Elements for Assessing/

Structuring Venture Capital

Financing

OVERVIEW

This is a high level breakdown of elements for venture financing including assessing an

opportunity and elements of structuring a deal.

The slides below highlight key terms/ concepts and provide additional resources

This is not meant to be an in-depth discussion/ analysis of each concept but instead

provide new entrepreneurs and investors a brief understanding of each topic and

concept for further study.

For any comments or additional resources please reach out to me at the contact below:

Nathan J Fink Email: NathanJFink@gmail.com

LinkedIn: www.linkedin.com/in/njfink

DEAL FUNDING ELEMENTS

Team: Management, gap analysis, board of directors

Customer: Customer value proposition, segmentation, acquisition costs

Product/ Technology: Minimum viable product, roadmap, intellectual property

Market: Segmentation, go-to-market, barrier to entry, growth

Competitors: Direct, indirect, point of differentiation

Financials: Financial statements, unit economics, cash burn, cash requirements

Risks: Organizational, operational, market, financial

Deal Structures: Convertible debt, preferred/ common equity, warrants, royalties

Term Sheet: Key terms

Valuation: Basic terms to valuations

Discount Rate: Risk free rate, systematic risk, value added, cash flow, liquidity Str

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TEAM

Resources

http://firstround.com/review/What-founders-need-to-know-about-building-management-teams-before-its-too-late/

http://www.entrepreneurship.org/KFSebook

http://www.entrepreneurship.org/Founders-School/Startup-Boards

Key Concepts

Management: Getting a well balanced

experienced team appropriate for the

company’s stage

Gap analysis: Understanding the team’s

current capabilities and what is missing to

achieve the next company milestones

Board of directors: Providing well balanced

and useful direction (technical and

commercial) where each member brings

something different to management.

Team is one of the most important

elements to a successful company

Finding a winning team that works well

together, develops sustainable solutions

and delivers them to market is often

elements of a promising company.

Thinking through a combination of

skills, experience, and culture fit are

important to getting the right team.

Hiring mistakes can cost distraction,

money, and time which are all costly

CUSTOMER

Key Concepts

Customer value proposition: Articulating

and delivering something the customer needs

that causes actions (purchase/usage)

Segmentation: Defining the different

customer groups by key qualities, attributes,

and size (E.g. need, geography, etc.)

Customer acquisition costs: The total cost

associated with finding, obtaining, and

retaining a customer (cost to acquire and

retain customers)

Resources

http://mjskok.com/resource/building-compelling-value-proposition

http://steveblank.com/2011/04/04/the-leanlaunch-pad-at-stanford-%E2%80%93-class-4-customer-hypotheses/

https://www.cbinsights.com/blog/misinterpretations-cltv-cac-saas-metrics/

Customer Analysis

Customer analysis is about finding and

determining what the customer needs

and how to deliver it in a unique and

sustainable way that’s difficult for

competition to replicate.

The key to successfully understanding

the customer is to continuously engage

the consumer and solicit feedback.

PRODUCT/ TECHNOLOGY

Key Concepts

Minimum viable product (MVP): A version

of a new product which allows a team to

collect the maximum amount of validated

learning about customers with the least effort

Roadmap: An outline for developing the

MVP into a commercially ready product

and/or product suite

Intellectual property: Patents, trademarks,

copyrights, trade secrets, know-how, etc.

Resources

http://theleanstartup.com/principles

http://www.ey.com/GL/en/Services/Strategic-Growth-Markets/Center-for-Entrepreneurship-and-Innovation---Intellectual-property-for-startups

Purpose of a product

The product/ technology is the

solution to the customer need and

requires customer engagement.

The Lean Startup Method

MARKET

Key Concepts

Segmentation: Breaking down a large market

into targeted/ defined subsets of customers

Go-to-market: An operational plan of how

to reach the targeted customer segments

Barriers to Entry: High Barriers to Entry:

“Good if you can get in” Low Barriers to

Entry: “Good if you can stay in”

Growth: Understanding the market trends

and health of the market participants

Resources

http://a16z.com/2015/03/06/go-to-market-bootcamp/

https://www.blueoceanstrategy.com/

https://hbr.org/1996/11/what-is-strategy

Managing Markets

Market analysis is able to direct efforts

and find near-term adopters and long-

term growth opportunities

Michael Porter 1996

COMPETITORS

Key Concepts

Direct competitor: Company with the same

products delivered to the same customers

Indirect competitor: Company with a

substitute product delivered to the same

customer

Point of differentiation: Key attributes that

are better or differentiated from what

competitors deliver to customers

Resources

http://steveblank.com/2013/11/08/a-new-way-to-look-at-competitors/

http://tomtunguz.com/ecosystem-vs-competition/

http://www.bothsidesofthetable.com/2010/12/26/talking-to-a-vc-about-your-competitors/

Competitor Analysis

Building an understanding of the broad

competitors and their capabilities are

important for market differentiation.

