venture capital outlook
TRANSCRIPT
Venture Capitalist’s an Overview
1
“VC” - Venture Capitalist is a speculator who is looking at high-risk, high-return investment in support of business creation and growth.
Funding
2
Pre - Venture Capital Funding ProcessConcept
VC
Re
venu
e
FoundersAngel Financing
Venture Capital Firms & Corporate Investors
Time
Gestation
Inception
Prototype
Roll Out
Rapid Growth
Expansion
Maturity
BanksIPO Acquisition
Typical cycle of a “VC” funding
3
Venture Capital Investment Stages
Seed Stage
AngelsInvestors Early Stage
Series A
Series B
Series C
Mezzanine
Amou
nt o
f Mon
ey
Stage of Startups
First Commercial Deals
Concept/ Research
Business Planning
Product Development
Fully Operational
Expansion Ready for IPO
The financing of the initial product development
It is the second stage in the venture capital cycle. Here in the entrepreneur has moved closer towards establishment of a going concern
It is also called first stage capital which is provided to entrepreneur who has a proven product
It is the capital provided for marketing and meeting the growing working capital needs of an enterprise that has commenced the production but does not have positive cash flows . In this stage the risk factor for a VC is high.
This stage is for an established commercial production and basic marketing set-up, typically for market expansion, acquisition, product development etc, this stage is a significantly high risk stage.
In this stage Market expansion, acquisition & product development for profit making company will be the goal of the company, this is the medium risk stage.
This is the final stage for a VC participation, in this stage the company will facilitate itself for a public issue, this is the low risk stage.
Stages of a VC funding
4
Pre - Venture Capital Funding Process
Idea or Concept
Patent and Trademark Research
Technical feasibility
studies
Competition Review
Initial Venture Planning (Report)
Entrepreneur Characteristic
Business Model
Reviews
Revenue Model
Reviews
Market Studies
Research
Market Characteristic
Competition
Technology Breakthrough
Pricing Studies
Business Plan
Executive Summary
Power Point Business Plan
Elevator Speech
Due Diligence
Valuation Models
First Chicago Methods
Discounted Cash Flow
Market Value Research
Investment Stage
Comparison
5
Process of different funding stages ………… Exit stage
Board of directors liquidity event decision tree
MergerSeed Capital
Round
Private Placement Reg
D
Friends, Family & 300,000+
Incubator Selection
Plan to complete
prototype/service
Angel Round
Board of Advisors and
Directors
Develop personal
contact list
Solicit Advisor Recommendati
on
Locate Local Associations of
Angels
Break-Even Plan
First Venture Capital Round
Venture Fund Research for a
fit
Portfolio Company
Comparisons
Angel Recommendati
on
Set Valuation Target
Term Sheet Comparisons
Second Round Financing
Venture Fund Research for a
fit
Portfolio Company
comparisons
First Round Recommendati
ons
Set Valuation Target
Term Sheet Comparisons
Ex
it P
roc
es
s
Valuation comparison
IPO or Merger
Decision tree
IPO Determine
Value
IPO Vs Merger
Shareholder Value
Option Values
Build Value Vs Liquidity Event
Tax Analysis
Building Block or First Move
Investment Banker Review
M & A Firm Selection
Merger Candidates
Check Current IPO Markets
Target Candidate Screening
Acquisition Candidates to Grow for IPO
Determine Financial
Needs
Determine Value &
Negotiate Deal Structure
Poll Investors BOD & BOA for best fit
Select (3+) Underwriters
Road Show
6
Synergistic combination of your distinctive and reproducible capabilities
TANGIBLE Intellectual property rights Exclusive licenses Statutory monopolies
INTANGIBLE Strong brands Leadership Tacit knowledge & skills Teamwork Organizational culture Business processes Partnerships
Distinctive Capabilities (Cannot be replicated by competitors)
Technical capabilitiesFinancial capabilitiesMarketing capabilitiesExplicit knowledgeNon-exclusive licenses
Reproducible Capabilities(can be replicated by competitors)
Venture process selection criteria
Business founders must assume that everything written in their
business plan will be checked by prospective investors
When reading a business plan they look for reasons such as
traps, oversights, oversimplifications, hidden
competitors, and upside opportunities.
