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Global EntrepreneurshipDeveloping Global Mindset for Entrepreneurs
Brian David Butler
TeachingBrian Butler is currently a professor with Forum-Nexus which is co-sponsored by the IQS Business School of the Ramon Llull University in Barcelona and the Catholic University of Milan He teaches classes on International Finance and Global Entrepreneurship in Europe every July and January
In Miami Brian has taught Finance Economics and Global Trade at Thunderbirdrsquos Global MBA program in Miami
He previously worked as a research analyst at the Columbia University Business School in New York City
brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler
Brian David Butler
InternationalA global citizen Brian was born in Canada raised in Switzerland (where he attended international British school) educated through university in the US started his career with a Japanese company moved to New York to work as an analyst married a Brazilian and has traveled extensively in Latin America Asia Europe and North America
Brian currently lives in Recife Brazil where he is teaching classes on ldquoGlobal Entrepreneurshiprdquo at the university ldquoFaculdade Boa Viagemrdquo
brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler
KookyPlan ndash wiki for Entrepreneurs
Global Entrepreneurship developing the global mindset for entrepreneurs
Class 5Saturday April 24th 2010
Schedule for today
1 First frac12 - Finance
2 After break Discussion about Group Projects Presentation of homework ndash transferrable
ideas (Funded) + dream companies (lottery winners)
3 Continue - Finance of startups (part A)4 Discuss Exam (next class)
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Brian David Butler
TeachingBrian Butler is currently a professor with Forum-Nexus which is co-sponsored by the IQS Business School of the Ramon Llull University in Barcelona and the Catholic University of Milan He teaches classes on International Finance and Global Entrepreneurship in Europe every July and January
In Miami Brian has taught Finance Economics and Global Trade at Thunderbirdrsquos Global MBA program in Miami
He previously worked as a research analyst at the Columbia University Business School in New York City
brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler
Brian David Butler
InternationalA global citizen Brian was born in Canada raised in Switzerland (where he attended international British school) educated through university in the US started his career with a Japanese company moved to New York to work as an analyst married a Brazilian and has traveled extensively in Latin America Asia Europe and North America
Brian currently lives in Recife Brazil where he is teaching classes on ldquoGlobal Entrepreneurshiprdquo at the university ldquoFaculdade Boa Viagemrdquo
brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler
KookyPlan ndash wiki for Entrepreneurs
Global Entrepreneurship developing the global mindset for entrepreneurs
Class 5Saturday April 24th 2010
Schedule for today
1 First frac12 - Finance
2 After break Discussion about Group Projects Presentation of homework ndash transferrable
ideas (Funded) + dream companies (lottery winners)
3 Continue - Finance of startups (part A)4 Discuss Exam (next class)
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Brian David Butler
InternationalA global citizen Brian was born in Canada raised in Switzerland (where he attended international British school) educated through university in the US started his career with a Japanese company moved to New York to work as an analyst married a Brazilian and has traveled extensively in Latin America Asia Europe and North America
Brian currently lives in Recife Brazil where he is teaching classes on ldquoGlobal Entrepreneurshiprdquo at the university ldquoFaculdade Boa Viagemrdquo
brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler
KookyPlan ndash wiki for Entrepreneurs
Global Entrepreneurship developing the global mindset for entrepreneurs
Class 5Saturday April 24th 2010
Schedule for today
1 First frac12 - Finance
2 After break Discussion about Group Projects Presentation of homework ndash transferrable
ideas (Funded) + dream companies (lottery winners)
3 Continue - Finance of startups (part A)4 Discuss Exam (next class)
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
KookyPlan ndash wiki for Entrepreneurs
Global Entrepreneurship developing the global mindset for entrepreneurs
Class 5Saturday April 24th 2010
Schedule for today
1 First frac12 - Finance
2 After break Discussion about Group Projects Presentation of homework ndash transferrable
ideas (Funded) + dream companies (lottery winners)
3 Continue - Finance of startups (part A)4 Discuss Exam (next class)
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Global Entrepreneurship developing the global mindset for entrepreneurs
Class 5Saturday April 24th 2010
Schedule for today
1 First frac12 - Finance
2 After break Discussion about Group Projects Presentation of homework ndash transferrable
ideas (Funded) + dream companies (lottery winners)
3 Continue - Finance of startups (part A)4 Discuss Exam (next class)
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Schedule for today
1 First frac12 - Finance
2 After break Discussion about Group Projects Presentation of homework ndash transferrable
