1. F317 – Venture Capital & Entrepreneurial Finance Businesses that Attract Venture Capital

2. One of the greatest mysteries to entrepreneurs is the process by which Venture Capitalists assess their businesses for purpose of an investment. Specifically, why do they keep saying “NO”?!? 10,000 FT View

3. A Couple of points to consider about Venture Capitalists 1)They cannot see the future; 1)They are wrong more than they are right; and 1)They invest in what they know….which means you may simply be presenting your business to the wrong Venture Capitalists.

4. However, there are some general guidelines that all savvy investors follow in order to determine whether they would invest. That’s what we are going to cover today

5. Rule # 1 – Money chases companies that have a large growing base of customers/users.

6. Rule # 2 – Making money is not just a good thing….it’s a great thing

7. In sum: Companies that have a large and growing customer base and are generating meaningful revenue get a speed pass through the VC process.

8. Rule # 3 – VCs follow the leaders in their industry

9. Thus….if you, 1)Don’t have a large and growing user base; 2)Are not generating meaningful revenue; and 3)Haven’t found a “Lead” investor to “vouch” for the project….. You have 4 hurdles to overcome to raise Venture Capital.

10. NOTE THE FOLLOWING This presentation “ASSUMES” that an entrepreneur already has: 1)A working product or service; 2)Some market verification that the product/service has value to the target audience. VCs don’t fund ideas/business plans

11. Hurdle #1: Big Enough Market Hurdle #2: Right Market Timing Hurdle #3: Defensible Position Hurdle #4: Management

12. Consider the following: Mike the Stick Figure VC Invests $1,000,000 in a startup. He has a ROR of 60% and a 7 Year time Horizon. For his investment, he receives 20% of the equity. Hurdle # 1 – Big enough Market

13. In year 7, based on a 60% ROR, the value of his Equity should be: $26.5 Million Hurdle # 1 – Big enough Market

14. If he owns 20% of the company (and it’s supposed by worth $26.5MM), then the value of the entire company in Year 7 should be: $134 Million Hurdle # 1 – Big enough Market

15. What are the odds of a company growing from $5MM in valuation to $134MM in valuation within 7 years? Without a large and growing addressable market, it’s extremely challenging.. (taking market share is hard) Hurdle # 1 – Big enough Market

16. # of businesses in the US < 20 Employees? # of businesses in the US 21 – 499 Employees? # of businesses in the US > than 500 Employees? Consider the Following ( based on 2011 Statistics): 5,104,014 562,739 17,671 89.7% 9.9%.31% Hurdle # 1 – Big enough Market

17. What’s the pain point being addressed? What’s the size of the target audience? What are the existing options? Hurdle # 1 – Big enough Market 3 Questions need to be asked when assessing the size of a potential market

18. What’s the pain point being addressed? What’s the size of the target audience? What are the existing options? Using email to send large files; mobile access to data Anyone that sends documents, pictures, etc. via email Email, USB Sticks, Intranets Hurdle # 1 – Big enough Market EXAMPLE

19. What’s the pain point being addressed? What’s the size of the target audience? What are the existing options? Taxis are unreliable and People don’t want to be late Anyone without a car and in reliance, in part, on taxis Taxis, walking, public transporation, car ownership Hurdle # 1 – Big enough Market EXAMPLE

20. Venture Capitalists would prefer to invest in a company going after 20% of a projected $5 Billion dollar market (with multiple competitors) than a company seeking to dominate a $100 Million market (with limited competitors). Odds of success are better. Hurdle # 1 – Big enough Market

21. Hurdle #1: Big Enough Market Hurdle #2: Right Market Timing Hurdle #3: Defensible Position Hurdle #4: Management

22. Hurdle # 2 – Right market timing Market Growth Time Early Adopters Late Adopters

23. 2002 Hurdle # 2 – Right market timing Too Early!!!!

24. What are the challenges of being too early? 1)It’s expensive to both sell and educate the market; 2)Will have to keep up with innovation within the space; and 3)May have to raise a lot of money to stay afloat while the market develops Hurdle # 2 – Right market timing

25. What are the challenges of being too late? 1)Product has become a commodity; 2)Competing against well funded, entrenched companies; 3)Fewer exit opportunities. Hurdle # 2 – Right market timing

26. Market Growth Time Early Adopters Late Adopters This is when VCs want to invest. Hurdle # 2 – Right market timing

27. Hurdle #1: Big Enough Market Hurdle #2: Right Market Timing Hurdle #3: Defensible Position Hurdle #4: Management

28. Hurdle # 3 – Defensible Position Great idea! Great first product! Now, how do you keep competitors from mimicking your product, marginalizing your competitive advantage, and killing your business?

29. Every business wants a Monopoly….so it can maximize its profits without working all that hard….. Hurdle # 3 – Defensible Position But it’s unrealistic to assume that competitors will not jump into your circle. If it’s a big enough market, you will have significant, well- funded competition

30. Example 1

31. Example 2

32. In order to ward off competitors, strong businesses work hard to develop every possible strategy to keep competitors at bay. For start-ups, Investors want to only invest in companies with a strong defensible position. Hurdle # 3 – Defensible Position

33. Intellectual Property Strategies: Patents / Exclusive Right to commercialize an invention (17 Years) Trademarks / Exclusive Right to a Brand/Certain Language (Very important for consumer-facing businesses) Hurdle # 3 – Defensible Position

34. Intellectual Property Strategies: Challenge? You have to defend the Patent or Trademark Infringement in the courts. Going to court costs a lot of money. (Hint: Investors don’t like to fund lawsuits.) Hurdle # 3 – Defensible Position

35. Market-Based Strategies: High Switch Costs – It’s painful for a customer to leave one service for another service Customer Experience – Customers don’t want to leave you because you provide a great experience (difficult to scale) Proprietary Technology or System – You are able to deliver a product/service more efficiently than the competitors. Hurdle # 3 – Defensible Position

36. Market-Based Strategies: High Switch Costs Customer Experience Proprietary Technology or System Hurdle # 3 – Defensible Position

37. Last Point: Having competitors isn’t a bad thing. If you can gain enough market share (and have a defensible position), then the business becomes an attractive acquisition target. Easier to acquire than fight it out on the market. Hurdle # 3 – Defensible Position

38. Hurdle #1: Big Enough Market Hurdle #2: Right Market Timing Hurdle #3: Defensible Position Hurdle #4: Management

39. Hurdle # 4 – Management Can the team execute on the vision????

40. Consider the following: Way too much emphasis is placed on the founders in the media….(i.e. Visionary, Brilliant, etc.) Venture Capitalists are not looking for the next Steve Jobs. They are looking for a team that’s “smart”, “nimble”, “experienced”, and, most importantly, of high integrity. Hurdle # 4 – Management

41. What helps make the case? Graduating from a top-flight university or MBA program (if first-time founder); Having more than one founder on the team; Having worked for a start-up that’s had success (i.e. facebook, google, etc.); Having actual experience in the market segment addressed. Hurdle # 4 – Management

42. What hurts the case?: Being Arrogant; Being a single founder (with an entourage); Not knowing everything about the business, competitors, etc.; A bad reputation. Hurdle # 4 – Management

43. in the end: The Venture Capitalist (or any investor) is going to use their gut on this and may pass even if everything else is a go. Many VCs will even have a psychological examination conducted of the Founder(s) to see if the personality is a fit with the fund. Hurdle # 4 – Management

44. Overcome these 4 hurdles and you will have success raising Venture Capital Big Enough Market Right Market Timing Defensible Position Management

45. End of Lecture Questions?