Screening YOUR OWN deal Rana K. Gupta Managing Director Navigator Technology Ventures Confidential

Agenda Starting and screening companies What kind of deal you have The line of ascension How to pursue your idea “Buckets of evaluation” Understanding Funding Confidential

$18.9B in Venture Investments 2003 Small Business Data 527,900 Business Births 554,800 Business Deaths 99.7% have <500 Employees 61% have <5 Employees 23.7M Businesses in America 2/3 survive 2 years 1/2 survive 4 years 82.5% use some form of credit $18.9B in Venture Investments in 2003 (2,847 deals) That’s 0.5% of all companies started Confidential Source: 2003 SBA data

The Deal Funnel Ideas 100 Ideas Spend Time 10 out of 100 Ideas Funded Screening: - Run the numbers on the back of an envelope - Sleep on it - Reject it 100 Ideas Spend Time More screening: - Research - Talk with some people in the practice - Write a business plan - Determine the right type of funding 10 out of 100 Ideas Funded Financing: - Very much depends on the type of deal AND the perseverance of the entrepreneur ? of 100 Ideas Succeed Type of Company - 50% of restaurants fail? ? of 100 Deals Confidential

Agenda Starting and screening companies What kind of deal you have The line of ascension How to pursue your idea “Buckets of evaluation” Understanding Funding Confidential

Ascending the slope of business opportunities Difficulty/ Barrier to Entry/ Cost to Implement AND Potential Return Offer Opinion Analyze Service Commercialize Confidential

Here are examples of what I mean Difficulty/ Barrier to Entry/ Cost to Implement AND Potential Return Product - Export/Import - Distribute - Consult - Research - Newsletter - Journal Outsourced R&D Offer Opinion Analyze Service Commercialize Confidential

This is why the slope is so steep - Secure proprietary position - Prototype - Market research - Paying customer(s) - Distribution channels - Manufacturer - Sales - Team - Rigorous financing Difficulty/ Barrier to Entry/ Cost to Implement AND Potential Return - Market research - Distribution channels - Product or service differentiation - Probably up-front financing - Find paying customers - Maybe some up front financing Find a paying customer Offer Opinion Analyze Service Commercialize Confidential

Conclusions about the ascension line There is a continuum of business models that you can enter Along that continuum, you must understand what it takes to make money Usually, the more money that goes in, the more money you can potentially make Entrepreneurs rarely stop and think about where they are along this continuum Be clear about what type of business you are starting It will make all the difference as you consider how to create and grow it Confidential

Agenda Starting and screening companies What kind of deal you have The line of ascension How to pursue your idea “Buckets of evaluation” Understanding Funding Confidential

Buckets for evaluation of new ideas No Opportunity Venturable - Bootstrap - Small/Large Co. - Non-venturable Licensable Confidential

Definition of ‘Venturable’ This is a commercialization opportunity The opportunity is attractive enough for an outside party to invest its money in the company This is usually for a product company This requires a fast growth opportunity VCs and Angels look to make 5-10X their investment in less than five years Confidential

What does a VC Deal look like? From the MARKET side Very large market – in the B’s and T’s Addressable market at least in the hundreds of millions of dollars Attractive buying cycle, i.e. consumer product mfrs, NOT insurance Cos. From the BUSINESS side Dramatic sales ramp-up potential Able to reach $50M in sales in 5 years OR Possible 10X return in 3-5 years after investment Revenues within two years after investment Fundable opportunity, i.e. reasonable rounds of investment will achieve major milestones From the TECHNICAL side: Distinct product – simpler is better Clearly defined path for product development (No miracles required!) Excellent proprietary position to create barrier to entry Need not be a patent Can be trade secret/secret sauce, i.e. Sand Video Confidential

Definition of ‘Licensing’ First, you have already invented/created/own something that someone else ‘needs’ BUT there are clearly existing companies that can commercialize this better than you could Often these are attributes to a product Requires significant protection around the idea – usually a patent There has to be something for the licensee to transfer/buy from you You’ll have to work with a lawyer This is bad – scientists and lawyers don’t usually do great business together well Best to find business help even when working with a licensee Confidential

Non-venturable - Definition A company that grows one customer at a time OR from some other form of investing rather than VCs Customers Vendors SBIR Factoring Corporate funding/joint development May take (a lot) longer to reach maturity – this may be desirable May only reach $1-10M in annual revenues Sale may not be the desired outcome This is often a service company or a testing device Confidential

Example of non-venturable Confidential

Agenda Starting and screening companies What kind of deal you have The line of ascension How to pursue your idea “Buckets of evaluation” Understanding ‘Funding’ Confidential

Wrong question first Most people have an idea!! Then they look for funding to pursue the idea Wrong Question!! First question should be the goal of the venture: Experience Make money Business for life Sell the idea Sell the business Make $$ How much money? When? Confidential

Most important thought!! What are your goals? Why are you doing this? How long do you want to do this? What if you could sell the idea for 3X your investment in three years? Most entrepreneurs have not thought about this question well enough Confidential

Fundability This is just about the most over-looked variable in a deal - by the entrepreneur The fundability of the deal is dependent upon: Timing Amount of money Milestones to be reached with that money Who cares that those milestones are reached Business model Market size Sales cycle YOUR GOALS Confidential

Fundability example Easy example from the VC market – because too many people are looking to it Say a VC wants to make 10X her investment (gee, I wonder where I found that number?) Say you’re looking for $2M Let’s further assume you’ll have a pre-money valuation of $3M So, a $5M post-money valuation You will grow to $20M in revenues in four years Multiples in your industry are 2X revenue Confidential

Fundability, continued So, here’s the math: You say: in Yr 4, you’ll be worth ~$40M The investor will have discounted your revenues by 50% Meaning your revenues will only reach $10M in Yr4 So, you’ll actually be worth $20M, in her eyes That’s only a 4X return on her money Confidential

Conclusions Too few entrepreneurs screen their own deals This is understandable since you are often not provided the tools to do so Understand WHAT kind of deal you have Understand HOW to pursue your deal to derive the greatest value from it Know your own goals for the venture Confidential