ideas (Funded) + dream companies (lottery winners)
3 Continue - Finance of startups (part A)4 Discuss Exam (next class)
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Finance
Types of funding sources available to global entrepreneurs
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Common Sources of Financial Capital for startups
Angel investor Bootstrap funding - bank loans - Equity line of credit Factoring - accounts receivable financing - Mezzanine financing peer-to-peer lending - Private equity - Public funding - IPO - Personal equity - Venture Capital - venture capital loan -
Links on httpkookyplanpbworkscom
While there are many sources we are going to talk about the ones in BOLD (in this class)
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Two basic categories
bull(a) Equity finance shareholders ndash give capital in exchange for hope of benefiting if company is profitable later Think ldquosharesrdquo of company
bull(b) debt finance think ldquobank loansrdquo ndash money plus interest is owed (monthly payments) Note banker does not become part owner of company
httpkookyplanpbworkscom
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Two basic categoriesbullEquity v Debt financinghellip
bullWhich do you think is more ldquoexpensiverdquo
bull ie who demands a higher interest return on money (the banker who lends money or the investor in shares of a company)
httpkookyplanpbworkscom
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Equity finance is more ldquoexpensiverdquobull The rate of return that an equity investors expects
is (of course) higher than that of a debt financer This makes sense a banker that lends you money
under strict terms and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer and demand less of a return on his investment than an equity investor that will only profit if the business is a success
bull Based on this logic equity capital should be the most expensive and debt capital should be the least expensive
httpkookyplanpbworkscom
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Funding Startups
bullNormally done with equity financing because debt financing (bank loans) are typically not available to young startups
bullWhy Why are bank loans not availableClass discusshellip
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Funding Startups
bullAnswer banks are CONSERVATIVE
They require at least 3-5 years of proven results (income statements balance sheets etc) with clear profits BEFORE they are willing to invest
So that typically leaves the more EXPENSIVE form of Equity financing (for startups)
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Finance
Typical ldquoroundsrdquo of funding for high-growth entrepreneur
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Rounds of funding
httpkookyplanpbworkscom
Risk and return demanded diminishes from one round to the next
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Rounds of funding bullTypical rounds might look like this
bullSeed - lt$500kbullAngel - lt$2MbullVenture Capital
Series A - $1 -$10MSeries B - lt$25MSeries C - lt$50M
httpkookyplanpbworkscom
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
The stages of venture capital investment
bull Seed is an investment of between $1000 and $500000 made when a
company is just a few people andor an idea bull Start-up
is an investment of between $50000 and $1 million in private companies that are completing product development and beginning initial marketing
bull First stage (or early stage) denotes an investment of between $500000 and $15 million made
when a company has completed its product but has no or little revenues
bull Second stage (or later stage) is an investment of between $2 million and $15 million when a firm
has product and revenues and has often already taken money from other institutional investors
bull Third stage (or mezzanine) investments range from $2 million to $20 million often invested in a
profitable company for a major expansion generally leading to an IPO in three to eighteen months Note that some of these terms
overlap
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Who remembershellip
bullWhat is the difference betweenPrivate Equity
AndVenture Capital
And Angel Investors
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Common Types of Private Equity
-----------------------All ldquotypesrdquo of private equity----------------------
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullAn angel investor (business angel in Europe or simply angel) is an affluent individual who provides capital for a business start-up usually in exchange for ownership equity
httpkookyplanpbworkscom
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullUnlike venture capitalists angels typically do not manage the pooled money of others in a professionally-managed fund However angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital
httpkookyplanpbworkscom
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullWho do they invest in bull Invest in promising startups too young
and raw to attract the attention and money of professional venture capitalists
httpkookyplanpbworkscom
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullAngel capital fills the gap in start-up financing between the three Fs (friends family and fools) and venture capital
