1Copyright ©2008 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be reproduced for educational purposes only.E145 E145 2008 Meets the VCs2008 Meets the VCsSessionSession1414Venture FinanceVenture FinanceTom Kosnik(Adapted from slides originally created by Tom Byers)2Chi-Hua ChienKleiner Perkinswww.kpcb.comRavi BelaniDFJwww.dfj.comMeet the VCs!Meet the VCs!Trae VassalloKleiner Perkinswww.kpcb.comRowan ChapmanMDVwww.MDV.com3© 2003 Mark P. Rice, Babson Sessions 2-8:Idea Versus OpportunitySessions 9-16:Realities of Business Operations4TodayToday’’s Agendas AgendaPart II. Given the nature of the business and the objectives of the founders, what capital resources are needed to build the venture?Part I. What is the purpose of a business plan?5Part I. Part I. What is the purpose and actual What is the purpose and actual value of a business plan?value of a business plan?6Money is plentiful but scarce Money is plentiful but scarce ––in boom in boom times and badtimes and bad7Too much of a good thing Too much of a good thing can knock a venture off balancecan knock a venture off balance8First Time Entrepreneurs often Ride First Time Entrepreneurs often Ride The The Money Talent MerryMoney Talent Merry--GoGo--RoundRound9One reason for a Business Plan is to raise One reason for a Business Plan is to raise capital to grow your business.capital to grow your business.Another is to clarify and focus your strategyAnother is to clarify and focus your strategyPEOPLE & RESOURCESExperiences, Skill,Contacts, Attitude, KnowledgeCONTEXTMacroeconomy,Tax, Regulatory,Socio-politicalDEALAllocation of Riskand Reward, Incentives, Signals,Sorting, ConsequencesOPPORTUNITYEntry Barriers,Customers, Suppliers,Substitutes, Rivalry,EconomicsProject-AppropriateFinancingOption PreservationOpportunity-AppropriateKnowing andBeing KnownAppropriate Risk / RewardAllocation and IncentivesInvestor Value AddedFavorable TechnologyMacroeconomyFavorable Rulesof the GameFavorable Sociological FactorsReference: Sahlman et al. (1999) The Entrepreneurial Venture.10Outline of a Business PlanOutline of a Business Plan•Executive Summary•Market Analysis•Vision and Concept (including Technology)•Competitive Positioning and Marketing•Business Model•Organization•Financial Projections•OwnershipFocus ofSessions 13-1611Part II. How Tech EPart II. How Tech E’’s Finance s Finance Their Ventures Their Ventures ……The The ““ABCsABCs””A. Amount of Cash Needed and PurposeB. Sources of CapitalC. Deal Structure12A. Amount of Cash A. Amount of Cash ……Two Key QuestionsTwo Key Questions#1 How much money is needed for this “round” of financing?Typical Financing Stages (or Rounds):Seed  Early  Mezzanine  Late (e.g., IPO)13#2 Which “white hot” risk(s) is to be reduced with this money?Team RiskTechnology RiskCapital RiskMarket Risk14B.B.Sources of CapitalSources of Capital15VentureCapitalFirmsAngel Investors Corporate VCBoot-strappingOther16A Deeper Look at A Deeper Look at Venture Capital FirmsVenture Capital FirmsVENTURE CAPITALISTS(Finding and Funding Entrepreneurial Companies)ENTREPRENEURS(Starting and Building Companies)INSTITUTIONAL INVESTORS(Limited Partners – e.g. University Endowments, Pension Funds)Source: Andy Rachleff17US Venture Capital US Venture Capital and the Economyand the Economy•GDP: about $12.5 trillion annually•Hedge funds: $1 trillion over 3 years•Mutual funds: $230 billion in 2007•Buyout funds: $86 billion in 2005• Venture capital? $31 billion in 2007… just 0.2% of $13.8 Trillion U.S. GDP.Source: BLS website, Investment Company Institute, Thomson Financial, 5VCA18But VCBut VC--Backed Companies = Backed Companies = 17% of GDP17% of GDP19At Year End # Venture Firms Capital Under Mgt 1970 28 $1B 1980 89 $4B 1990 398 $31B 2000 887 $223B 2001 949 $252B 2005 866 $259B Source: 2006 5VCA Yearbook, prepared by Thomson Financial, page 1820After a Peak in 2000, After a Peak in 2000, Now on a $25B+ Annual Pace in US Now on a $25B+ Annual Pace in US Source: PricewaterhouseCoopers/5ational Venture Capital Association MoneyTree™ ReportHistorical Comparison of VC StylesHistorical Comparison of VC StylesUS ModelInternational Model(e.g., Europe)Peoplecompany founders and buildersconsultants and bankersStageseedearly (A Round), but not seedProvide“value added” “just money”Stylehands on hands offObjectivecreate very large companiescreate medium sized companiesPhilosophymaximize upside minimize downsideReturnstarget a small number of big winners –home run investingbelieve returns can be earned across a portfolioReference: Mowbray Capital, London22C. Two Key Questions C. Two Key Questions Regarding the Regarding the ““DealDeal””1. What percentage of the company do the investors receive for their cash?2. What special terms and conditions are necessary to compensate them for the risk?23Kaplan’s Startup Game“A race against time to create value and reduce risk”(1) Founding:An entrepreneur begins with a vision and shares of stock in the new venture.Entrepreneur trades stock for ideas, money, and people(2) Seed Stage:•Venture capitalists provide money in return for stock•Employees join via friends & associates in return for cash salary and stock options•Ideas become intellectual property which represents the initial value in the companyFurther growth is delayed until milestones are reached and risk of failure is reduced(3) Growth Stage:More money, ideas, and people are obtained, but for much less stock than in the earlier stage due to lower riskCompany balances earning cash, taking investment, and spending cash to create value(4) Exit Stage (Success):•Company files for IPO or gets acquired (M&A)•A viable enterprise has been created (maybe public) •Entrepreneur, investors, and employees can cash in stock for money (eventually)•Each party continues to build the company, starts the game again, or something elseValue has been successfully createdReference: Jerry Kaplan24Chi-Hua ChienKleiner Perkinswww.kpcb.comRavi BelaniDFJwww.dfj.comQ and AQ and ATrae VassalloKleiner Perkinswww.kpcb.comRowan