BIOE 4410 – Senior DesignVenture Capital

K. LangA. Pinkie04 Nov 2013

Venture Capitalism is a way for businesses or individuals to obtain money and experience for a business via the private equity of Venture Capitalists

Venture Capitalists: individuals willing to invest in a start up

Looking for potential of high return, often technological companies

Raise money from institutional investors, wealthy individuals or private and public entities

Money raised put into a fund, $50 million $2 billionCan offer expertise with finances and management

What is VENTURE CAPITAL?

VENTURE CAPITAL

Some of the first Venture Capitalists include the following:

• Vanderbilts - Railroads• Whitneys - Thoroughbred horseracing• Rockefellers - Oil business• Warburgs - physics, arts, pharmacology, physiology,

finance, private equity, and philanthropy

The Small Business Investment Act of 1958 Officially allowed for the Small Business

Administration to license private "Small Business Investment Companies”

Allowed for creation of venture capital firms

History of Venture Capital

1960s and 1970s, VC firms focused their investment on starting and

expanding companies in electronic, medical and data-processing industries

1980s Companies post losses for first time The market for initial public offerings cooled in the

mid-1980s before collapsing after the stock market crash in 1987

The Small Business Innovation Development Act (1982) Established the SBIR/STTR programs

History of Venture Capital

VENTURE CAPITAL

The late 1990s were a boom time for VC, large returns with technology

Benefited from a surge of interest in the Internet and computer technologies

In the 2000s VC funding had spread widely through the medical field

Early disease detection and prevention

NASDAQ Composite Index

History of Venture Capital

2010 Investments in Industry (In Millions of Dollars)

Other

Healthcare Services

Electronic/Instrumentation

Consumer Products and Service

Networking and Equipment

Semiconductors

IT services

Software

Biotechnology

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93.8133141.4152.4171.1175.2205.7245.8

321.3413.9

755.41034.6

1282.21296.1

Berkeley Entrepreneurs Forum Shaking the MoneyTree presentation: http://entrepreneurship.berkeley.edu/main/index.html

Venture Capital: The Numbers

VENTURE CAPITAL

New companies are small with little experience and VC’s bring capital and financial expertise

Seed Funding Early prototypes and proof of concept

Start-up Funding (Often VC Funding) Making investments in future rounds

WHY VENTURE CAPITAL?

VENTURE CAPITAL

Availability Banks usually do not offer loans to startups

without strict provisions to reduce the risk Venture capital reduces overall risk of

investment because of the pool of funding Interest

Why Not a Bank Loan?

SOURCES

Of V.C.

Friends & Family

Angels

Venture Capital

Government Grants

Banks

Corporate Investment

Public Investors

Customers

• Members of your personal network

• Have adequate means to make an investment

Friends & Family

Angels

Venture Capital Corporate

• Experienced investors using own wealth

• Professional investment managers

• Fund profile set up with industry and horizon time

• Made by large companies for strategic reasons

1. Purchase equity supporting R&D or licensing agreement

2. Traditional venture investments

Sources of Venture Capital

Banks

Public Investors

Gov’t Grants

Customers

• Commericial/State institutes providing financial services

• Loans and such

• May be awarded to companies that meet the size standards established by the Small Business Administration (SBA)

• General public can invest by buying shares of the company

• For established companies

• Customers make direct investment in the R&D of new products or services

Sources of Venture Capital

SBIRSmall Business Innovation Research

• Funding given to small technology companies or individual innovators who form a company

Government Grants• $2+ billion available each

year to fund R&D at small companies (<500 employees)

• Higher rate of success for receiving funding (9-12%)

• 3 Stages for different steps of funding

STTRSmall Business Technology Transfer

• Funding given to small companies working in collaboration with a non-profit research institution (ie. university)

GOVERNMENT GRANTS

Zenios, Makower, and Yock. Biodesign: The Processing of Innovating Medical Technologies. Ann Arbor, Michigan: Edwards Brothers Inc., 2010.

SOURCE OF FUNDING ADVANTAGES DISADVANATGES

Family and Friends • Least expensive funding source• Flexible alternative for early-stage funding

• Limited expertise• Not able to participate in subsequent rounds of funding

Angel Investors • Moderately priced, early-stage funding source • Take on considerable risk• Exercise less control than venture capitalists and corporate money• Act more quickly than venture capitalists

• Limited expertise• Not able to invest in subsequent rounds• Negatively affect terms and level of control by company’s perspective• Multiple angels to meet funding needs

Venture Capitalists • Valuable experience to share with innovators• Provide access to vast network of contacts• Ablility to take on considerable risk• Participate in multiple rounds of funding

• Exercise considerable control over venture’s direction, management, and exit• Require considerable share of ownership in exchange for investment• Expect high returns or other terms not favorable to company

Corporate Investment

• Lead to meaningful product/project synergies• Provide accesss to valuable resources• Less expensive than venture capitalists funding• Lend to young company’s credibility• Provide company with a “built-in” exit strategy

• Limited value in return for building business• Conflicts with corporate investors• Issues with intellectual property ownership• Limit value realized from exit stragety if corporate investor has “right of first refusal”

Pros/Cons of Funding

Pros/Cons of Funding

SOURCE OF FUNDING ADVANTAGES DISADVANATGES

Customers • Extremely inexpensive funding• Potential for young company’s credibility• Provide valuable market-based insights revelant to product development

•Lead to conflicts if company seeks to sell the innovation to customer’s competitor• Customer seeks to limit way in which innovation is marketed to match its best interest

Government Grants • Inexpensive funding • Founders not require to part with any equity in the company• No influence over any business decisions• Strengthen a young company’s credibility

•Highly competitive• High expectations based on rigorousness of research performed• Lengthy funding review cycles• Funding capped at $850,000 per project

Banks • Access to funds usually does not require the company to share ownership• No influence over any business decisions• Interest payments are tax deductibles• Secured relatively quickly and used to help bridge short-term financing gaps

• Business assets can be used as collateral• Affect cash flow as regular payments of principal and interest must be made• Start-ups pay a premium on their loans• Start-ups may have difficuilty getting loans if no revenue or tradeable assests

Zenios, Makower, and Yock. Biodesign: The Processing of Innovating Medical Technologies. Ann Arbor, Michigan: Edwards Brothers Inc., 2010.

VENTURE CAPITAL

Does your company fit the VC fund profile?

Research & find your target Best firm partner for your idea • Do they have a history of supporting

ideas like yours?

What to do: Have someone introduce you (e.g.

LinkedIn) Set up a meeting with the investors NOT send a “cold” email

How to Obtain VC

Concise

Know

Who

Ret

urn W

hy

$$ Needs

Potential RewardsHow do investors get their reward?

Tailor Your SpeechWho are you speaking to? Know your audience.

30 secMake them want to hear more.

BetterWhat does your idea/product fulfill?

How Much?How much capital do you need?

The ‘Elevator Pitch’

VENTURE CAPITAL

Once Elevator Pitch worked, business plan is used to provide the detailed planInvestors often check financials first and then assumptions page

The business plan answers all the questions VCs have before an investment is made

The BUSINESS PLAN

VENTURE CAPITAL

PartneringTwo entities share responsibility for the development or commercialization of an idea or invention

LicensingTransfer of an idea or invention from the innovator to a licensee in exchange for ongoing royalties and/or other payments

Sale/AcquisitionInnovator chooses to sell an idea outright, completely relinquishing control to acquirer [2]

ALTERNATIVE PATHWAYS

THANK YOU!!!