bullWhile it is usually difficult to raise more than US$100000 - US$200000 from friends and family most venture capital funds will not consider investments under US$1 - 2 million
httpkookyplanpbworkscom
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Rounds of funding
httpkookyplanpbworkscom
Angels invest HERE
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullThus angel investment is a common second round of financing for high-growth start-ups
bullFirst = seed funding self-funding friends family home loans etc
httpkookyplanpbworkscom
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
Very Popular
bulland accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs $22 billion in the US in 2004 according the University of New Hampshires Center for Venture Research)
httpkookyplanpbworkscom
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullAngel investments bear extremely high risk and thus require a very high return on investment
bullSome angel investors seek a return of at least 10-20 times their original investment within 5 years through a defined exit strategy such as plans for an initial public offering or an acquisition
bullAngel financing can thus be an expensive source of funds However cheaper sources of capital such as bank financing are usually not available for most early-stage ventures
httpkookyplanpbworkscom
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullDeal Size
bullIn comparison to VC dealswhich start around 60 M$ (in 2006)
bull Angel deals may be as low as $100000
httpkookyplanpbworkscom
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel investor
bullBut how much should Angels invest
bullAngel Investor method of Valuation
Later today we will cover ldquovaluationsrdquo and how much shares to offer an investor hellip
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Common Sources of Financial Capital bullVenture Capital -
is a type of private equity capital typically provided by outside investors for financing new growing or struggling businesses
Venture capital investments are generally high-risk investments but offer the potential for above-average returns andor a percentage of ownership of the company
A venture capitalist (VC) is a person who makes such investments httpkookyplanpbworkscom
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Common Sources of Financial Capital bullVenture Capital -
A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
httpkookyplanpbworkscom
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Companies with the most VC funding (as of 092008)bull a list of all the technology startups that have raised at least $25
million over the past two years according to CrunchBase The ~160 startups to stockpile that much capital recently are listed below
bull bull Facebook - $455Mbull ZeniMax - $310Mbull Nanosolar - $300Mbull OverSee - $210Mbull OANDA - $200Mbull Kayak - $196Mbull GridPoint - $167Mbull Plastic Logic - $150Mbull eSolar - $140Mbull Demand Media - $135M
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
What is Venture Capital
bullVenture Capital companies raise money from institutional investors and invest that money for them in other companies
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
What is Venture Capital
bullVC business model in a nutshell
VCs goal is to make a large investment receive a high return and do that quickly in order to have a liquidity event
Note companies are not LIQUID (not easy to sell shares on stock exchange)
httpkookyplanpbworkscomVenture-Capital
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
What is Venture Capitalbull Exit Strategy why is it important
bull In the traditional early-stage venture capital investment model a vibrant IPO market is necessary for success
bull Backing early-stage companies is risky and in any venture capital fund portfolio the anticipation is that a number of investments will end up being written down or written off
bull Traditionally the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio
httpkookyplanpbworkscomVenture-Capital
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
What is Venture Capital
bullVenture Capital Math Problem
bullRecommended reading A venture capital Math problem from Fred Wilson a VC and principal of Union Square Ventures
httpkookyplanpbworkscomVenture-Capital
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Venture Capital - summary
bullInvest in high-risk high-return investments with horizon of five or 6 years
bullExit strategy Goal is to either go public or sell to a competitor
httpkookyplanpbworkscom
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Venture Capital - summary
bullTo manage risk VCrsquos typically make staged investments in which the company must meet stated business milestones before qualifying of next financing round
bullVCs typically specialize in one stage (startup early stage or mezzanine)
bullRisk and return demanded diminishes from one round to the next
httpkookyplanpbworkscom
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Breakhellip
10 minute break
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Homework review + group projects
Presentations from last weeks homework
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Homework for this weekbull One group assignment ndash cancelled Will re-
assign this task next week (this week)
bull 2 individual assignments
bull Due Dates If you want feedback PRIOR to next classhellip you
