Introduction to Venture Capital Week 2 Understanding the pre-investment phase

Transcription

1 Introduction to Venture Capital Week 2 Understanding the pre-investment School of Business and Economics TIME Research Area Innovation & Entrepreneurship Group (WIN)

2 First, of course you will have to contact a Non- disclosure agreement Letter of intent Term sheet (investment proposal) Contract 1 month 2 weeks - 2 months 1-3 months 1-3 months Contact Rough Detailed Negotiation Contacting a directly or via a mediator regarding an investment Contact is best made using a short paper describing the venture Source: Boersch (1998) 2

3 Upon your contact, the VC will evaluate whether they will further investigate your proposal Non- disclosure agreement Letter of intent Term sheet (investment proposal) Contract 1 month 2 weeks - 2 months 1-3 months 1-3 months Contact Rough Detailed Negotiation Contacting a directly or via a mediator regarding an investment Contact is best made using a short paper describing the venture makes a preliminary decision on whether to follow up on the contact or not Up to 90% of investment proposals fail at this stage Source: Boersch (1998) 3

4 If you make the cut, the VC will get in contact with you and enter a detailed Non- disclosure agreement Letter of intent Term sheet (investment proposal) Contract 1 month 2 weeks - 2 months 1-3 months 1-3 months Contact Rough Detailed Negotiation Contacting a directly or via a mediator regarding an investment Contact is best made using a short paper describing the venture makes a preliminary decision on whether to follow up on the contact or not Up to 90% of investment proposals fail at this stage Business plan is checked in detail (due diligence) Several meetings between the Venture Capitalist and the entrepreneurs usually take place in this Source: Boersch (1998) 4

5 If all goes well, you might enter the last stage and negotiate a deal with the Non- disclosure agreement Letter of intent Term sheet (investment proposal) Contract 1 month 2 weeks - 2 months 1-3 months 1-3 months Contact Rough Detailed Negotiation Contacting a directly or via a mediator regarding an investment Contact is best made using a short paper describing the venture makes a preliminary decision on whether to follow up on the contact or not Up to 90% of investment proposals fail at this stage Business plan is checked in detail (due diligence) Several meetings between the Venture Capitalist and the entrepreneurs usually take place in this Final negotiations about all details of the contract Negotiations may take place over a period of several months Source: Boersch (1998) 5

6 In total, you should expect the process to take at least 6 Months until deal closure Non- disclosure agreement Letter of intent Term sheet (investment proposal) Contract 1 month 2 weeks - 2 months 1-3 months 1-3 months Contact Rough Detailed Negotiation Contacting a directly or via a mediator regarding an investment Contact is best made using a short paper describing the venture makes a preliminary decision on whether to follow up on the contact or not Up to 90% of investment proposals fail at this stage Business plan is checked in detail (due diligence) Several meetings between the Venture Capitalist and the entrepreneurs usually take place in this Final negotiations about all details of the contract Negotiations may take place over a period of several months Source: Boersch (1998) 6

7 Non- disclosure agreement Letter of intent Term sheet (investment proposal) Contract 1 month 2 weeks - 2 months 1-3 months 1-3 months Contact Rough Detailed Negotiation Contacting a directly or via a mediator regarding an investment Contact is best made using a short paper describing the venture makes a preliminary decision on whether to follow up on the contact or not Up to 90% of investment proposals fail at this stage This week we will focus on: Selection of a VC and Tips on getting chosen by the VC Source: Boersch (1998), Icons designed by Freepik 7

8 Introduction to Venture Capital Week 2 Choosing the (right) VC School of Business and Economics TIME Research Area Innovation & Entrepreneurship Group (WIN)

9 First of all, is an institutional really the right financing partner for your venture? Family & Friends Crowdfunding Who is right for me? Business Angel Strategic Investor (e.g. CVC) 2

10 The selection of a potential Venture Capital partner highly depends on the investment VC? Seed Startup Expansion Many seed financings are too small and require too much hands-on support from the venture capital firm to make them economically viable as investments Contact is best made using a short paper describing the venture Venture capitalists makes a preliminary decision on whether to follow up on the contact or not Up to 90% of investment proposals fail at this stage Business plan is checked in detail (due diligence) Several meetings between the venture capitalists and the entrepreneurs usually take place in this Source: IVCA 3

11 If your venture is in the right situation to seek institutional VC funding, make up your mind about the following selection criteria Criterion Relevance Name and reputation of the s Development of the company Industry sector of firm and s Required financing volume Location of the s s have a different reputation, which reflects on the young company or influences future financing rounds Different s finance different development s of young companies s sometimes have a specialization on a certain industry sector Different s invest different amounts Rule of thumb: if the company cannot be reached within two hours, the probability of an investment is not so high 4

12 It s no bad idea to keep these general guidelines in mind when selecting a potential VC Listen to your instinct Negotiate from a position of strength Find shared beliefs Pay more attention to the partnership than the terms Source: Stanford Business School 5

13 Introduction to Venture Capital Week 2 Get chosen by the right VC increase your chances! School of Business and Economics TIME Research Area Innovation & Entrepreneurship Group (WIN)

14 Identification and selection of a potential Venture Capital partner depend not only on your current investment Long-list of potential Sorting of relevant s Approaching the right 3i Accel Partners Andreessen Horowitz Atlas ventures Greylock Partners 1 2 Name and reputation of the venture capitalists Development of the company Executive summary of your business idea OCA Ventures Holzbrinck Ventures 3 Industry sector of firm and venture capitalists Venrock 4 Required financing volume 5 Location of the venture capitalists Icons by Freepik 2

15 Step 1: Take a proper approach these guidelines might increase your chances! Look for warm intros: leverage your network and try identify the VC s preferred channel Be aware of who your primary contact at a VC is: Analyst vs. Partner? Think parallel: Don t just approach one at a time Timing is crucial! One team member driving the process: Have the proper go-to-guy Source: Stanford Business School; Feld & Mendelson (2013); Icons by Freepik 3

16 Step 2: Make it to the next meeting, be precise, be memorable, don t forget to ask for money! 30 SECOND PITCH 3 MINUTE PITCH What does your company do? What problem do you solve? How big is the market? How much traction do you already have? Do you have a toothbrush product? Provide unique insights (i.e., solution/ product, customer, market) Explain how you (plan to) make money Sell your team Be specific about desired funding (and what you will use it for) Additional details go to the appendix Source: Stanford Business School; Feld & Mendelson (2013); Icons by Freepik 4

17 Step 3: Avoid mistakes and pay attention to detail more handy advice coming right up: INTRODUCTION Make sure the listener understands what you re doing PROGRESS Show it and know your numbers! MARKET SIZE Ideally build bottom up (drivers) INSIGHTS The investor should learn something that is counter-intuitive TEAM Your team should be uniquely suited for this business ASKING FOR MONEY Drive the conversation towards a conclusion but don t make the claim that you won t need future funding after this round INTRODUCTIONS TO OTHER FOUNDERS THEY HAVE BACKED Maybe the best source of information on how the VC will act once they are invested Source: Stanford Business School; Feld & Mendelson (2013); Icons by Freepik 5