venture capital analysis prof. dell, spring 2011
TRANSCRIPT
Venture Capital Analysis
Prof. Dell, Spring 2011
Stage Sources Form SizeSeed / Angel Friends & Family, SBC Common / Loan $100-2MM
Venture Capital Institutional Firms Preferred Stock $1-5MM
Private Equity Institutional Firms Preferred Stock $10-50MMGrowth Equity Re-Cap
Stages of Company Financing
Seed/Angel Venture Capital Private EquityGrowth Equity
IPO PIPE Icahn ;)
3
Private Equity Pipeline and Diligence Process
Source: NVCA, HBS materials
100 Business Plans
Initial Diligence• Initial meeting with
management• Total Addressable
Market (TAM)• Competitive
landscape• Barriers to entry
(patented IP, head start on R&D, founder/ management expertise)
• Initial review of projections
10 Promising Opportunities
Intensive Due Diligence• In-depth meetings with
management• Analysis of potential returns based
on industry comparables and probability of successful exit
• Reference calls with customers, industry experts, management/board contacts
• Modeling of financials
1 Investment
PartnerDealflow
IndustryEvents
FounderCold-Call
Private Equity investments result from robust pipeline and rigorous filtering process:
Precisely what is the product or service you are offering?
Precisely what is the market you are targeting?
Who are the competitors in this market?
What is the competitive advantage of your offering andis it sustainable?
What are the economics of the business opportunity?
How will the public markets value this business?
Venture Capital: 6 Simple Questions
WHAT’s MISSING FROM THIS LIST??????
Venture Capital: 6 Simple Questions
June 2005
7 employees
850 customers paying customers
75 Handbag Merchant Relationships
Run rate of $85,000 per month
$400k in angel funding
And a big idea……NetFlix for Handbags
BagBorrowOrSteal.com
BagBorrowOrSteal.com
What questions would you have for BBOS?
BagBorrowOrSteal.com
Team
The Economics
ValueProposition
Technology
Competition
VC =
Venture Capital: Dynamic Fit Analysis
Sales/Marketing
Partners
MarketOpportunity
Do you want to ‘be’ in this business?
What is exciting about the opportunity?
Is the market new and rapidly growing?
Lots of Questions: People / Management
How well do these people work together?How well suited are they to compete in the market?How effective are they at getting to the right answer?Assess management’s judgment.
Where do they sit within this industry?How well does management understand the marketplace?What are the distinctive competencies of management?Does management have the right characteristics?What competencies are missing?How intense is the management team?
Track record, done it before, know how to win, refuses not to win.Assess their strategy, strengths, and weaknesses.How are their references?How will they treat their investors, their partners, their customers?How well does the CEO understand the details of the business?How well does the team understand: integrity, honest, commitment?
Lots of Questions: People / Management
Is there a deep pool of people in this market who can execute on the business?
How hard will it be to recruit in this market?
- Senior Management- Engineering- Marketing- Sales- Business Development
Lots of Questions: Market
How big is the market?- How big is the handbag market?
How fast is it growing?
Is that the right market to look at?
Rental Market?
Used Goods?
Seasonality?
Market characteristics: robust competition, litigious
Lots of Questions: Value Proposition
Do customers want this?
Is it a PUSH or PULL sale?
Are the dogs eating the dog food?
How happy are the customers?
How loyal?
How unique is this value proposition?
Lots of Questions: Go to Market Strategy
How can you reach the customer?
What relationships are necessary to effectively reach the customer?
How realistic is it that you’ll get them?
How much control to other companies have over the wallet of our customer?
How fickle are the customers?
How much can you lock your customers into your business?
Lots of Questions: Unit Economics
Does the core business model make $?
- How much does it cost to make what you sell?- How much can you sell it for?- How much does it cost to reach the customer?- How many customers are there who will buy this?- How much is left over after all other costs?
What are the economics of the business?
- Cost of customer acquisition- Lifetime value of the customer- Cost of bag acquisition- Lifetime value of the bag- Value of bag at disposition
Lots of Questions: Competitors
Who are the competitors?
What are the substitutes?
What are the barriers to entry?
Who are likely entrants into the market?
If there are only likely to be a few winners, can we be one of them?
Lots of Questions: Barriers to Entry
What are the barriers to entry?
Is the ‘process’ patentable?
How defensible is the business?
- Against who?- Who are likely entrants into the market?
Lots of Questions: Technology
How difficult is it to build what they’ve built?
How unique is it?
How defensible?
How well can it scale?
How robust is it?
Was it built on standards? Or is it proprietary?
Lots of Questions: Partners
What partnerships are key to success?
How critical are they for your success?
Are you dependent on them?
Can they put you out of business?
What is the bargaining power of suppliers?
What is the bargaining power of buyers?
Lots of Questions: Financing Requirements & Exit
How much will it cost to finance the business to cash flow positive?
How well thought out is management’s financing plan?
At what point will you know the economics of the business ‘works’?
How much ownership will I have after all the rounds of financing are done?
Is this company a ‘take public’ kind of opportunity?
How will Wall Street view the cash flow generated by the business?
What kind of operating margins can we achieve?
Who is likely to buy this business if I cant access the public market?
At what multiple?
Venture Capital: Decision Tree
Screen
Market/Strategic Analysis
Project Origination
Technology Analysis
Business ModelSuccess Factors
Decision
Management Assessment
Expert Review
Expert Review
Analyze Need for Syndicate
Fund
Decision Decision
Decision
No
Yes
Yes
Yes
YesYes
Yes
Yes
No
No
No
DecisionYes
No
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Team
The Economics
ValueProposition
Technology
Competition
VC =
All the Pieces Need to Work & Fit Together
Sales/Marketing
Partners
MarketOpportunity
Team
The Economics
ValueProposition
Technology
Competition
VC =
Venture Capital: Dynamic Fit Analysis
Sales/Marketing
Partners
MarketOpportunity
Product Marketing as a
Proxy for Venture Capital
If you think carefully about what venture capitalists look for, you’ll
note that it’s not that dissimilar from the ever important role of PRODUCT MARKETING
Product marketing in a business addresses four important strategic questions:
What products will be offered (i.e., the breadth and depth of the product line)?
Who will be the target customers (i.e., the boundaries of the market segments to be served)?
How will the products reach those customers (i.e., the distribution channels to be used)?
Why will customers prefer our products to those of competitors (i.e., the distinctive attributes and value to be provided)?
What does the product need to do?
What does it need to have to differentiate from the competition?
Who is going to buy it?
How much will they pay for it?
How can we sell it / position it in the market?