Ravi Belani - Venture Capital Overview: Funding Strategy, Company Valuation & Exit Strategy

1. Ravi Belani
@rbelani
AlchemistAccelerator.Com
Ravib@stanford.edu
July 2017
Venture Capital Overview:
European Innovation Academy
Funding Strategy, Company Valuation, & Exit Strategy

2. Navigating the VC-Founder Dance

3. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

4. Entreprneurship Lecturer at Stanford
ecorner.stanford.edu/
Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director
6 Years as a Venture Capitalist
Skype, Baidu, Hotmail, Tesla
Me: Twitch (Amazon), Pubmatic
Director, Alchemist: B2B-Focused Accelerator
AlchemistAccelerator.com

5. #1: Alchemist
#2: Ycombinator
#3: Techstars
#4: 500 Startups
PAG 4
Alchemist Tops CB Insights’ 2016 Rankings of
Accelerators Based on Median Funding Levels
Source: https://www.cbinsights.com/blog/top-accelerators-follow-on-funding-rates/

6. Institutional Investors in Flagship Accelerator Program include:
Alchemist Investors
PAGE 04

7. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

8. Cash is Oxygen

9. 3 Sources of Cash: What are the Pros & Cons of Each?
Revenue (Customers)
Debt (Banks)
Equity (Venture Capitalists)

10. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

11. How VC’s Make Money
Carry
Management Fee

12. Management Fee Consumers 25% of a FundHow much management fee does a VC make in this fund?
$500M Fund

13. Management Fee Consumers 25% of a FundManagement Fee Can Consume 25% of Fund Principal
$500M Fund $125M Mgmt Fee
• 2.5% Per Year For
10 Years
• Fund Committed
after 3-4 Years
• 3 Funds Drawing
Management Fee
Down on in any
given year

14. How VC’s Make Money
Carry
Management Fee

15. Case Study of a Young Fund:
Kleiner Perkins I (1972)
15
Fund Size
$7.5M
# of Co’s
17 @
Check Size
$450K
Return
$345M
46x
#
How much carry did the partners get?

16. VC Profit Share: Carry Calculation
16
Fund Returns: $345M
- Fund Size: $ 7.5M
-----------------------------------
Fund Profit $337.5M
X Carry 20%
-----------------------------------
Carry $67.5M

17. Of Kleiner Perkins’ 17 Investments, 2
were responsible for 90% of returns
17

18. VC’s want to return 1/3 of their fund with each investment
$500M Fund
# of Co’s
30
#
Big Winners
1 out of 10
%
x =
3 Big
Winners
in Each
Portfolio

19. Can Make Money Several Ways: Two Case Studies
Google: Rising Star
Hotmail: Contrarian Bet

20. Optimal Ownership is typically between 20 – 40 %
VC Ownership
VC
Return

21. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

22. PRIMARY TERMS
Pre-Money Valuation
Option Pool
Liquidation Preferences
Anti-Dilution

23. Valuations are a function of
fundraising dynamics NOT instrinsics
Driven by the ownership needs of the funds you raise from and
the cash needs of the company
Post–Money Valuation = Cash Needs of the
Company / Ownership Needs of the Fund
Pre-Money Valuation = Post-Money – Cash Raised
Larger Funds are Much More Sensitive about Ownership Needs than Cash
Needs!
Series A : Raising off of the IDEA
Series B: Raising off of RESULTS
Trick is balancing the Series A valuation to set you up so you can raise off of
Results in the Series B at a markup (ideally 3x!)

24. What’s the post? What’s the pre?
• $2M given for 25% of the company
• $3M given for 25% of the company
• $2M given for 20% of the company
• $1M given for 40% of the company
Post–Money Valuation =
Cash Needs of the
Company / Ownership
Needs of the Fund
Pre–Money =
Post-Money – Cash
Invested

25. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

26. WHAT MAKES A SUCCESSFUL NEGOTIATION?

27. NEGOTIATIONS 101: DOES A ZOPA EXIST?
BATNA: Best Alternative to a Negotiated Agreement
ZOPA: Zone of Possible Agreement
Alternative to Sell: $1 Alternative to Buy: $8

28. Capture Value: How do you know how big the ZOPA is?
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA

29. Negotiations Generate Value in 2 Phases
Create Value: Focus on Interests, Not
Positions
Capture Value: Understand the
Other Person’s BATNA first

30. Create Value

31. Create Value

32. Capture Value: Focus on the Other Person’s BATNA First
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA

33. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

34. Negotiation Exercise: Count Off!

35. Negotiation Exercise: Go Here (Don’t Read the Other)
http://bit.ly/EIAFounder1
2 http://bit.ly/EIAVC

36. SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE
TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY

37. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

38. Employee Pool
• Employee Pools typically come out of the PRE-MONEY – that is YOUR
Total Dilution is the NEW INVESTOR’s money PLUS the Employee Pool
• Can always expand the employee pool later – and when you do, all will
be diluted equally. Try to minimize the employee pool to what’s
absolutely needed.
• Exercise: You own 40% of a company. A VC wants to put in $2m for 25%
of your company, and requires a 20% employee pool PRE-MONEY.
• What’s the Post-Money Valuation?
• What percent of the company do you own afterwards?

39. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

40. Board Composition & CEO Role
How many, and what’s the split between preferred, common, and independents?
When is the independent important?
How do you fire a board member?

41. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure

42. Liquidation Preferences
Why does Preferred Exist?
Check for:
• Multiples?
• Participating vs Non- participating
• Senior or Pari-Passu
What’s this?

43. Liquidation Preferences
Why does Preferred Exist?
Check for:
• Multiples?
• Participating vs Non- participating
• Senior or Pari-Passu
What’s this?

44. Liquidation Rights
Exit Value
Payout
Draw the payouts to:
• Investors
• Founders
Assuming a
•$3.5m exit
•$10.5m exit
•$20m exit
•$100m exit

45. TERMS: OTHER PRIMARY TERMS
EXIT STRATEGY
SOURCES OF CASH
AGENDA
INTRODUCTION
HOW VC’s MAKE MONEY
TERMS: VALUATIONS
NEGOTIATIONS 101
EXERCISE

46. Exits
• Go Public
• Be Acquired
• Remain an Ongoing Concern
• Go Bankrupt

47. Billion-Dollar Unicorns
47

48. 48

49. 49

50. Exit Valuations
Create Value: Revenue, Growth,
Margins
Capture Value: Drive a good
negotiation

51. Create Value

52. Capture Value: Market Timing

53. Capture Value: Negotiations
Increasing the # of Suitors Increases Your BATNA

54. FINAL THOUGHTS
54
The future will be far more surprising than most observers
realize. – Ray Kurzweil

55. 55
10 Years – Variability to NASDAQ > 100%

56. 56
10 Years – Variability to NASDAQ > 150%

57. 57
10 Years – Variability to NASDAQ > 300%

58. 10 Years – Variability to NASDAQ > 400%

59. 59
10 Years – Variability to NASDAQ > 1000%

60. 60
FOUNDERS ARE HEROES.
They think non-linearly. Angels: Your Job is to FIND THEM.

61. Thank You!
Ravi Belani
@rbelani
Ravi Belani
203 Addison Avenue Palo Alto, CA 94301 +1-415-309-8860
Ravi@alchemistaccelerator.com