FINANCES Key Concepts

Financial statements: Income statement, balance sheet and cash flow statement

Unit economics: Understanding revenue, costs, and allocated overhead to deliver a single product to the customer

Cash burn: Gross cash burn is cash out per month excluding cash in, net cash burn is cash out per month including cash in

Cash requirement: Each company should look to raise/ have 12-24 months of cash on hand to help them achieve set milestones.

Resources

http://www.investopedia.com/university/financialstatements/

http://www.bothsidesofthetable.com/2014/09/28/what-is-the-right-burn-rate-at-a-startup-company/

http://blog.openviewpartners.com/refocusing-the-startup-burn-rate-debate/

Seven Line Financial Analysis

RISKS

Key Concepts

Organizational: Risk the team is not able to

fill gaps and deliver on their plans

Operational: Company specific risk around

the ability to deliver to customers and partners

Market: Broader high level shifts in the

market which a company can’t control but will

impact their business

Financial: Misalignment with expected

financial performance and actual financial

performance.

Resources

http://tomtunguz.com/breaking-down-a-typical-vcstartup-diligence-process/

Risks

Both investors and early employees will

work to reduce risks and find a strong

risk/ reward profile to fit their needs

DEAL STRUCTURES

Convertible Note: Debt security that contains a predefined converted terms. Gets paid before equity players

Preferred Equity: Senior equity that has preferential terms over common equity. Gets paid before common equity

Common Equity: Equity that doesn’t contain any preferences and is paid last. Typically founders and some employees hold common equity in the capitalization table

Warrants: Security issued by the company providing the right to purchase securities at a specified price and time.

Royalties: Payment from the sale or a product/ service that doesn’t include transfer of ownership

Capitalization Table: Detail of company ownership

Resources

http://www.startupcompanylawyer.com/category/convertible-note-bridge-financing/

http://www.bothsidesofthetable.com/2010/08/30/is-convertible-debt-preferable-to-equity/

TERM SHEET Key terms

Pre-money, post money, liquidation preference, board of directors, protective provisions, drag along, anti-dilution, pay-to-play, dividends, redemption rights, conversion, conditions precedent to financing, vesting, right of first refusal, voting rights, employee stock option pool, indemnification, assignment, co-sale agreement, etc.

Understanding the terms in detail and how these terms can impact future rounds/ different parties is important before signing

Resources

http://nvca.org/resources/model-legal-documents/

http://feld.com/archives/2005/08/term-sheet-series-wrap-up.html

Term-Sheet

A term sheet is issued by investors to a

company and outlines the terms of the

deal (e.g. price, control, etc.)

VALUATION

Post-money = Pre-money + Investment

Exit value = Multiple * Exit year metric

Required return factor = (1+ Discount Rate)Years to harvest

Final equity percentage = (Required return factor * Investment)/ Exit value

Retention percentage = 100% - Future expected dilution of ownership

Retention percentage = Final percentage/round percentage

Final percentage = (Required return * Investment)/Exit Value

New shares = (Round percentage/(100%-Round percentage))* Old shares

Exit share price = Exit value/final total shares

Resources

https://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm#

http://pitchbook.com/news/reports/1h-2015-vc-valuations-trends-report

DISCOUNT RATES Risk Free Rate: Rate earned on an investment with

no default risk. This rate is comprised of an expected

inflation component and a real return component.

Systematic Risk Premium: Capital Asset Pricing

Model (CAPM) defines this as the sensitivity of the

return to changes in the overall market. Any other

risk can be diversified away.

Value Added: Venture Capitalists are “active”

investors adding value to the their investments

through assistance in managing, recruiting, and

financing and thus demand additional return in

exchange for services rendered.

Cash Flow Adjustment: Difference between the

forecasted cash flow and expected cash flow. A high

discount rate is used as a “haircut” to inflated

entrepreneurial forecasts.

Liquidity Premium: Almost all Venture Capital

investments are “illiquid” securities. Securities of this

type often sell at a discount of 50 % under those of

comparable marketable or liquid securities.

Seed Stage: Concept Exploration: 80% and Up

Start Up Stage: Commencing Operations: 50 - 70%

First Stage: Unprofitable Going Concern: 40 - 60%

Second Stage: Growth of (Profitable) Going Concern: 30 -50%

Bridge: Carry through IPO: 20 - 35%