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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: [email protected]
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
uctu
re
Ass
ess
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t/ D
ilig
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ce
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%