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Raising Venture Funding: Demystifying the Journey
Rahul Khanna
October 2011 TiEcon Delhi
© Copyright 2008 Canaan Partners 2
About Canaan Partners
» Global early stage venture fund with $3Bn under management
» Invest in technology and tech enabled services
› iYogi, UnitedLex, Naaptol, Cellcast, Mcarbon
» Typical first cheque : $2Mn - $7Mn
» Selective seed and growth stage investments › Motorexchange, Equitas
© Copyright 2008 Canaan Partners 3
Agenda
» Lifecycle of a Business and Need for Capital » Venture Fund Economics » What Do Venture Funds Look For ? » When To approach a VC ?
Lifecycle of a Business
© Copyright 2008 Canaan Partners 4
Concept Stage: Ideation - Initial market
feedback - Market Sizing
Feasibility Stage: Product Development, Value Proposition - Early Customer
Feedback - Select hires
Market Validation Stage: BD, Fine Tune Biz Model, Partnerships - Product/Service live - Early revenue model - Customer feedback - Team build out
Growth Stage: Scalability, Teams, Process, Profitability - Market Validated - Biz model validated - Product diversification
Maturity
Time
IPO Self/Angel Seed VC PE Bank Financing
Source of Funds
Mature Stage - Focus Execution - Financial predictability - Risk management
© Copyright 2008 Canaan Partners 5
Agenda
» Lifecycle of a Business and Need for Capital » Venture Fund Economics » What Do Venture Funds Look For ? » When to Approach a VC ?
© Copyright 2008 Canaan Partners 6
Know Venture Economics ?
Look at things from a VC’s perspective. Why ? » To minimize your fund raising duration
› You don’t want to run out of money during fund raise › Minimize the diversion and get back to running the business › Know what kind of investors to approach
© Copyright 2008 Canaan Partners 7
Early Stage Venture Economics
» Venture fund invests capital over 3-4 years » Money returned to investors (LPs) 7- 10 years » Typical return 2.5x – 3.5X (IRR 18% – 25%) » Few super hits, few write-offs
» Early stage investments require more time/involvement » Each investment professional may manage $50M - $60M & can only
deal with 6-8 companies
§ Return expectation of 5X – 7X + (High risk, longer duration) § Model works with Large Exits ($$$) § Model works with Significant Ownership (25% - 35%+)
© Copyright 2008 Canaan Partners 8
Types of Venture Funds / Which VC to Pick » Types of VCs
› Stage of Investment (Early, Growth, Late) › Sector Focus (Tech, Healthcare, Infrastructure, Real Estate) › Corporate VCs
» Picking a VC › Sector, Stage › Compatibility of thought/chemistry › Non-monetary contribution – domain knowledge,
relationships › Ability to provide reserves for future investment › Investment cycle of fund
© Copyright 2008 Canaan Partners 9
What Can You Expect From a Venture Fund » Other than money
› Assistance/sounding board for strategy › Large network of customer contacts, advisors › Active assistance in hiring senior members of team › Appointment of Board, Advisors › Corporate governance › Enhanced credibility Most of above – varies by stage of investor.
» What are the trade-offs › Higher Accountability / Governance (spending, reporting) › Decisions being made by a balanced board rather than founder › Lower equity holding (but potentially much higher value)
© Copyright 2008 Canaan Partners 10
Agenda
» Lifecycle of a Business and Need for Capital » Venture Fund Economics » What do Venture Funds Look For ? » When to Approach a VC ?
© Copyright 2008 Canaan Partners 11
» How large depends on size, stage, VC model. • If investing $10M per company, want to get at least $50M+ back • What does this mean for the valuation of the company ? • What does that mean for VC stake in the company ?
Large Ownership Large Multiple
Large $$$
Implications • Revenues/Profits have to be of scale • Exit multiples should be attractive • Business should have potential strategic exit options
Can this opportunity generate a large exit for us in 5-6 years ?
The most important question for a VC
© Copyright 2008 Canaan Partners 12
Early Stage: DNA of VC fundable businesses » Team
› Early stage – risky so lots of emphasis on founders
» Large Market › Nascent market but rapidly growing and potential to be large › Large existing market with a disruptive play or discontinuity
» Strong Value Proposition › Why you will win
» Scalable › Build the business rapidly, with capital efficiency/operating leverage
» Defensible › Intellectual Property › First mover advantage › Network effects
» Exit Prospects › IPO, Trade Sale
© Copyright 2008 Canaan Partners 13
Team » Passion
› strong belief › risk taking appetite › Ambition
» Relevant experience › Domain / Market understanding › Functional Skills
» Ability to sell, hire, evangelize, motivate
» Execution capability › Business and operational experience
Team Market Value Proposition
Scalable Defensible
© Copyright 2008 Canaan Partners 14
Market
» Very critical component of VC decision making › Big is important, but markets dynamics are also key › India vs. International markets
» Small, fast growing markets are fine (ecommerce in India!)