Their business plan evaluation criteria, in order of importance,
include: Key personnel: people/management that can
get the job done
A large, rapidly expanding market and the company's
marketing strategy a unique brilliant idea or technology that
can be commercialized and protected a business strategy that has a strong sustainable
competitive advantage
7
1 2
5
3 4
Advantages
Disadvantages
Angel’s Characteristics Value-adding Geographically dispersed More permissive investors
Investment Characteristics Seek smaller deals Prefer start-ups & early stage Invest in all industry sectors Like high-tech firms
Added Bonuses Leveraging effect Give loan guarantees No high fees
Little follow-on money Want a say in firm Could turn out to
be “devils”
No national reputation
leverage
Potential Pros and Cons of Business Angel Investments
Business Angels
8
Sources of funds for a start up……
First Round Second Round Third Round0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
70%
10%18%
5%
8%
8%
32%25%
7%
15%
10%
7%
15%
17%
3%10%
20%10%
10%
Public stock issuesCommercial banksNon Financial CorpsVenture CapitalistsBusiness AngelsFamily & FriendsPersonal Savings
9
Potential Investor Returns, Timing & Cost Of Capital
Cash Returns, Investment Periods, and Rates of Return
ReturnInvestment Period
2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs 8 yrs
2 x 41.4% 26.0% 18.9% 14.9% 12.2% 10.4% 9.1%
3 x 73.2% 44.2% 31.6% 24.6% 20.1% 17.0% 14.7%
4 x 100.0% 58.7% 41.4% 32.0% 26.0% 21.9% 18.9%
5 x 123.6% 71.0% 49.5% 38.0% 30.8% 25.8% 22.3%
6 x 144.9% 81.7% 56.5% 43.1% 34.8% 29.2% 25.1%
7 x 164.6% 91.3% 62.7% 47.6% 38.3% 32.0% 27.5%
8 x 182.9% 100.0% 68.2% 51.6% 41.4% 34.6% 29.7%
9 x 200.0% 108.0% 73.2% 55.2% 44.2% 36.9% 31.6%
10 x 216.2% 115.4% 77.8% 58.5% 46.8% 38.9% 33.4%
11 x 231.7% 122.4% 82.1% 61.5% 49.1% 40.9% 35.0%
12 x 246.4% 128.9% 86.1% 64.4% 51.3% 42.6% 36.4%
10
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
Profit (In Millions) for last four quarters
Top ten companies in silicon valley who have made profits in the year 2010 – these companies were majorly funded by top VC’s
Voted # 1 Brand in the World overtaking Google in
the recent past
11
Top segments in silicon valley who have made profits in the year 2010 – these companies are majorly funded by top VC’s, Computer peripherals have high sales and high profits but when Sales to net profit ration is compared Bio medical stands out because the sales to profit ration is 28% and computer peripherals at 13%
Computers, perip
herals
Semiconducto
r
Software
Networking, telecommunica
tions
Internet service
s
Non-Technology
Semiconducto
r manufactu
ring equipment
Electronic c
ontract s
ervices
Bio Medica
l
Instruments,
other high technology
Storage$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00Sales (Billions) Net profit (Billions)
Sale
s (B
illio
n)
Net
Pro
fit (B
illio
n)
Sectors Sales (Billions) Net profit (Billions) Net profit ratioComputers, peripherals $206.15 $25.82 13%Semiconductor $80.08 $16.16 20%Software $62.54 $10.40 17%Networking, telecommunications $56.41 $8.40 15%Internet services $49.03 $11.80 24%Non-Technology $18.48 $1.81 10%Semiconductor manufacturing equipment $17.79 $2.87 16%Electronic contract services $15.68 $0.21 1%Bio Medical $13.95 $3.89 28%Instruments, other high technology $13.26 $1.42 11%Storage $10.49 $1.95 19%Total $543.86 $84.73
Net profit ratio 28%
Net profit ratio 13%
12
Com
pute
rs, p
erip
hera
lsSo
ftwar
eIn
tern
et se
rvice
sSe
mico
nduc
tor
Net
wor
king
, tel
ecom
mun
icatio
nsBi
o M
edica
lN
on-T
echn
olog
y
Inst
rum
ents
, oth
er h
igh
tech
nolo
gy
Sem
icond
ucto
r man
ufac
turin
g eq
uipm
ent
Stor
age
Elec
tron
ic co
ntra
ct se
rvice
s$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
Market Capitalization
Bio
Med
ical
Inte
rnet
serv
ices
Stor
age
Sem
icond
ucto
r man
ufac
turin
g eq
uipm
ent
Com
pute
rs, p
erip
hera
lsN
etw
orki
ng, t
elec
omm
unica
tions
Sem
icond
ucto
rIn
stru
men
ts, o
ther
hig
h te
chno
logy
Softw
are
Non
-Tec
hnol
ogy
Elec
tron
ic co
ntra
ct se
rvice
s
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
Sales per employee
Companies who have more profits have huge market capitalization but Bio medical sector has generated high sales per employees even though their profit and market capitalization is low, this is because these companies are more based on innovative products.
