Startup Accelerator 2014: Iterative Startups - Risk/value framework for the start-ups

1/7/14 Strictly Confidential Copyright © Canaan Partners 2013, All rights reserved.

Creating Value and Managing Growth

Nishant Verman

March 2014

1/7/14 Strictly Confidential Copyright © Canaan Partners 2013, All rights reserved. 1/7/14 Strictly Confidential

About

Canaan Partners

2


About Canaan

MONEY EXPERIENCE BREADTH RESULTS

$600M

FUND IX

26+

YRS WORKING WITH

ENTREPRENEURS

2

GLOBAL INSIGHTS

55

IPOS

$3.5B

UNDER

MANAGEMENT

400

INVESTMENTS

MULTI-SECTOR

95

M&As

$3.1B

EXIT PROCEEDS

12

YRS AVERAGE OF

GPs WORKING

TOGETHER

EARLY STAGE FOCUS

TOP QUARTILE

PERFORMANCE

33%

67%

Seed andEarly

Mid andLate

20%

80%

3


Consumer

Internet

Payments &

Financial Services Mobility

Enterprise &

Managed Services

Canaan India Portfolio

4

1/7/14 Strictly Confidential Copyright © Canaan Partners 2013, All rights reserved. 1/7/14 Strictly Confidential

Creating Value &

Managing Growth

5


TIME / REVENUE

M

A

T

U

R

I

T

Y

Business Model

Management

Product

Incubators

Angels Venture Capital Bank loans

Private equity IPO, Trade Sale

Profitability

Competition

Financing

Governance

Expansion

Liquidity

Value Creation

6


Case Study - iYogi

Concept & Pilot

- Pilot – demonstrate

quality of service

- Initial go-to-market plan

- Core team

Feasibility Stage

- Unit economics

- Initial traction

- Continuing quality of

service

Scale Phase 1

- Internet based scale

- Pilots around other

channels

- Team build out

Growth Stage

- Multi-channel scale

- Additional services

- Organizational Maturity

Maturity

Time Self/Angel Series A Series B Series C Series D

(Apr 2007) (June 2008) (Dec 2009) (Dec 2010)

Maturity Stage

- Profitability

- Focus Execution

- Financial predictability

- Risk management

7


Business Model

• Market Size

• Validate assumptions in a controlled pilot

• Comparables

• Key macro trends & discontinuities

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

8


Market: Case Study

$ 400MN

# of urban HH = 100MN

Annual Spent= 200/-

Market Size = 200*100

= 20 bn INR = $ 400MN

$ 80 MN

# of digi cams in India

= 20MN

Market Size = 20*200

= 4 bn INR = $80MN

$ 60 MN

Internet Penetration =

75%

Market Size = 0.75*80

= $60MN

?

Subscription Services

Photo Storage Platform

100/- per HH per annum

Mobiles with Cameras

Easy Storage. How

many of us print

Photos today?

» Competition

» Degree of fragmentation, network effects

» Compare growth rates, adoption rates from international markets

» Additional revenue opportunities

+

Online Photo Printing

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

9


Case Study

Online Travel Industry Online Ticketing

Internet

Penetration

Payment

Options

LCC Zero Commission

Regime

Watch for discontinuities which can impact the business

Online Ticketing - Air

Assisted

Ecommerce

2004 2005 2006 2007 2008 2012

Mobile

Commerce

E-ticketing

Hotels,

Packages

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

10


Management

• Skills fit Domain

Functional

• Passion

• Execution capability

• Scalability

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

11


Product

• Instantly broadcast live video over wireless

channels

• Product Risk

Can team successfully build the technology

• Competitive Risk

Other technologies and approaches may still be in labs

• Adoption Risk

Use cases enticing industry to adopt it

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

12


Profitability

• Early Stage Series A in April 07

Remote desktop support company

Company had pilot with 1000 customer

Experienced founders

Large market at an appropriate price point

• Focused on contribution margin before growth

Life time value – key driver

• Series B in May 08

Build scale

Develop other marketing channels

• Series C in Jan 10

Build scale

Marketing

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

13


Competition

• Online travel industry (2008), eCommerce (today)

• Many well capitalized players with good teams

• Increased marketing spends

• Profitability risk

• Evolving barriers to entry

• Increased options for acquirer

2008:

2012:

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

14


Financing

• Out of Home industry – Network of digital screens

• Financing requirements

Critical mass on screens required, often financed by the

startup - Leading players will have 10,000+ screens in 4-5 years

- ~ $1000-2000 per screen

Operating losses to cover rental costs till revenues catch

up - ~ $2500 per screen per year

• Minimum $30MN - $40MN to build the business

What kind of syndicate should one setup to finance this?

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

15


Financing

• eCommerce in India

• Financing requirements

Customer acquisition costs - ~$10 for horizontal players, ~$20 for verticals

- Significant well-funded players bidding up keywords

- Also need to invest in brand building

Working capital requirements - Need 45-60 days of working capital (depending on vertical)

- For a $50M top-line business, translates to $6-8M in working capital

• Minimum $30MN - $40MN to build the business

What kind of syndicate should one setup to finance this?

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

16


Governance

• Growing Business – Series A in August 2006

Validated business model

Category leader in classified space

• Series B in Jan 2008

Growth financing to breakeven

Ultimate exit – IPO or strategic acquisition

• Internal audits

• Control and management systems

• Board formation and formal processes

• Risk management

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

17


Scale and Expansion

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Re

ven

ue

s (in

Cr)

Jobs InfoEdge

2464 Headcount

IPO, 951

headcount

Business Model

Management

Product

Profitability

Competition

Financing

Governance

Expansion

Liquidity

18


Realizing Value

• Every stage has different risks to manage

• Investors should keep Exit options in mind

IPO - Focus on Scale and Profitability

Strategic M&A - Align with potential buyers early on

19


Economy & Finance

Startup Accelerator 2014: Iterative Startups - Risk/value framework for the start-ups