Venture Capital: Data & Thoughts (felipe Mendozaof Aristos Ventures)

WEEK 2: THE PROCESS OF INVESTMENT

VENTURE CAPITAL: DATA & THOUGHTS (FELIPE MENDOZAOF ARISTOS VENTURES)

• What is private equity?

• Investment classes

• Traditional

• Cash
• Bonds
• Equities
• Real estate

• What is venture capital?

• Private equity

• Leveraged buyouts
• Growth capital
• Distressed investments
• Mezzanine capital
• Venture capital

• Venture capital partnerships
• VCs funded 2340 new companies in 2016
• What you want to get across

• What’s the concept? Who is the customer? Who’s money are you displacing?
• What’s the big problem (or opportunity) and how do you solve it? What does the product help the customer do? What’s next (product vs. company building)?
• What’s progress to date? Is there transaction and proof it works?
• Who’s the team and what are their past successes?
• Sources/uses of the raise and how much

• Analogies help
• The first thing an investor hears is the last thing he remembers. Tell them what you do in the first sentence.
• Simplify the ‘technology’. Investors can be techies or finance people
• KISS (keep it simple, stupid); minimize buzz words
• Show your enthusiasm and excitement. You’re selling the company/idea/team.
• Know the audience and match the pitch to them.
• Address the pain points or predictable surprises
• Talk about risk mitigation: development risk, marketing risk, etc.
• Your product must be substantially better than incumbent to mitigate customer risk of buying from you
• Ask for the money you need and what you will do with it

VENTURE CAPITAL DEAL SOURCING AND SCREENING

• Venture capitalists (VCs) invest in privately held, high-growth, early-stage companies

• Typically partnerships, run by general partners who raise money to invest from limited partners who are usually institutional investors
• Firms generally raise new funds every 3-4 years

• The modern venture capital industry began in Silicon Valley in the late 1950s with the founding of computer, medical, and technology-based start-ups

THE PROCESS OF INVESTMENT: A MATTER OF TRUST AND MUTUAL INTEREST

PRELIMINARY ANALYSIS

• Investor success depends on finding the right opportunities
• Developing Trust between Investor and Entrepreneur/Management
• [pic 1]
• Project fits our mandate
• Management credible
• Basis to work with management
• Attractive industry
• Attractive market
• Business model
• [pic 2]

DUE DILIGENCE PHASE 1

• Management
• Market

• Competitors
• Positioning

• Customers

VALUATION

• What are the possible exits?

• IPO
• M&A

• Attractive market values

VALUATION INFLUENCERS FOR EARLY STAGE

• Overall risk
• Significant market size
• Manageable competition
• Fundamental sustainable differentiator
• Top-tier management team

VALUATION AND RISK

[pic 3]

CAPITAL EFFICIENCY AND RISK

[pic 4]

METHODS OF VALUATION

• Methods

• Discounted cash flow (DCF)
• Comparables
• Target ownership

• Reality for early-stage companies

PROS AND CONS OF DCF

• Pros

• Highly quantitative
• Provides specific, objective numbers as basis for negotiation
• Speaks to ‘intrinsic value’ of company

• Cons

• Too many variables
• Depends upon accurate forecasting
• Difficult to discount for risk and lack of liquidity

COMPARABLES

• Most closely resembles real estate valuation
• Look at prices of similar deals

• Stage of business
• Location of business
• Industry

• Adjust up or down for specific circumstances

NEGOTIATING

• Important considerations
• Priorities
• Equilibrium
• Common basis for valuation
• Preliminary valuation
• Exclusive

STRUCTURING

• Form of entity

• C corp
• LLC

• Capital structure
• Economic terms
• Control terms

DUE DILIGENCE PHASE 2: THE DEEP DIVE

TRANSACTION-PROCESS DOCUMENTATION

• Preliminary Investment Overview/Thesis

• Single page document-high level overview
• Relays first opinion back to partners

• Investment Due Diligence Package/Notebook

• Documents, interviews, observations

• Investment Memorandum

• 7-10 page document that summarizes due diligence, market, management, product, proposed financing, milestones, etc
• Investment recommendation

• Term Sheet

MONITORING AND EXIT-PORTFOLIO MANAGEMENT