13
Bottom ten companies in silicon valley who have made losses in the year 2010 – these companies are majorly funded by top VC’s, the trend shows that these products have a lot of competition and the margins in these products are really low, piracy is also one of the major factors for attaining huge losses in Entertainment software industry
Wire
less netw
orking pro
ducts
Broadband ch
ips
TV servi
ces,
digital r
ecord
ers
Entertainment s
oftware
$(450.00)
$(400.00)
$(350.00)
$(300.00)
$(250.00)
$(200.00)
$(150.00)
$(100.00)
$(50.00)
$-
Sum of losses (In Millions) for last four quarters
14
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
Market value of the company (in millions)
Technology companies lead pack of market capitalization, it also clearly shows that high profit margin companies have high market capitalization.
15
Number of venture firms expected to decline in traditional markets, expected to grow in emerging markets
Brazil
Canada
China
France
Germany
India
Israel
United kingdom
United States
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
0.3
0.48
0.06
0.21
0.1
0.22
0.04
68%
28%
51%
11%
22%
65%
3%
6%
17%
6%
10%
8%
4%
47%
1%
72%
61%
9%
60%
59%
68%
19%
11%
20%
10%
24%
Increase Significantly (More than 30%) Increasly moderatly (1% to 30%) Remain the same Decreased slightly (1% to 30%)Decrease Significantly (More than 30%)
Expected Growth in Next 5 Years – Number of VC Firms
• Brazil, China, India respondents see an increase in number of VC firms• Canada, France, Germany, Israel, UK and U.S. respondents see a decrease in number of VC firms
16
Venture capital available for investment in home country over the next five years
Expected Growth in Next 5 Years– $$ Available for VC Investment
Brazil
Canada
China
France
Germany
India
Isreal
United kingdom
United States
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
0.51
0.700000000000001
0.41
0.1
0.02
0.01
49%
50%
30%
22%
39%
50%
31%
17%
6%
11%
17%
6%
10%
11%
33%
61%
44%
3%
70%
61%
57%
11%
6%
10%
6%
14%
Increase Significantly (More than 30%) Increasly moderatly (1% to 30%) Remain the same Decreased slightly (1% to 30%)Decrease Significantly (More than 30%)
• Brazil, China, India respondents see an increase• Canada and Germany respondents were split with approximately half expecting a increase and half expecting a decrease• France, Israel, UK and U.S. respondents see a decrease
17
Telecommunications
Semiconductors including electronics
Software
New media/Social Networking
Biopharmaceuticals
Medical device and Equipment
Clean technology
Consumer business
Finance services
Healthcare services
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
27%
17%
36%
56%
42%
51%
80%
51%
39%
63%
48%
44%
52%
34%
40%
37%
17%
41%
47%
30%
25%
39%
12%
10%
18%
13%
3%
8%
14%
6%
Increase Remain the same Decrease
Investment by sector in the next 5 years
• Clean technologies and healthcare services are the hottest industries• Semiconductor and telecommunication see the biggest slow down in future investments
18
Industry investment highlights by country
Top 2 industry sectors countries will be increasing their investment in
Country #1 Increased Investment Sector #2 Increased Investment Sector
Brazil Consumer Business – 92% Clean Technologies – 85%
Canada Clean Technologies – 67% New media/social networking – 50%
China Clean Technologies – 95% Healthcare Services – 92%
France Clean Technologies – 88% Health care Services – 69%
Germany Clean Technologies – 71% New media/social networking – 64%
India Clean Technologies – 90% Healthcare Services – 89%
Israel New media/social networking – 86% Medical device and equipment -67%
United Kingdom Clean Technologies – 85% Healthcare Services – 62%
U.S. Clean Technologies – 72% New media/social networking – 58%
19
42% of the VC’s felt that U.S. remain a dominant force in the technology
industry in light of increased competition in the venture capital industry
54% of the VC’s felt that they are very important for the growth of
US economy
2010 Trivia
2006 2007 2008 2009 2010 20110
20
40
60
80
100
57
86
612
72
14
Companies converted from VC to IPO
Limited Partners expected to shift larger allocations to emerging markets
Cross border investing increases expected to plateau
Political, regulatory and market environments causing impediments to venture capital investing
Despite challenges, VCs remain optimistic about quality of deal flow
Emerging marketsTraditional markets$ $
