2. About Index Ventures
Index Ventures
• Pan European Venture Fund
• Over €1.5bn under management
• Based London & Geneva
• Active investor in web / internet
Selected Investments
3. Agenda
Important reflections before you
start
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect
during the investment process
4. A big undertaking
• Starting a business is a big commitment
– Energy & Passion
– Time
– Financial resources (yours and your investors)
• Before thinking of financing, is worth
taking a deep breath …
5. Key questions about you
• Why am doing this
– Make money
– Lifestyle
– “Change the world”
• How long do you want to commit?
• What level of financial risk are you
prepared to take?
6. Key questions about the business
• Be honest with yourself about the risks /
unknowns
– Do customers want the product / service?
– Do you have the competence to build the
product and the team
– Can you monetise the product / service?
– How competitive is / will the space be?
– How big can the overall market become?
7. Agenda
Important reflections before you start
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect
during the investment process
8. Overview of financing options
Non-Equity Financing
Equity Financing
Angel Financing
Self Finance /
Bootstrapping
Venture Capital
Debt /
Bank Finance
Private Equity
Public
Stock Markets
9. Self financing / bootstrapping
• Financing growth from previous cashflow and personal
funds
• Obviously need to have cashflows…
• Most good bootstrapped companies emerge from a service
or consulting companies that are productising their offering
• Pros
– Bootstrapped companies almost always spend cash more
effectively than equity financed companies
– Already being close to existing customers, give excellent
ability to understand problems and define good solutions
• Cons
– Resources for product and market dev constrained by
cashflows
– May miss a big opportunity if other players raise finance and
invest heavily
10. Debt / bank finance
• Relatively limited funds will be available ;
likely to want security anyway
• Banks only lend to predictable businesses
they can understand
• If your capital requirements are limited
and your business is following a well
trodden path, can be a useful source of
finance
• Not particularly useful web or high growth
tech industries
11. Good reasons to raise equity finance
Pre-requisites
Unique Product
Or Concept
Passionate
Founding Team
Large Potential
Market
Opportunity
Implications…
Intense
competition
likely
Need to move
rapidly
VC funding supports
Hiring
Rapid Product
Development
Partnerships
Infrastructure
Internationalisa
tion
Commercialisati
on
12. When NOT to raise VC
Application
is a feature
not a product
Market size is
too small
Motivation is
not financial
•
Risk is not that you waste time unsuccessfully trying
to raise finance …
•
… real danger is that you do succeed in raising VC
funds
– Lose opportunity for small exit which could be
personally lucrative
– Lose opportunity to run lifestyle business
– Get bound in to 3+ yrs work you may not enjoy
13. Equity Financing
Seed
Early Stage
Series A, (B)
Later Stage
(B),C,D…
Pre-IPO /
Buy-out
Investment
Size
0 - €1m
€2m-€20m
€5m-€20m
€30m+
Potential
Sources of
Funds
Grant-funding
Venture
Capital
Venture
Capital
Specialist Late
stage tech
investment
funds
University seed
funds
Friends and
family
(Wealthy)
Angel
investors
Hedge Funds
Angel Investors
(Venture
Capital)
Growth Fund
Private
Equity
14. Agenda
Important reflections before you start
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect
during the investment process
15. Venture Capital – How the VC makes
money
• Raise fund every 2-4 years
– Pension funds, financial institutions and specialist “fund of
fund” investors
• Invest money over 3-5 years
~ 1/2 of investments lose money
~ 1/3 of investments break even
~ 1/6 of investments make (lots) of money
• Very small management fee on funds managed
~ 1-2.5% pa
• Carry
~ 20-25%x (Total Return – Total Amount Invested)
16. Angels – How the Angel investor makes
money
• Unlike the VC the Angel invests their own money
• Much smaller absolute returns can be very meaningful to an angel
• The Angel approach is to invest small amounts at a very early
stage / low valuation
– €50-€250k at valuations of €500k-€4m
• Two “exits” for angel
– Firm might be sold quickly for €5-10m or less where the Angel can
make 2-5x money
– Firm raises VC money, after which Angel typically becomes more
passive but has built up exposure very cheaply to a venture backed
enterprise
• The key thing when selecting an Angel therefore is whether they
can help you raise VC finance
– See which Angel investors have invested with which VCs
17. Venture Capital – What a good VC will
add
• Advice and Strategy
• Internationalisation
• Hiring
• Trusted service
provider relationships
–
–
–
–
–
Developers
Country Managers
Sales
CEO / CFO / COO
Advisory Board
• Partnerships
• Profile and PR
• Further access to
capital
– Search / recruiting
– Branding / PR
– Finance, etc
• Exit optimisation
– Knowledge / contacts
with relevant buyers
– Experience with process
18. What does an investor look for?
Team
Technology
Traction
•
Can
–
–
–
evaluate each as
Exceptional
Good / credible
Mediocre / incomplete
•
Misconception that being good / credible across the board is
what VCs look for
– Can always add credible attributes to the mix later
•
We focus on finding opportunities which rate as exceptional in
one attribute
19. Identifying relevant VC partners
Has funds
to invest
•
Do create a shortlist
•
Rifle is a better weapon
than a shotgun
•
Similar process for
identifying angels, look at
VC funding press releases to
identify prior Angel
investors
Match of
Size/Stage/
Geography
Excellent
track record
Shortlist
No directly
competitive
investments
Relevant
Portfolio
20. Getting on radar screens
• Out of the blue email is a longshot
• Try to build context
– Analyse portfolio companies – are there any links
there?
