Scribd Logo
Upload

Welcome to Scribd!

  • 80 views

    07 - VC Financing Co Creation and Expansion

    Uploaded by

    miku hrsh
    The document discusses the lifecycle of companies receiving venture capital financing. It begins by outlining the stages of financing - seed, startup/early growth, and later stage venture capital. It then provides more details on each stage, including types of investors involved, challenges companies may face, and how venture capital is typically invested in stages as companies reach milestones. The document also covers topics like deal pricing, anti-dilution clauses, and includes a case study example of a company progressing through multiple rounds of venture capital financing.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    07 - VC Financing Co Creation and Expansion

    Uploaded by

    miku hrsh
    80 views13 pages
    The document discusses the lifecycle of companies receiving venture capital financing. It begins by outlining the stages of financing - seed, startup/early growth, and later stage venture capital. It then provides more details on each stage, including types of investors involved, challenges companies may face, and how venture capital is typically invested in stages as companies reach milestones. The document also covers topics like deal pricing, anti-dilution clauses, and includes a case study example of a company progressing through multiple rounds of venture capital financing.

    Original Title

    07 - VC financing co creation and expansion

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses the lifecycle of companies receiving venture capital financing. It begins by outlining the stages of financing - seed, startup/early growth, and later stage venture capital. It then provides more details on each stage, including types of investors involved, challenges companies may face, and how venture capital is typically invested in stages as companies reach milestones. The document also covers topics like deal pricing, anti-dilution clauses, and includes a case study example of a company progressing through multiple rounds of venture capital financing.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    80 views13 pages

    07 - VC Financing Co Creation and Expansion

    Uploaded by

    miku hrsh
    The document discusses the lifecycle of companies receiving venture capital financing. It begins by outlining the stages of financing - seed, startup/early growth, and later stage venture capital. It then provides more details on each stage, including types of investors involved, challenges companies may face, and how venture capital is typically invested in stages as companies reach milestones. The document also covers topics like deal pricing, anti-dilution clauses, and includes a case study example of a company progressing through multiple rounds of venture capital financing.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 13

    Private Equity and

    Venture Capital
    Atul Kedia
    VC: Financing company creation and
    expansion
    Sessions 7

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 2
    Lifecycle of a Company

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 3
    Seed Financing
     Riskiest and most complex
     High uncertainty – trust the idea of the entrepreneur
     Limited managerial role by investor at this stage
     Can the idea generate output?
     Does the output has marketability?
     Investment in an idea or R&D project
     R&D Project → Patent → Product
     100/10/1 rule
     VC needs to have high ‘threshold’ and invest in multiple projects
     Winning project may not be the first one!
     Bootstrapping: self-financing by entrepreneurs (control vs. value creation)
     Business Angels (BAs): High-net-worth individuals
    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 4
    Start-up & Early Growth
    Start-up Financing
     Funding initial operations; betting on a business plan
     Need for cash to buy initial equipment (inventory, P&M, building etc.)
     Risk remains high
     VC should protect her/his interest, e.g. by using put option
     Balance between investment and management

    Early Growth Financing


     Financing of the day after; entrepreneur has started operations
     Money + hands on; e.g. re-write the business plan to analyse financing gap
     the first phase of growth of a new company that has started generating sales
    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 5
    Venture Capital
     Typically minority investors, though bring-in experience, expertise, guidance, network
     Invest basis industries / technologies / geographies / sub-stage of investment
     Early-stage: Entrepreneur + idea + PowerPoint presentation
     Mid-stage: started operations and stable sales
     Late-stage: fast-growing business
     Capital requirements vary widely
     Challenge for start-up: reach next stage and raise capital before running out of cash
     Typically negative monthly cash flow and high burn rates
     VC must analyse idea, entrepreneur and provide mentorship
     1/3rd investments would fail, 2/3rd would lose money
     must be offset by at least one or two highly successful “home-runs”

