Raising Venture Capital for the Serious

Entrepreneur

Book by Dermot Berkery

GoogleBooks: XXX

Creating a set of "stepping stones:

Step 1

Step 2

Step 3

Step 4

Step 5

Milestone 1Milestone 2Milestone 3

Milestone 4Milestone 5Milestone 6

Milestone 7Milestone 8

Milestone 9Milestone 10Milestone 11

Milestone 12Milestone 13Milestone 14

Main Path and Alternatives:

Step 1

Step 2

Step 3

Step 4

Step 5

Step 2.1

Step 2.2

Step 2.3

Step 5.1

Step 5.2

Step 5.3

Worst Case Szenario:

Step 1Step 2

reached?

Yes

No

Abandon the project

Restructuring the company

"bridging" to step 1

proceed

accelerate

partnering

Large and Small Companies:

innovationbreakthrough products and services

manufacturing distribution

incremental product and service improvement

core competence

of small companies

core competence of large companies

"J" Cash Curve of a Busniess:

0

cumulative generated

cash($)

time (years)

operating cash flow break even

cash flow break even

start-upbiotech company(ultimately sold)

start-up company

total investment

required

total investment

required

start-up companystart-up biotech company (ultimately sold)

The seven-year marathon...

It takes at least five to seven years to build a business.There are three to four common financing stages in the development of a businessThe really big hits in a venture capital portfolio tend to be the ones held onto for seven to ten years.

Activities in a new business that absorb capital...

Capital AssetsProduct development costsLeadership and administrationWorking capital (Working Capital = Current Assets − Current Liabilities)Sales ramp-up financing

Evidence to include in a business plan:

Potential for accelerated growth in a big, accessible market An achievable position of market power - a sustainable, differentiated product or service propositionCapable, ambitious, trustworthy management

Evidence for opportunity...

Tools and arguments

"ROI-spreadsheet": Focus on the economic benefits of the company's product or service: What is the company's superlative values proposition to customers and why is the company better placed than the competition to deliver this value?Sustainable and defensible position (e.g. patents, know-how, first-to-market,...) to allow market power to be exploitedVery high gross margins (greater than 70%)

Balanced team with deep domain knowledge and prior experiences and records

Evidence for opportunity...

Evidence to include in a business plan:

Plausible, value-enhancing stepping stonesRealistic valuation to allow the investor to earn a sizable multiplePromising exit possibilities

Evidence for a good deal...

Tools and arguments:

Outline of milestones / stepping stones and Alternative sets of milestonespossibility of an initial public offering (IPO) exit strategy

Evidence for a good deal...

1. Fast growth2. High gross margins3. Low capital intensity

Companies that have the potential to provide very high returns on investment share three simple factors:

How venture capitalists value early-stage companies

1. They look at the long-term and short-term future to identify possible value

2. They discount the future values back using multiples

Long-term and short-term future value

short-term future value = value at the next financing round

investors will see a higher company value in the next round (in 12-18 months) to be compensated for the risksvaluation method: find examples of similar companies in other sectors

long-term future value = maximum valuation of the company = "exit value"

only possible if the company stays independent - i.e. an IPO is possible and plausible to explainvaluation method: compare with similar company

Discounting the future values

First Round Second Round

Pre-IPO final (max.) value

10 to 20 times

6 to 8 times

3 to 5 times

Why big companies buy small companies

Small companies are better at innovation than big companies!

Distribution Benefit

small company (stand alone)

small company (acquired by a big one)

revenue 10$ (100 %) 40$ (100 %)

development costs -4$ (-40 %) -4$ (-10 %)

administration costs -2$ (-20 %) -0,8$ (-2 %)

sales and distribution costs -6$ (-60%) 0$ (0 %)net profit -2$ (-20%) -35,2$ (88%)