Kristen Attard Lauren Brett Preety Dev Alex Fitzthum Adam Schlachter Venture Capital Kristen Attard Lauren Brett Preety Dev Alex Fitzthum Adam Schlachter

Contents What is venture capital? History of venture capital Why do you need venture capital? Why not get a bank loan? Angel investors What do you give up? Why do you care? Where do you get venture capital? Who do you contact? How do you convince them? The Elevator Pitch

What is Venture Capitalism? In short, it is a way to obtain money and experience for a business via private equity Otherwise, money is gained through Personal Savings Bootlegging Use of company’s profits early-on to grow Bank Loan Venture Capitalists (VCs) Individuals willing to invest in the business Venture Capitalists are also grouped into investment firms that make venture investments It is definitely most common for VC’s to become part of a VC firm because their investment is pooled into a variety of companies rather than one. This presents much less risk VC firms are normally comprised of small teams with technology backgrounds, such as scientists and researchers, or those with business training or deep industry experience VC’s are interested in generating a return through eventual realization of funds such as IPOs (initial public stock offering) or trade sale of the company Because of the high risk assumed, VC’s usually get significant control over company decisions as well as a large portion of company ownership

Structure of a generic VC fund - The venture capital firm itself is generally run by partners which serves as managers of the firm and advisers to the VC funds raised. Investors in VC funds are known as Limited partners. Venture capital firms can vary from firm to firm meaning that one firm may try to invest only in manufacturing based companies whereas another firm may try to invest solely in service based internet companies.

What is Venture Capitalism? Venture Capital from a Company’s Viewpoint Company starts up and seeks investors to grow A business plan is created for the VCs to look at If VCs interested, the first round of money (seed money) is doled out Typically will receive 3 to 4 rounds of funding VCs get stock and some control in the company for invested money VCs on the board of directors Amount of stock given to VCs happens during the pre-money valuation Post-money valuation happens after VCs invest money Original shareholders values diluted from 100% to whatever is decided upon during the pre and post-money valuation When a company seeks a VC firm they have to take several things into consideration. These are: Business Cycle: Do they invest in budding or established businesses? Industry: What is their industry focus? Investment: Is their typical investment sufficient for your needs? Location: Are they regional, national or international? Return: What is their expected return on investment? Involvement: What is their involvement level? Most VC funds have a fixed life of 10 years. The investing cycle for most funds is generally 3-5 years and the subsequent years are focused towards management and follow up investments. This model was actually started in the 1980’s successful Silicon Valley investments.

History of venture capital Some of the first Venture Capitalist were the Vanderbilts, Whitneys, Rockefellers and Warburgs in the first half of the 20th century. VC was then 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. The Act officially allowed for the licensing of private "Small Business Investment Companies" the first Venture capital firms.

History of venture capital In 1960s and 1970s, VC firms focused their investment on starting and expanding companies. These companies were primarily exploiting breakthroughs in electronic, medical, or data-processing technology. Consequently VC has come to be synonymous with technology finance. In the 1980’s 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.

History of venture capital The 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. NASDAQ Composite Index

History of Venture Capital VC funding has since spread widely through the medical field. Examples: The Vertical Group is one of many VC firms Many start-ups have begun in recent years after sequencing the human genome, centered around early disease detection and prevention.

Why do you need venture capital? Many businesses and start up companies are too small and/or inexperienced to raise enough money for expenses on their own Expenses include R&D, employee salaries and benefits, and manufacturing and production costs. Venture Capitalists are expected to bring not only managerial and technical expertise but also capital to their investments

Why VC over a bank loan? Venture capital funds are generally a pooled investment vehicle that invests financial capital of third party investors in enterprises that are too risky for the standard capital markets or bank loans If a bank did loan you money, you would have no say in how the money is spent http://www.youtube.com/watch?v=DmdtKkBBnJ4 Sometimes getting a loan can be a shot in the dark!

Alternatives to Venture Capital Angel Investors Many start up companies seek out angel investors because of the strict requirements venture capitalists have for potential investments Angel investors typically invest their own money More willing to invest in highly speculative opportunities May have had a prior relationship with the entrepreneur. Known to invest between $250,000 to $1M, whereas family and friend investments are typically from $0 to $250,000 and VC’s are from $1M to $2M They “fill the gap” between “family and friend” investments and Venture Capital Angel investors and Angel networks invest annually just as much as venture capitalists into start up companies, but invest in 10X as many companies Recently groups have emerged aside from VC and Angel Investors which allow groups of small investors or entrepreneurs to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process

Disadvantages of Venture Capital In-direct Investment: Most Venture capitalists are firms that have investors or limited partners who provide funds Ownership rights Expenses and Profits highly regulated May influence management infrastructure Equity on a company will last for an infinite time period Selection process is very strict and there are many strict requirements that venture capitalists place on the companies they invest in.

Advantages of Venture Capital Increase in start up capital will allow for access to new technology and amenities available Increase company’s net worth in short time period Provide resources Mentor - with strategic, operational and financial advice. Alliances - Venture capitalists can introduce the company to an extensive network of strategic partners both domestically and internationally. Facilitate exit - Assist in preparing initial public offering (IPO) of its shares stock exchange such as, NASDAQ and also facilitate a trade sale.

Where do you get venture capital? Can make contact with prospective investors through attorneys, consultants or business brokers. Start with local VC firms (in-state) Provides networking for out of state expansion California has the highest concentration of VC investment compared to any other state in the country

How do you convince them? Once you get a meeting with a VC or a VC firm you still need to convince them to invest money into your idea or firm. Business Plan Shows the VC’s you have done your homework How much money do you plan to make? How big is the market? Where do you plan on manufacturing the product and what are your cost of production? All of the above are just some of the questions VC’s want answered before they give you money In order to get a meeting with a VC and explain to them what their potential rewards could be you need to have a quick, powerful, it to point speech that will hook them; make them want to hear more. This speech is called an “Elevator Pitch”

The Elevator Pitch The elevator pitch is a brief but meaningful overview of your idea. The reason it is called an elevator pitch is because is should be delivered in the amount of time you would spend in the elevator with someone (30 seconds) What makes a good elevator pitch? Hard numbers, no “I think” analysis Know who you are talking to Try to avoid words that are uncommon to many people Tailor presentation to the audience Make sure the person understands the “why” of what you are doing What need are you fulfilling? Why is it better than what is already on the market? Explain how investor will obtain a return on his investment, and how much funding you need

The Elevator Pitch Useful websites for developing an elevator pitch: Tech Crunch Elevator Pitches (http://pitches.techcrunch.com) Submit videos of elevator pitches, which are voted and commented on by viewers Start-Up Nation Elevator Pitch Competition http://www.statupnation.com/elevator-pitch-2009 Twitpitch (www.stoweboyd.com/message/2008/04/twitpitch-is- th.html) New idea that elevator pitch should be further shortened to a 10-second “escalator” pitch, consisting of 140 characters (the length of a Twitter post)

Questions?