Venture Capital Analysis Prof. Dell, Spring 2011

StageSourcesFormSize Seed / AngelFriends & Family, SBCCommon / Loan$100-2MM Venture CapitalInstitutional FirmsPreferred Stock$1-5MM Private EquityInstitutional FirmsPreferred Stock$10-50MM Growth EquityRe-Cap Stages of Company Financing Seed/AngelVenture Capital Private Equity Growth Equity IPO PIPEIcahn ;)

3 Private Equity Pipeline and Diligence Process Source: NVCA, HBS materials 100 Business Plans Initial Diligence Initial meeting with management Total Addressable Market (TAM) Competitive landscape Barriers to entry (patented IP, head start on R&D, founder/ management expertise) Initial review of projections 10 Promising Opportunities Intensive Due Diligence In-depth meetings with management Analysis of potential returns based on industry comparables and probability of successful exit Reference calls with customers, industry experts, management/board contacts Modeling of financials 1 Investment Partner Dealflow Industry Events Founder Cold-Call Private Equity investments result from robust pipeline and rigorous filtering process:

Precisely what is the product or service you are offering? Precisely what is the market you are targeting? Who are the competitors in this market? What is the competitive advantage of your offering and is it sustainable? What are the economics of the business opportunity? How will the public markets value this business? Venture Capital: 6 Simple Questions

WHAT’s MISSING FROM THIS LIST?????? Venture Capital: 6 Simple Questions

June employees 850 customers paying customers 75 Handbag Merchant Relationships Run rate of $85,000 per month $400k in angel funding And a big idea……NetFlix for Handbags BagBorrowOrSteal.com

What questions would you have for BBOS? BagBorrowOrSteal.com

Team The Economics Value Proposition Technology Competition VC = Venture Capital: Dynamic Fit Analysis Sales/ Marketing Partners Market Opportunity

Do you want to ‘be’ in this business? What is exciting about the opportunity? Is the market new and rapidly growing?

Lots of Questions: People / Management How well do these people work together? How well suited are they to compete in the market? How effective are they at getting to the right answer? Assess management’s judgment. Where do they sit within this industry? How well does management understand the marketplace? What are the distinctive competencies of management? Does management have the right characteristics? What competencies are missing? How intense is the management team? Track record, done it before, know how to win, refuses not to win. Assess their strategy, strengths, and weaknesses. How are their references? How will they treat their investors, their partners, their customers? How well does the CEO understand the details of the business? How well does the team understand: integrity, honest, commitment?

Lots of Questions: People / Management Is there a deep pool of people in this market who can execute on the business? How hard will it be to recruit in this market? - Senior Management - Engineering - Marketing - Sales - Business Development

Lots of Questions: Market How big is the market? - How big is the handbag market? How fast is it growing? Is that the right market to look at? Rental Market? Used Goods? Seasonality? Market characteristics: robust competition, litigious

Lots of Questions: Value Proposition Do customers want this? Is it a PUSH or PULL sale? Are the dogs eating the dog food? How happy are the customers? How loyal? How unique is this value proposition?

Lots of Questions: Go to Market Strategy How can you reach the customer? What relationships are necessary to effectively reach the customer? How realistic is it that you’ll get them? How much control to other companies have over the wallet of our customer? How fickle are the customers? How much can you lock your customers into your business?

Lots of Questions: Unit Economics Does the core business model make $? - How much does it cost to make what you sell? - How much can you sell it for? - How much does it cost to reach the customer? - How many customers are there who will buy this? - How much is left over after all other costs? What are the economics of the business? - Cost of customer acquisition - Lifetime value of the customer - Cost of bag acquisition - Lifetime value of the bag - Value of bag at disposition

Lots of Questions: Competitors Who are the competitors? What are the substitutes? What are the barriers to entry? Who are likely entrants into the market? If there are only likely to be a few winners, can we be one of them?

Lots of Questions: Barriers to Entry What are the barriers to entry? Is the ‘process’ patentable? How defensible is the business? - Against who? - Who are likely entrants into the market?

Lots of Questions: Technology How difficult is it to build what they’ve built? How unique is it? How defensible? How well can it scale? How robust is it? Was it built on standards? Or is it proprietary?

Lots of Questions: Partners What partnerships are key to success? How critical are they for your success? Are you dependent on them? Can they put you out of business? What is the bargaining power of suppliers? What is the bargaining power of buyers?

Lots of Questions: Financing Requirements & Exit How much will it cost to finance the business to cash flow positive? How well thought out is management’s financing plan? At what point will you know the economics of the business ‘works’? How much ownership will I have after all the rounds of financing are done? Is this company a ‘take public’ kind of opportunity? How will Wall Street view the cash flow generated by the business? What kind of operating margins can we achieve? Who is likely to buy this business if I cant access the public market? At what multiple?

Venture Capital: Decision Tree Screen Market/Strategic Analysis Project Origination Technology Analysis Business Model Success Factors Decision Management Assessment Expert Review Analyze Need for Syndicate Fund Decision No Yes No Decision Yes No

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Team The Economics Value Proposition Technology Competition VC = All the Pieces Need to Work & Fit Together Sales/ Marketing Partners Market Opportunity

Team The Economics Value Proposition Technology Competition VC = Venture Capital: Dynamic Fit Analysis Sales/ Marketing Partners Market Opportunity

Product Marketing as a Proxy for Venture Capital

If you think carefully about what venture capitalists look for, you’ll note that it’s not that dissimilar from the ever important role of PRODUCT MARKETING

Product marketing in a business addresses four important strategic questions: What products will be offered (i.e., the breadth and depth of the product line)? Who will be the target customers (i.e., the boundaries of the market segments to be served)? How will the products reach those customers (i.e., the distribution channels to be used)? Why will customers prefer our products to those of competitors (i.e., the distinctive attributes and value to be provided)?

What does the product need to do? What does it need to have to differentiate from the competition? Who is going to buy it? How much will they pay for it? How can we sell it / position it in the market?