VC’s
20
1st Quarter
21
$1,483$1,265
$1,618
$1,253
$2,543224 221
233 233
272
Q4'09 Q1'10 Q2'10 Q3'10 Q4'10
Internet VC Investment and Deal Volume Trend
$ Funding # of Deals
www.cbinsights.com
Last Five Quarters
1% 1% 2% 1% 1%
22% 19% 20%31%
12%
28% 33%19%
27%
16%
28% 24%40%
23%
19%
16%10%
19% 7%
27%
5%13%
1%10%
25%
Q4'09 Q1'10 Q2'10 Q3'10 Q4'10
Share of Internet VC by Series - Dollars of Funding
Seed Series A Series B Series C Series D Series E +
www.cbinsights.com
Last Five Quarters
26%
24%
6%5%
3%
3%
3%2%
2%2% 2%
1%
2%
1%18%
VC Investment ($) in Internet by Sub-Industry, Q410
DiscountSocialAdvertising, Sales & MarketingBus. Intelligence, Analytics & Performance MgmtVideoGamingData StorageData & Document ManagementHealth & WellnessConferencing & CommunicationInformation Providers & PortalseCommerce enablementTravel (internet)Content ManagementAll Other
www.cbinsights.com
Venture capital investment in US - InternetInternet VC trends & deal volume trends Share of internet VC by series
VC investment in internet industry 2010
22
Top 5 acquired & venture capital funding deals in Internet industry at 2010
Company Bidder Bid value($ US million) Business description
CyberSource Corp. Visa Inc. $1,964 Provides electronic payment processing services for Web, call center, and POS environments
VeriSign Inc.-Identity Business Symantec Corp. $1,280 The identity and authentication business of VeriSign Inc., provides
Internet security services
Playdom Inc. Walt Disney Co $763 Develops social gaming software used in social networking sites such as Facebook
AdMob Inc. Google Inc. $750 Provides marketing solution services for discovery, branding and monetization on the mobile web
Internet Brands, Inc. Hellman & Friedman Capital $640 Provides Internet media services to large ticket consumer purchases
Company Venture Capitalist Funding
($ US million)
Business description
LivingSocialUS Venture Partners, Grotech Ventures, Revolution , Lightspeed Venture Partners, Amazon
$227 LivingSocial is the social commerce leader behind LivingSocial Deals, a group buying program that invites people and their friends to save up to 90 percent each day at their favorite restaurants, spas, sporting events, hotels and other local attractions in major cities.
Twitter Kleiner Perkins Caufield & Byers $200 Twitter is a social networking and micro-blogging service that allows users to post their latest updates.
GrouponDigital Sky Technologies, Battery Ventures, Accel Partners, New Enterprise Associates
$135 Groupon features a daily deal on the best stuff to do, see, eat, and buy in more than 565 cities around the world.
Whale Shark Media Austin Ventures, Norwest Venture Partners, Adams Street Partners $90 WhaleShark Media, Inc. is the world’s leading marketplace for coupons
and deals.
FleetMaticsInstitutional Venture Partners, Investcorp Technology Partners, New World Ventures
$68 FleetMatics is the leading software provider of GPS-based fleet management systems.
Acqu
ired
deal
sVe
ntur
e Ca
pita
l fun
ding
dea
ls
Appendix
23
Some companies will create increases in share value faster than 30 or 40% per year, but these are extremely rare. Everyone who has run a company knows that generating consistent 30 to 40% annual increases in value requires a great deal of hard work and some luck.
Time Required to Generate 10x to 30x Returns
20.00% 25.00% 30.00% 40.00% 50.00% 100.00%0
2
4
6
8
10
12
14
16
18
20
To achieve a minimally acceptable VC fund return of 20% per year and assuming all of the returns are from 20% of investments
Annual Return on Investment
Additional Years to VC Exit
Optimum time to exit
10X Return
30X Return
Year
s
If the venture has to be successful then yield on capital investments should be 30x on average else at least the business produce10x
The graph below shows venture capital exit times required to generate a minimally acceptable VC fund return from the winning investments.
24
Thank you
25
Thank YouFor any of your valuable feedback & queries
you could reach, engage and reciprocate@
26
Smart Team Office Google Facebook Skype Mobile
Ram Prasanna [email protected] [email protected] [email protected]
Ram-prasanna Paid version
Pratap.SR [email protected] [email protected]
Pratap.sr Paid version
Ravi sankar [email protected]
[email protected] [email protected] Ravisankar81 Paid version
Jagadish D [email protected]
[email protected] [email protected]
Jagadish.Diwakar Paid version