must email me the homework before WEDNESDAY at midnight (before next class)
Otherwise all homework is due at the start of our next class Saturday
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Group Projectbull Seeking investors
Next step assume that you would really consider doing this project and assume that I am a Finance professional with money to potentially invest in your project Your job is to convince me to invest in your project
Create a viable marketing and business plan for this market-entry project into the USA Careful analysis needs to be made to see if it would work before I would be willing to invest in your idea
Make sure to read CH 4 from the book (digital sent by email)
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Group Project Assignmentbull 1 Form Group
bull Please divide up the project among your team and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project (who
is going to research what)
Note you donrsquot have to do the actual research all by next class but you MUST have met with your group discussed the case and divided the task of who will
research whathellip
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Group Project - proposalsbull Group 1bull Roberta bull Luiza bull Arthur bull Italo
bull Transferrable Idea Clube de Estrelinha
bull Countries Brazil to USA
Clube Estrelinha Other ideas
bull Group 2bull Diogo bull Carol bull Ana Maria bull Emanuel
bull Transferrable Idea assigned NET FLIX
bull Countries USA to Brazil
bull Group 3bull Pedro bull Rodrigo bull Augusto bull Juliana
bull Transferrable Idea assigned TIVO
bull Countries USA to Brazil
Tivo Or shopping cart Or others
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
bull NET FLIX
bull httpenwikipediaorgwikiNetflix
bull Netflix (NASDAQ NFLX) is a service offering online flat rate DVD and Blu-ray disc rental-by-mail and video streaming in the United States
bull TIVO
bull httpenwikipediaorgwikiTivo
bull TiVo is a brand and model of digital video recorder (DVR) TiVo was introduced in the United States and is now available in New Zealand Canada Mexico Australia Taiwan and the UK TiVo DVRs provide an electronic television programming schedule whose features include Season Pass recordings which record every episode of a series and WishList searches which allow the user to find and record shows that match their interests by title actor director category or keyword
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Individual presentations
bullEach student is to present their ldquotransferrable ideardquo to the class (of a company funded abroad) with PEST analysis
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Homework 1bull Find company abroad that has raised money
What problem are they addressing How solving What trend are they getting in front of If you were to localize that business to Brazil would the same
problem exist Same solution be appropriate Are the same trends important in Brazil (Include a PEST analysis)
bull Plan on taking that business model to Brazil (creating a similar business in Brazil) You will need to raise money (either in Brazil or from foreign
sources of capital) I will be the VC (venture capitalist) Your job convince me to invest ndash in 5 minutes
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom Be prepared to present your analysis in Class (with class review)
To present in class 5 minutes to convince class to invest in your project
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Be inspired ndash see what kinds of companies are getting $$ funded
VentureBeatcomKey source of inspirationhellip if you see how much $$ is being raised each week
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Be inspired ndash see what kinds of companies are getting $$ funded
Sign up for the weekly newsletter email
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Homework 2
bull Dream Company
bull What would you do if you won the lottery But you could only spend the money on creating a businesshellip what business would you create
Tell me 1-3 ideas
What if I told you the $$ would only be available to ldquohigh growthrdquo business but if you had an idea with big enough growth potential then UNLIMITED money was available
To turn in Maximum 1 page ndash word document ndash submit by email to
briandbutlergmailcom
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Finance Valuations
How much is your startup worth How many shares should you offer
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Valuing a startup
bullThis is the most difficult partbullDetermining how much your startup idea
is worth bullDeciding how many shares ( ownership)
should you trade to an investor (in exchange for his capital)
bullHow do you value a company that might not have cash flows yet (no revenueshellip so what is the value)
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Valuing a startup ndash why its difficult
bullNormal ways of financial ldquovaluationrdquo do not apply (do not work)Example the DCF ( discounted cash flow)
technique does not work well for VCrsquos because the cash is intended to cover near-term negative free cash flows
But more importantly the standard techniques of discounting cash flows does not take into consideration the multiple financing rounds at different required rates of return
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