» Large mature markets can be very competitive. Need a disruptive play › Breakthrough Technology › Business model
» How do you calculate market size ?
Team Market Value Proposition
Scalable Defensible
© Copyright 2008 Canaan Partners 15
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
Team Market Value Proposition
Scalable Defensible
© Copyright 2008 Canaan Partners 16
Value Proposition Team Market Value Proposition
Scalable Defensible
» Is there a genuine need for the product / service?
» How is it being addressed today ? Why NOW ?
» Who is best positioned to fulfill this need ? Why YOU ?
» Why will the customer select you, continue to use your service/product ? » Cheaper, Better, Faster
Scalability: Business Model
© Copyright 2008 Canaan Partners 17
Enterprise Software: Scalability Barriers › Small Ticket Price › Fragmented market, Competition › Technical sale , Long Sales Cycle › Demanding Customer, Customization
» What would be interesting: › Large ticket Price › Channel / distribution › Upsell / Cross Sell; Recurring revenues › Strong demand (regulation, compliance)
Team Market Value Proposition
Scalable Defensible
Discontinuity: SaaS
Cloud Offerings
© Copyright 2008 Canaan Partners 18
Scalability : Capital Team Market
Scalable Defensible
Input: Effort, Capital
Output: Revenue, Profits
Technology Facilitates Capital Efficiency
Product Companies (Software)
Online marketing/ distribution/ sales
(Digital Media)
Defensibility
© Copyright 2008 Canaan Partners 19
» Intellectual Property » Installed Base – Platform Play » Installed Base – deep entrenchment, hard to remove » First to Market - if Network effect » Specialized knowledge / Resources » Capital
» NOT PRICE (unless sustainable cost advantage)
Team Market Value Proposition
Scalable Defensible
© Copyright 2008 Canaan Partners 20
Defensibility : Installed Base Play/ Capital
» 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 in initial years
» Minimum $30MN - $40MN to build the business
è Need a syndicate of investors to finance this
© Copyright 2008 Canaan Partners 21
Less likely to be Venture Fundable » Entrepreneur
› Lack of experience / knowledge in related area › Lack of sales and operational experience in founding team › Mindset: Always prioritizes profits over growth › Mindset: Not open to feedback, change
» Market › Small Market / aiming to build a 20 Cr company in 5 yrs › Uncertain Business model, Scalability challenges
» Differentiability and Competition › Me too product / service
» Capital Requirement › Risk of consuming too much capital
© Copyright 2008 Canaan Partners 22
Agenda
» Lifecycle of a business and need for capital » Venture Fund Economics » What do Venture funds look for ? » When to approach a VC ?
© Copyright 2008 Canaan Partners 23
When to approach an early stage Venture Fund ?
» VC unlikely to make a bet on multiple risk factors › Team › Technology and Product risk › Competitive Risk › Market and Business Model risk › Exit Risk
» Product ready / close to being ready & customer traction
» Some validation of assumptions, business model, market size
» Presence of Business and Operations guy on team
Lifecycle of a Startup
© Copyright 2008 Canaan Partners 24
Concept Stage: Ideation - Initial market
feedback - Market Sizing
Feasibility Stage: Product Development, Value Proposition - Early Customer
Feedback - Select hires
Market Validation Stage: BD, Fine Tune Biz Model, Partnerships - Product/Service live - Early revenue model - Customer feedback - Team build out
Growth Stage: Scalability, Teams, Process, Profitability - Market Validated - Biz model validated - Product diversification
Maturity
Time
IPO Self/Angel Seed VC PE Bank Financing
Source of Funds
Mature Stage - Focus Execution - Financial predictability - Risk management
For further details please go to:
http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=powerpoint
Typical investment process
Deal Identification / Preliminary Analysis
Deal Validation
Due Diligence
& Closure
Investment Committee &
Issue of Term Sheet
Typically 1% of deals get through the funnel
30 – 45 days
60 days
15 days
Prelim Market Analysis Discussion : Internal + External
Experts
Deep Dive: Team, Market, Differentiation, Traction,
Financials
Fact Validation. Accounting & Legal Diligence
Background checks
Thank You