAL OVER BANK LOAN?Availability

Banks usually do not offer loans to startups without strict provisions to reduce the risk

Venture capital is usually generated from a pool of investors, which reduces the overall risk of the investment

SOURCES

Friends & Family

Angels

Venture Capital

Government Grants

Banks

VENTURE CAPITAL

Corporate Investment

Public Investors

Customers

• Members of your personal network

• Have adequate means to make an investment

Friends & Family Angels

Venture Capital Corporate

VENTURE CAPITAL

• Experienced investors using own wealth

• Professional investment managers

• Corporations make the investment

Banks Gov Grants

Public Investors Customers

VENTURE CAPITAL

• Commericial/State institutes providing financial services

• Loans and such

• Department of Defense

• General public can invest by buying shares of the company

• For established companies

• Customers make direct investment in the R&D of new products or services

Venture Capitalist• Invest in companies with

potential for high return• Raise money and put into

funds• Funds vary in size ($50m

to $2b)• Each fund has a specific

profile (eg. Medical devices) & investment horizon (eg. 5 yrs)

• Able to povide multiple rounds of funding & have extensive networks of contacts

Corporate Investment• Made by large

companies for strategic & financial reasons

• Two ways to provde funds:

• Purchase equity in

support of R&D or licensing agreement

• Traditional venture investments

VENTURE CAPITAL

Government Grants• DoD gives $1b/yr to

early-stage R&D• Projects must serve DoD

need & have commercial applications

• There are two programs: SBIR and STTR

SBIR• Small Business Innovation

Research• Small technology

companies or Individual innovators who form a company

• Up to $850,000

VENTURE CAPITAL

STTR• Small Business

Technology Transfer• Small companies working

cooperatively with researchers at universities & other research institutions

• Up to $850,000

GET STARTED

VENTURE CAPITAL

Be a people person

Know your capital investors

Be active about your managerial decisions

[2]

VENTURE CAPITAL

HOW TO OBTAIN VC? Ensure the investors your company/idea fits their

investment profile Research & find your target

Which partner of the firm should you speak to about your idea

Who has a history of supporting ideas or companies similar to yours

Do: NOT Send a “cold” email Have someone introduce you (e.g. LinkedIn) Set up a meeting with the investors

ConciseKnow

Who

Retu

rn Why

$$ Needs

ELEVATOR PITCH

Potential RewardsHow do investors get their reward

Tailor speechWho are you speaking to? Know your audience

30 secmake them want to hear more

BetterWhat does your idea/product fulfill

How muchHow much capital do you need

Pick one Semi-Applicable Youtube Video for your viewing pleasure:

1.)

http://www.youtube.com/watch?v=cd2rWeswwGw

2.)

http://www.youtube.com/watch?v=sYeup5zrZbs

3.)

http://www.youtube.com/watch?v=azRzqI3BJ2A

BUSINESS PLAN

VENTURE CAPITAL

Once Elevator Pitch worked, business plan is used to provide the detailed plan

How much you plan to make?Where do you plan to make the products?What is the cost of production?What is already in the market & how you compare?

Answer all the questions VCs have before giving you their money

[2]

VENTURE CAPITAL

Angels

Venture capitalists

Corporate investment

SOUCE OF FUNDS

• Valuable experience to share with innovators

• Provide access to vast network of contacts• Ablility to take on considerable risk• Participate in multiple rounds of funding

DISADVANATGESADVANTAGES

Family and friends• Least expensive funding source• Flexible alternative for early-stage

funding

• Moderately priced, early-stage funding source

• Take on considerable risk• Exercise less control than venture capitalists

and corporate money• Act more quickly than venture capitalists

• Lead to meaningful product/project synergies

• Provide accesss to valuable resources• Less expensive than venture capitalists

funding• Lend to young company’s credibility• Provide company with a “built-in” exit

strategy

• Limited expertise• Do not understand level of inherent risk• Not able to participate in subsequent

rounds of funding

• Limited expertise• Not able to invest in subsequent rounds• Negatively affect terms and level of control

by company’s perspective• Multiple angels to meet funding needs

• Exercise considerable control over venture’s direction, management, and exit

• Require considerable share of ownership in exchange for investment

• Expect high returns or other terms not favorable to company

• Limited value in return for building business• Conflicts with corporate investors• Issues with intellectual property ownership• Limit value realized from exit stragety if

corporate investor has “right of first refusal”

[2]

VENTURE CAPITAL

Government grants

Banks

SOUCE OF FUNDS

• Access to funds usually does not require the company to share ownership

• No influence over any business decisions• Interest payments are tax deductibles• Secured relatively quickly and used to help

bridge short-term financing gaps

DISADVANATGESADVANTAGES

Customers

• Extremely inexpensive funding• Potential for young company’s credibility• Provide valuable market-based insights

revelant to product development

• Inexpensive funding • Founders not require to part with any equity

in the company• No influence over any business decisions• Strengthen a young company’s credibility

• Lead to conflicts if company seeks to sell the innovation to customer’s competitor

• Customer seeks to limit way in which innovation is marketed to match its best interest

• Highly competitive• High expectations based on rigorousness of

research performed• Lengthy funding review cycles• Funding capped at $850,000 per project

• Business assets can be used as collateral• Affect cash flow as regular payments of

principal and interest must be made• Start-ups pay a premium on their loans• Start-ups may have difficuilty getting loans if

no revenue or tradeable assests

[2]

ALTERNATIVE PATHWAYS

VENTURE CAPITAL

PartneringTwo entities share responsibility for the development or commercialization of an idea or invention LicensingTransfer of an idea or invention from the innovator to a licensee in exchange for ongoing royalties and/or other payments Sale/AcquisitionInnovator chooses to sell an idea outright, completely relinquishing control to acquirer

Crowd-Funding

[2]

VENTURE CAPITAL

[2] Zenios, Makower, and Yock. Biodesign: The Processing of Innovating Medical Technologies. Ann Arbor, Michigan: Edwards Brothers Inc., 2010.

REFERENCES[1] Berkeley Entrepreneurs Forum Shaking the MoneyTree presentation: http://entrepreneurship.berkeley.edu/main/index.html

Investors?

Maybe You?