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 6
    Funding in stages
     Funding basis milestones achieved
     Good way of unlocking value at a higher price
     Brings in discipline for the entrepreneur
     Helps investors safeguard their future
    investments in case the venture doesn’t go well
     Stop ‘feeding losses’
     Tranches:
     maybe designed in the same Term Sheet to be
    invested basis milestones
     drawback – all investments at initial valuation
    resulting in higher equity dilution

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 7
    Deal pricing
     Common question: what percentage of equity stake to offer against an amount of investment?
     Negotiation depends on formal due diligence and valuation
     Pricing involves placing a value on the business, establishing share price and equity stake
     Pre-money value refers to the value prior to the addition of investor capital
     Post-money value = pre-money value + additional investment
     Pre-money value and amount invested determine the investor’s ownership percentage
     Example:
     Pre-money valuation = $4 million; outstanding shares = 1.5 million
     New investment = $1 million
     Post-money valuation = $4m + $1m = $5 million
     Investor’s shareholding = $1m / ($4m + $1m) = 20%
     Share price = $4m / 1.5m = $2.66

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 8
    Case study
     Nina has been working on a new energy technology on part-time basis for the past 3 years
     She now wishes to focus fully on it and, along with Rahul, invest next one year on development
     With their existing savings, they start a new venture – EnerTech
     At incorporation:
     1 mio common shares are issued (Nina 60%, Rahul 40%)
     9 months:
     Things speed up, they need to have 2 FTEs and purchase equipment
     With the above, prototype should be ready in 6 months
     Savings are drying up; they need an investor to save the venture
     Seed Round:
     VC1 (Seed funding) values the venture at $2.5 mio and is ready to invest $1.5 mio

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 9
    Case study contd…
     After 8 months, prototype EnerPro is ready
     Energy experts are impressed, though it’s yet to be transformed into a product
     Long way to go, new investments required to further develop into a promising product
     Additional engineers, development lab, offices, machines
     Series-A round – Early-stage phase:
     VC2 finds it promising; sits with EnerTech and determines funding requirement of $8 mio
     VC2 will invest $6 mio with VC1 co-investing $2 mio at the same terms
     Pre-money valuation is agreed at $15 mio
     Another condition by VC2: set up ESOP plan with 5% of o/s shares, post-money

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 10
    Case Study contd…
     After 1 year, EnerPro is in production
     Additional funds are required to further develop production & invest in sales channels
     Though the venture looks very promising, it is still ‘burning’ cash
     Series-B round – Growth phase:
     Basis initial due diligence, VC3 and VC4 (syndicate) submit TS to fund $15 mio out of $20 mio reqd
     After several rounds of negotiation, pre-money valuation is set at $45 mio
     VC1 and VC2 decide to provide $1 mio and $4 mio respectively
     ESOPs to remain at 5%, post-money

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 11
    Case study contd…
     After 2 years, the company has been doing well
     Entered into strategic partnership with large OEM
     The company has reached break-even
     Cash-flow deficit is at its peak, but will now reduce steadily
     Additional funds are required to further expand sales, set up overseas offices & maybe acquisition
     With existing investors, it is determined that at least $40 mio will be required
     Series-C round – further growth:
     VC5 submits a TS to fund $25 mio
     Pre-money valuation is set at $100 mio
     VC3 and VC4 decide to provide remaining $15 mio
     ESOPs to be increased to 15%, post-money, to attract / retain highly skilled people

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 12
    Dilution
     Reduction in a shareholder’s relative ownership %age as a result of the venture issuing more shares
     Original investors would not want valuations too high in an initial equity round. Why?
     What if dilution happens with a lower pricing? (down round)
     Include Anti-Dilution clause in Term Sheet

    Anti-Dilution clause in Term Sheet (by Series-A investor):


    In the event that the Company issues new shares or securities convertible into or exchangeable for shares at a
    purchase price lower than the applicable conversion price of the Series A Shares, then the conversion price of
    the Series A Shares will be subject to a full ratchet adjustment, reducing the applicable conversion price of
    the Series A Shares to the price at which the new shares are (to be) issued.

    Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 13

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy