How Venture Capitalist (VC) Firms Screen Deals

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Venture Capital “ I was seldom able to see an opportunity until it had ceased to be one” Mark Twain C L E A R S T O N E V E N T U R E P A R T N E R S

Venture Capital ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Venture Capital Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch C L E A R S T O N E V E N T U R E P A R T N E R S

Industry Snapshot ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Typical Firm Profile ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Investment Stages ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Most VC’s have a preference for a particular investment stage. C L E A R S T O N E V E N T U R E P A R T N E R S

Stage/Characteristic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Stage/Characteristic Stage Investment Characteristics Early $1MM - $3MM - Most of team in place - Limited revenues - Not profitable - Primary risk:execution Expansion $3MM - $10MM - Meaningful revenues - Achieving profitability - Growing customer base - Primary risk: competition C L E A R S T O N E V E N T U R E P A R T N E R S

Stage/Characteristic Stage Investment Characteristics Mezzanine/ $10MM - $20MM - Significant revenues Bridge - Profitable - Industry player - IPO in 6-12 months - Risk much lower C L E A R S T O N E V E N T U R E P A R T N E R S

The Role of the VC ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Targeted Industries ,[object Object],[object Object],[object Object],[object Object],[object Object],Most of the $10 billion invested by VC’s in 1997 was concentrated in five industries. Why these? C L E A R S T O N E V E N T U R E P A R T N E R S

How Do VC’s Make Money? ,[object Object],[object Object],How do VC’s earn their income? Source of VC Income: C L E A R S T O N E V E N T U R E P A R T N E R S

What Do VC’s Want to See? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Venture capitalists tend to focus on five specific areas when evaluating a company: C L E A R S T O N E V E N T U R E P A R T N E R S

Management ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],The most important question: Has the team had experience and success in the same industry? C L E A R S T O N E V E N T U R E P A R T N E R S

Market ,[object Object],[object Object],[object Object],[object Object],[object Object],Can management demonstrate a thorough understanding of the marketplace dynamics? C L E A R S T O N E V E N T U R E P A R T N E R S

Competition ,[object Object],[object Object],[object Object],[object Object],Does management have a clear understanding of the competitive landscape? C L E A R S T O N E V E N T U R E P A R T N E R S

Business Economics ,[object Object],[object Object],[object Object],[object Object],[object Object],Does management have a deep understanding of the financial dynamics of the business and industry? C L E A R S T O N E V E N T U R E P A R T N E R S

Risk ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Does management recognize, accept, and have strategies to deal with key risks? C L E A R S T O N E V E N T U R E P A R T N E R S

The Venture Capital Process ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Business Plan “ Madam, enclosed please find the novel you commissioned. It is in two volumes. If I had had more time I could have written it in one.” Voltaire C L E A R S T O N E V E N T U R E P A R T N E R S

Business Plan ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],#1 objective of the the business plan: Get the VC interested in hearing more about the opportunity . C L E A R S T O N E V E N T U R E P A R T N E R S

Business Plan ,[object Object],[object Object],[object Object],Magic Numbers? C L E A R S T O N E V E N T U R E P A R T N E R S

Business Plan ,[object Object],[object Object],[object Object],[object Object],[object Object],Business plan phrases that ‘spook’ VC’s... C L E A R S T O N E V E N T U R E P A R T N E R S

First Meeting ,[object Object],[object Object],[object Object],[object Object],[object Object],‘ Skepticism’ might best describe the venture firm’s attitude in the first meeting. Don’t be alarmed by this. C L E A R S T O N E V E N T U R E P A R T N E R S

Second Meeting ,[object Object],[object Object],[object Object],[object Object],Getting to the second meeting is an important milestone. The team will now make its case to the entire partnership. C L E A R S T O N E V E N T U R E P A R T N E R S

What Went Wrong? - A Few Tips ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

What Went Wrong? - Getting Feedback ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Getting honest feedback can be challenging… C L E A R S T O N E V E N T U R E P A R T N E R S

Term Sheet ,[object Object],[object Object],[object Object],[object Object],[object Object],After the second meeting, the VC typically provides a term sheet to the entrepreneur. C L E A R S T O N E V E N T U R E P A R T N E R S

Term Sheet Conditions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],The term sheet is intended to embody the overall conditions of a business agreement. What’s covered? C L E A R S T O N E V E N T U R E P A R T N E R S

Due Diligence ,[object Object],[object Object],[object Object],[object Object],[object Object],The “heavy lifting” for the venture capitalist starts with the due diligence process . C L E A R S T O N E V E N T U R E P A R T N E R S

Negotiations ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Negotiations take place throughout the due diligence process. What is negotiable? C L E A R S T O N E V E N T U R E P A R T N E R S

The Business Plan ,[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Executive Summary ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],What should the executive summary address? C L E A R S T O N E V E N T U R E P A R T N E R S

Main Body ,[object Object],[object Object],[object Object],[object Object],Management C L E A R S T O N E V E N T U R E P A R T N E R S

Main Body ,[object Object],[object Object],[object Object],[object Object],Product/Technology/Service C L E A R S T O N E V E N T U R E P A R T N E R S

Main Body ,[object Object],[object Object],[object Object],[object Object],Marketplace C L E A R S T O N E V E N T U R E P A R T N E R S

Main Body ,[object Object],[object Object],[object Object],Strategy Key Questions to Address: C L E A R S T O N E V E N T U R E P A R T N E R S

Appendix ,[object Object],[object Object],[object Object],Not all business plans require an Appendix section, but it can be useful. What to include? C L E A R S T O N E V E N T U R E P A R T N E R S

Valuation Stage Criteria Methodology Range Seed - Mgmt. track record Comparables, $400K to $1.5MM - Market size/growth Whats the “going - Competition rate” in the region - Investment to date Start-up - Market size/growth Comparables $750K to $2.0MM - Working prototype? - Team complete? C L E A R S T O N E V E N T U R E P A R T N E R S

Valuation Stage Criteria Methodology Range Early - Market size/growth Comparables $1.5 to $5.0MM - Revenue run rate - Gross margin % - Performance to date Expansion - Revenue run rate - 1X sales Varies - Profitability ratios - EBIT multiple - Performance vs. plan C L E A R S T O N E V E N T U R E P A R T N E R S

Valuation Stage Criteria Methodology Range Mezzanine/ - Market share/size Multiples of Varies Bridge - IPO environment proxy companies - Performance Relative to plan C L E A R S T O N E V E N T U R E P A R T N E R S

Exit Strategies ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Secrets of Success? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],The Eight Commandments C L E A R S T O N E V E N T U R E P A R T N E R S

Odds of Getting a Deal Done? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

Odds of Getting a Deal Done? Hurdle Likelihood of Occurring 5. Complete the due diligence - 7 in 10 process satisfactorily 6. Get a term sheet agreed to - 8 in 10 in principle 7. Find co-investors - if necessary - 9.9 in 10 8. Get legal documentation done - 9 in 10 9. Fund the company EQUATES TO 1% C L E A R S T O N E V E N T U R E P A R T N E R S

Commonly Asked Questions ,[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

How do you Contact a VC? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],C L E A R S T O N E V E N T U R E P A R T N E R S

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Local Resources C L E A R S T O N E V E N T U R E P A R T N E R S

Venture Capital C L E A R S T O N E V E N T U R E P A R T N E R S

How Venture Capitalist (VC) Firms Screen Deals

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How Venture Capitalist (VC) Firms Screen Deals