Digital Ignition Presents

FINDING YOUR WAY THROUGH THE VENTURE CAPITAL GAUNTLET

Agenda• The Basics – Venture Capital defined• When are you ready to raise capital• The Venture Capitalist Perspective• The Ins and Outs of Valuation• Risk, Rewards & Disclosures• Funding, Form & Structures • Managing your Cap Table• Option Pools• How much from whom• How it’s done

Venture Capital the Basics• Venture Capital – a form of financing that is

provided to small, early-stage, emerging firms that are deemed to have high growth potential or which have demonstrated high growth.

• Sources:o Family & Friendso Angels, Angel Groups & Angel Networkso Venture Capitalo Private Equityo Crowd-Sourced Capital

Venture Capital’s Perspective• Their World

o 9 out of 10 will failo Success Returns must be largeo Lingo to know: Fund X, Reserves, Series A-B-C, Limiteds,

Fully invested and Cross Fund investingo Legal life of a fund is typically 10 years but 90% live

longer• What are they looking for

1. Team2. Idea3. Plan4. Validation

• Why your model is wrong

What drives valuation• EBITDA• Revenue• Revenue Growth Rate• Gross Margin• Uniqueness of Product• Scalability of model• Standardization, documentation & Process• Market positioning & Brand Recognition

The “Why” of valuation• Predictability & Scalability is key to valuation

o EBITDA drives IRRo Valuation is ultimately a multiple of future cash flow

• New Owner wants to knowo Revenue & EBITDA are predictableo Business will scale up easilyo More aggressive growth is achievableo Systems & Processes are already in placeo The new “baton carrier” will win the race

• Unicornso Normal rules do not applyo Very, very, very rare

Pre and Post valuation• Pre-funding valuation is more art then

science• Typical scenario

o Pre Money Valuation = $5 million (50%)o Equity Investment = $5 million (50%)o Incentive pool for mgt = 15%o Post Money Valuation = $10 million

• Founders 42.5%• Investors 42.5 (possibly with preference)• Management Incentive pool 15%

o Larger equity investments do not necessarily dictate giving up larger percentages of ownership

Scenario 1 – Organic Growth

AnnualizedRun-Rate 2012 2013 2014 2015 2016

Rev 2,000 3,560 5,120 6,680 8,240 9,800 COGS 1,080 1,922 2,765 3,607 4,450 5,292 GM 920 1,638 2,355 3,073 3,790 4,508

46% 46% 46% 46% 46% 46%

S&M 100 412 412 412 412 412 Opx 800 1,156 1,312 1,802 2,036 2,270 Tot Opx 900 1,568 1,724 2,214 2,448 2,682

EBITDA 20 70 631 859 1,342 1,826 1% 2% 12% 13% 16% 19%

est Head equiv 7 10 11 15 16 18

2012 2013 2014 2015 2016 -

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Rev EBITDA

1 2 3 4 5 -

20,000 40,000 60,000 80,000

100,000

Valuation (Post)

Valuation (Post)

Pre-Money 5,000 86% 3,069 4,414 5,182 8,101 11,019 Equity 0% - - - - - Mgt 800 14% 491 706 829 1,296 1,763 Valuation (Post) 5,800 100% 3,560 5,120 6,012 9,397 12,782

Scenario 2 - $5 Mil RaiseAnnualizedRun-Rate 2012 2013 2014 2015 2016

Rev 2,000 5,900 9,800 17,600 29,300 41,000 COGS 1,080 3,186 5,292 9,504 15,822 22,140 GM 920 2,714 4,508 8,096 13,478 18,860

46% 46% 46% 46% 46% 46%

S&M 100 1,760 1,660 3,220 4,780 4,780 Opx 800 2,680 3,160 2,960 4,130 5,300 Tot Opx 900 4,440 4,820 6,180 8,910 10,080

EBITDA 20 (1,726) (312) 1,916 4,568 8,780 1% -29% -3% 11% 16% 21%

est Head equiv 7 29 32 41 59 67

Pre-Money 5,000 42% 2,458 4,083 5,588 13,323 25,608 Equity 5,000 42% 2,458 4,083 5,588 13,323 25,608 Mgt 2,000 17% 983 1,633 2,235 5,329 10,243 Valuation (Post) 12,000 100% 5,900 9,800 13,412 31,976 61,460

2012 2013 2014 2015 2016 (10,000)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Rev EBITDA