bull To give you an idea of how to value your startup I have created the following model
1 Assume you will be cash-flow positive in 5 years (assume positive income)
1 2 3 4 5
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
bull To give you an idea of how to value your startup I have created the following model
2 Look online for similar PUBLIC company (as close as you can find) and get their PE ratio (price to earnings)
This will indicate the ldquomultiplerdquo on earnings that public companies are valued
Multiply to get your ldquovaluerdquo in 5 years
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
bull To find PE ratios See httpenwikipediaorgwikiPE_ratio Sites such as Reuters offer these
comparisons in one table Example of RHT
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
3 Take that future value and ldquodiscountrdquo it to the present using your (estimated) WACChellip which in this case is = VC target rate of return (60 per year for example)
4 Discounting will give you the ldquoPresent Valuerdquo of your company (before investment)
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
bull To give you an idea of how to value your startup I have created the following model
5 Take this present value (before investment) and call it ldquopre-money valuationrdquo (lets assume $20 million)
6 If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
bull Pre-money valuation (of company) = $20mm
bull Investment = $5mmbull Post-money valuation (of company) =
$25mm
Question what of shares should the investor get
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Simplified model
bull Did it make sense
bull Question what shares of your company would you give this investor
bull (do you remember the class last week about ldquodividing the pierdquo)
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Keep in Treasury
49
Sales
bull Question what shares of your company would you give this investor
bull If you are asking for $5 million investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Answerbull If you are asking for $5 million
investment then add $20+ $5 and get $25 million (call this ldquopost-moneyrdquo valuation
bull Pre-money = 20bull Money = 5bull Post-money = 25
bull So the investor would own 525 = 15th of your company and should demand 20 of the shares
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm20
Keep in Treasury 29
Sales
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
New Questionbull But what if the ldquovalue of the companyrdquo
were calculated at only 10 million and he offered $5 millionhellip What of the shares should you offer
bull A) 50bull B) otherhellip Why
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
New Questionbull Pre-money = $10bull Money = $5bull Post-money = $15bull Value of investment = $515 = 13 = 33
bull So NO you should NOT offer 50 of the shares
bull Follow up question how many shares will be left in your ldquoTreasuryrdquo after this ldquoroundrdquo of financing And do you think you will have enough shares left for another ldquoroundrdquo
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Dividing the (shares) ldquopierdquo
partner 1 10
partner 210
partner 310
You keep 21
Angel Investor $5mm33
Keep in Treasury 16
Sales
bull 49 - 33 = 16 remaining
bull Probably NOT enough for further rounds of financing
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Valuing a startup ndash getting help
bullOnline software tools can help
bullhttpwwwliquidscenarioscom Liquid Scenarios provides software that estimates valuations of private companies and determines the benefits or outcomes of liquidation events versus financings for all parties involved
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Valuing a startup ndash getting help
httpkookyplanpbworkscomVenture+Capital+Method+of+Valuation
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
httpwwwownyourventurecomequitySimhtml
Valuing a startup ndash getting help
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Rounds of funding - calculator
httpwwwownyourventurecomequitySimhtml
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Valuations
bullSee links from KookyPlanVenture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companiesand Angel investor valuation method
httpkookyplanpbworkscom
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Resources from KookyPlancom
bullFundingRaising capital - ideas for the entrepreneurInvestingVenture CapitalProject Finance capital budgeting
bullValuations Venture Capital Method of Valuationbusiness valuationFinancial modelingValuations and internet companies
httpkookyplancom
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
more
bullSee KookyPlancom for more info onInvestingissuing sharesAbiding by Securities LawsPresenting your plan to Venture Capitalists
httpkookyplancom
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
bull Valuation tools for investors and Entrepreneursbull bull Angel investor valuation method bull Venture Capital Method of Valuation bull morebull Accountingbull business valuationbull Choosing which venture capital firm to send your planbull Finance bull Financial marketsbull issuing sharesbull List of VC deals from 2007bull Options bull Options valuations with Black-Scholes bull P-E ratiobull Presenting your plan to VCs- tips for entrepreneurs bull Price term sheetbull PE and venture capital in Emerging Markets bull Private equity bull Public funding - IPObull Securities Lawsbull Silicon Valleybull Valuations and internet companies bull Venture Capital Fund Raisingbull Venture Capital bull WACC