– Analyse contact network and advisors
– Analyse press coverage
– Participate in blog conversations
– Attend events and conferences
– Relevant PR around product also helps
• VCs spend their time looking for businesses
with momentum
21. Agenda
Important reflections before you start
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect
during the investment process
22. Sharing relevant information
Pre - first meeting
• 100 page business plan
not required
• 20 page ppt which
clearly answers main
questions is best bet
–
–
–
–
–
–
–
–
–
Product
Market
Business Model
Team
Competition
Product Roadmap
Technology Overview
Business Development
Financial Status
Pre - termsheet
Post - termsheet
• Dialogue rather than
documentation – expect
lots of meetings
• Some additional
reference calls with
partners / customers
• Calls with current /
prospective customers or
partners
• Personal reference calls
• Meeting broader team
• Drafting legal
documentation
• Brainstorming around
strategy
• Legal / accounting audit
(if relevant)
• Identifying key hires post
closing
• Formal presentation to
VC partnership
2-4 weeks
1-2 Months
23. Types of investment
• Ordinary Share investment
– Simplest form, often used by angels
– All shareholders have similar rights
– Company Board composed according to
• Convertible Loan
– Sometimes used by both Angels and VCs
– Typically when another financing is anticipated soon
– Loan will convert (with a discount ~25%) into the next
financing round
• Preferred Share Investment
– Typical Structure used by VCs and occasionally larger Angels
investing as a group
24. Understanding a termsheet –
case study
• Anything between 2 and 15 pages (if points are
spelt out in fuller legalise)
• Sample phrasing is
– “[XXX fund] proposes to lead a Series A preferred share financing
of €5m at a €8m pre-money valuation. As part of the investment
process an employee option pool of 15% on a post money basis will
be put in place. Typical venture capital terms including
participating liquidation preference, etc. etc …”
• What does it all mean?
26. Venture Capital – “Typical Deal Terms”
•
•
•
•
•
•
•
but that’s so
Board Representation
unfair…
Liquidation Preference
Participation rights
Anti-dilution rights
Element of reverse vesting
Certain control and veto rights
Period of exclusivity to close legals
Photo Source: Philip Greenspun, MIT
27. Case Study - liquidation preference
Types of Liquidation Preference
Payout to Series A (€m)
30
25
20
15
10
5
0
0
10
20
30
40
50
60
Valuation of Company at Exit (€m)
No Liquidation Preference
Non-Participating liquidation preference
Participating Liquidation preference
Participating Liquidation preference (capped at 3x)
70
80
28. Case Study - liquidation preference
Types of Liquidation Preference
Payout to Series A (€m)
30
25
20
15
10
5
0
0
10
20
30
40
50
Valuation of Company at Exit (€m)
No Liquidation Preference
60
70
80
29. Case Study - liquidation preference
Types of Liquidation Preference
Payout to Series A (€m)
30
25
20
15
10
5
0
0
10
20
30
40
50
Valuation of Company at Exit (€m)
Non-Participating liquidation preference
60
70
80
30. Case Study - liquidation preference
Types of Liquidation Preference
Payout to Series A (€m)
30
25
20
15
10
5
0
0
10
20
30
40
50
Valuation of Company at Exit (€m)
Participating Liquidation preference
60
70
80
31. Case Study - liquidation preference
Types of Liquidation Preference
Payout to Series A (€m)
30
25
20
15
10
5
0
0
10
20
30
40
50
60
Valuation of Company at Exit (€m)
Participating Liquidation preference (capped at 3x)
70
80
32. Case Study - Antidilution
• If a subsequent investment round is done a price lower
than the previous investment round then the previous
investment round is repriced (more stock issued to Series
A)
• Two flavours
– Broad-based – Series A price ratchets down based on size of
Series B relative to Previous post-money valuation
– Narrow-based – Series A price ratchets down based on size of
Series B relative to Size of Series A
• Say €5m Series B done at €0.75 per share
– Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25)
= €0.93
– Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) =
€0.875
33. Case Study – Reverse Vesting
• The value of startup is
typically in the promise of
future labour from the
founders
• Investors seek to secure this
by reverse vesting founder
stock, typically over 3 or 4
years
• For startups typically all
founder stock is subject to
reverse vesting.
• For later stage companies
perhaps half the stock might
be subject to vesting
• NB – this also protects
founders from each other
34. Choosing the right VC - Valuation should
not be the decisive factor
•
Team quality
•
Strategic fit with buyer community
Well managed exit process
Fewest strategic errors made
•
Hiring (quality & speed)
•
Partnerships
•
Product development
•
% share of business
at exit
Growth rate
•
Probability of getting
there
Revenues / Profitability
•
Value at exit
•
•
Entrepreneur’s Equation
Valuation at initial round
•
Valuation and dilution at
subsequent rounds
•
Option grants
35. Key things to consider when choosing an
investor
• Relationship
– With key individual(s); and
– broader team
• References
– Speak to other founders
• Portfolio
– Relevant experience
– Non competitive
– Community you want to be part of
• Valuation and associated deal terms
Right partner at a fair
price
vs.
Any partner at best
price