1 2 3 4 5 -

20,000 40,000 60,000 80,000

100,000

Valuation (Post)

Valuation (Post)

Scenario 3 - $10 Mil RaiseAnnualizedRun-Rate 2012 2013 2014 2015 2016

Rev 2,000 9,800 17,600 29,300 44,900 60,500 COGS 1,080 5,292 9,504 15,822 24,246 32,670 GM 920 4,508 8,096 13,478 20,654 27,830

46% 46% 46% 46% 46% 46%

S&M 100 3,720 3,220 4,780 6,340 6,340 Opx 800 3,960 5,520 4,930 6,490 8,050 Tot Opx 900 7,680 8,740 9,710 12,830 14,390

EBITDA 20 (3,172) (644) 3,768 7,824 13,440 1% -32% -4% 13% 17% 22%

est Head equiv 7 48 59 65 85 96

Pre-Money 10,000 42% 4,083 7,333 10,990 22,820 39,200 Equity 10,000 42% 4,083 7,333 10,990 22,820 39,200 Mgt 4,000 17% 1,633 2,933 4,396 9,128 15,680 Valuation (Post) 24,000 100% 9,800 17,600 26,376 54,768 94,080

1 2 3 4 5 -

20,000 40,000 60,000 80,000

100,000

Valuation (Post)

Valuation (Post)

2012 2013 2014 2015 2016 (10,000)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Rev EBITDA

Exit Valuation Comparison• Exit Valuations are calculated as a

multiple of EBITDA• Actual valuation would likely be

greater for larger faster growing scenarios

• Estimates exit valuations are as followo $0 Raise = $11 milo $5 Mil Raise = $61 mil [Investor’s Return 5x]o $10 Mil Raise = $95 mil [Investor’s Return 4x]

• Founders own 42.5% (charted below) 2012 2013 2014 2015 2016 -

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Revenue

0 Mil5 Mil10 Mil

2012 2013 2014 2015 2016 -

20,000

40,000

60,000

80,000

100,000

Valuation

0 Mil5 Mil10 Mil

2012

2013

2014

2015

2016

- 5,000 10,000 15,000 20,000 25,000 30,000

10 Mil5 Mil0 Mil

Risk, Rewards & Disclosures• Disclosures

o The numbers presented here are for discussion purposes only – actual performance WILL VARY!

o Valuations are estimates and will be influenced by many factors including things outside of the company’s control – economic conditions for example

• Private equity brings both strings and benefitso Often compared to getting married (but with no options for

divorce)o Increased growth requirements (capital return expectations)o Additional demands & oversight (board seats)o Benefits include resources, contacts and industry expertiseo Access to capital – add on roundso Can ultimately mean loss of controlo Larger returns

Forms, Structures & Terms• Common• Preferred• Convertible (or Convert)• Up Rounds and Down Rounds & other Follow on

Rounds• Cram Down

Managing your Cap Table• A capitalization, or cap, table is a record of the

pro-rata stock ownership of the company’s founders and shareholders.

• The basic data included in a cap table are:o Company stockholderso Classes of stock and how much was paido How many shares of each class are owned and by whomo Total ownership on a fully diluted basis (issued and non issued

(options))• Number and “Quality” of shareholders matters• Reps and Warranties

Option PoolsTitle Range*CEO 5 - 10COO 2 - 5VP 1 - 2Independent Advisor 1Director .4 – 1.25Lead Engineer / Developer .5 – 1 Senior Engineer / Developer .33 - .66Junior Engineer / Developer .2 - .33

Management option pools are typically 10% to 20% of total equity

* Represents percentage of total option pool

How much from whom• Friends and family < $100,000• Angles $100,000 to $700,000• Super Angles $200,000 to $1,000,000

• No man’s land $1,000,000 to $2,000,000

• Early Stage Venture $2,000,000 to $7,000,000• Later Stage Venture $5,000,000 to

$25,000,000• Silicon Valley Venture $5,000,000 Plus

• Private Equity $100,000,000 +

How its done• The Pitch Deck

o Practice, practice, practiceo Listen to feedback (even conflicting feedback)

• The Financial Model• 1,000s of meetings & presentations

o Ask everyone for a referral• Networking is critical• Don’t forget “Strategics”• Look beyond Atlanta• Be careful of the meaningless “yes”

The Beginning

Questions