httpkookyplanpbworkscomVenture-Capital-Method-of-Valuation
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Tips for dealing with investors
Advice
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
NOT to do
bullDonrsquot conceal lie or exaggerate about the investment opportunity Always provide potential investors with everything that is available for them to make a knowledgeable decision When in doubt disclose disclose disclose
httpkookyplanpbworkscomissuing-shares and httpnolocom
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
NOT to do
bullDonrsquot make public advertisements of your investment opportunity
bullDonrsquot accept investments (or any payment for interest in your invention) unless the transaction is exempt from security registration requirements If in doubt speak with an attorney
httpkookyplanpbworkscomissuing-shares and httpnolocom
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
To do
bullDo include the following notice on all solicitations business proposals and business plans ldquoInvesting in this enterprise involves
considerable risk and should not be done unless you are prepared to lose the complete investment Estimates of projected income or revenue are speculative and this company does not presently have the capital required to meet such projectionsrdquo
httpkookyplanpbworkscomissuing-shares and httpnolocom
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Venture Capital Finance in Brazil
VC funds in Brazil
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Venture Capital activity in BrazilbullBigger funds
5 times bigger today than five years agoThe average venture capital fund now
being set up in Brazil seeks to raise 80 million - 100 million reais while
Five years ago it could only raise 20 million reaisldquo
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
What is PE and what is VC
bullHard to tell exactly how much is PE and how much is VC
bullldquoit is hard to distinguish the exact sum of money that has been raised for VC from the amount secured for private equity (PE)
bullOften the lines between the two are blurred but VC investment tends to be smaller in size and at a much earlier stage in a companys formation than PE
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
ldquoPrivate Equityrdquo Industry
Venture Capital
Angel Investors
Private Equity funds
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Venture Capital activity in Brazilbull Who invests in Private Equity funds
Rich individuals Rich families And hellip professional investors And other funds
bull Figueiredo says that around 2 of Brazils pension fund assets ndash which exceed $275 billion according to ABRAP the Brazilian Association of Pension Funds ndash is allocated to VC and PE today up from only 1 a year ago
bull However this proportion is still much lower than in the US where pension funds allocate 6 to VC and a further 8 to PE
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Venture Capital Where in Brazil
bullThe country is seeing clusters of technology companies set up around the best universities
bullparticularly in Satildeo Paulo Rio de Janeiro and Belo Horizonte
bullBrazils equivalent of Silicon Valley will take shape in these geographic areas says Wood
bullHe adds that its most innovative firms leverage Brazils strength in agriculture and are often found in the bio-technology and ethanol technology sectors
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Example Fir Capital bull Fir Capital the Belo Horizonte-based venture
capitalist with $150 million in assets under management
has invested in a business called Safetrace which has developed a pioneering platform to track animals involvement in the food chain
bull The typical size of Firs VC investments is $1-$10 million equivalent and its main exit strategy is through strategic sale
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Example Fir Capital
bullWe have a time horizon of three to five years and often earn double-digit multiples on the original investment we make ndash
bullldquoSometimes we get up to 30 times of our initial investment back says Firs president Marcus Regueira
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel Network in Brazilbull Lupatech LatAms biggest valve producer and
leader in precision casting is a good example of a Brazilian enterprise that has reaped the rewards of VC
bull Founded in 1980 by CEO Nestor Perini and called Micro Inox the company first received VC backing from CRP the Brazilian VC group in 1987
bull The business ndash headquartered in Rio Grande do Sul state ndash also secured rounds of PE investment in 1995 2003 and 2005
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel Network in Brazil
bullVenture capital was vital for the development of the business says CFO Thiago Alonso de Oliveira
bullThe most important factor for us was the management assistance and support that our VC backers gave usrdquo
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Value of VCrsquos to entrepreneurs
bullldquoDuring that time Irsquove come to appreciate the real value that great venture capitalists provide amazing informational awareness comprehensive business networks providing brand cover for companies so
that they can recruit and raise more money effectively and more
bullBen Horowitz | Apr 14 2010httpwwwbusinessinsidercomfour-things-some-vcs-do-that-i-dont-like-2010-4ixzz0lYVjZ21s
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel Network in Brazil
bullIn parallel with the evolution of VC in the country an angel network of investors has sprung up throughout Brazil
bullMany of these have themselves created businesses and know the benefits of receiving a loan or equity investment when starting a company
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel Network in Brazilbull The angels have set up their own websites
work with incubators and universities and provide entrepreneurs with capital from 100000 to a million reais
bull We provide an incubator an accelerator so that companies can grow really quickly Some 40000 business people in Brazil benefit from all the incubators in the country and the number of them is growing exponentially says Joseacute Alberto Aranha president of the Genesis Institute
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Angel Network
bullSome 80 of the companies in incubators turn out to be successes says Aranha
bullOne of the main exit strategies for the angel investors is via mergers of several incubated companies
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
4 Venture Capital Finance in Brazil continuedhellip
Why now
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Why Brazil why now
httpvc-brazilcomblog
bull ldquothe venture capital market in Brazil has reached an extraordinary moment I compare it to the US in 1994 ndash an inflection point where a critical mass of startups in certain markets will grow exponentially
bull Like the US in 1994 a healthy balance exists between the number of startups and the market for their products and services With proper execution and sufficient capital Brazilian entrepreneurs have the potential to build the next generation of great companiesrdquo
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Why Brazil why now
httpvc-brazilcomblog
bullldquoFor both multinational strategic investors and private equity firms Brazil has become a place where you have to have exposure going forwardrdquo
Nick Wollak who oversees $150 million in
private equity for Axxon Group in Rio de Janeiro
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Why Brazil why now
httpvc-brazilcomblog
bull ldquoIn sum the technology that is required for a boom is present in Brazil broadband and great software development What will spark the boom going forward is the confluence of other factors
bull Trends including but not limited to demographics (emerging middle class consumers) the economic environment (lower interest rates
fiscal stability) culture (entrepreneurship high wireless and
internet usage)
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
httpvc-brazilcomblog
bullA Pessimist Interest rates while falling remain high enough to compete for investor dollars ndash why invest in a high-risk startup when you can earn 11 a year buying a low-risk bond
bullB Response Certainly interest rates must continue to fall or at least not rise in order for the venture capital ecosystem to flourish
Reasons the private VC industry has not (yet) taken off in Brazil
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
httpvc-brazilcomblog
bullIndeed why has most of the venture capital in Brazil come from government sources (FINEP BNDES etc) up to this point Because private investors have had no incentive to take the huge risks involved in venture capital investing They could get great returns from bonds or if they wanted to dabble in alternative investments private equity
Reasons the private VC industry has not (yet) taken off in Brazil
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Incubators in Brazil
Incubating companies of the future
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Incubators in Brazil
bullIncubator buildings or studios set up for budding entrepreneurs often linked to universities
bullTrends in BrazilEarly 2000rsquos - just 135 incubators had
been set up in BrazilToday - more than 400 exist today
Source Brazilian Venture Capital and Private Equity Association (ABVCAP)
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Incubators in Brazil
bullToday the incubators are home to some 4000 start-ups
Source Genesis Institute an incubator attached to Rio de Janeiros Catholic University
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Entrepreneurship in Brazil
bullSegundo relatoacuterio do GEM o Brasil estaacute entre os sete paiacuteses
empreendedores com mais de 200 incubadoras 3000 companhias mais de 15 milhotildees de empreendedores e mais de 45000 novas empresas
estabelecidas no paiacutes a cada ano
httpwwwabvcapcombrUpLoadArquivoSobre20o20setorpdf
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
International IQ moment
Inspiration from global travels
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Raratonga Cook Islands ndash my favorite travel spot
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
Mid-term Exam ndash May 8th 2010
-- 830 am-10am
bull15 to take exambullMixture of
Multiple choiceShort answer (15 words max)Essay (half page max)
bullHow to prepareStudy all slides from my lectures
