VENTURE CAPITAL Dominic Shaull Michael Jordan VENTURE CAPITAL

VENTURE CAPITAL Dominic Shaull Michael Jordan

VENTURE CAPITAL WHAT IS IT? A BRIEF HISTORY OF VENTURE CAPITAL NEED FOR FUNDING SOURCES OF FUNDING ADVANTAGES AND DISADVATANGES ALTERNATIVE PATHWAYS

VENTURE CAPITAL WHAT IS VENTURE CAPITAL? ØWay to obtain money and experience for a business via the private equity of Venture Capitalists (individuals willing to invest in a start up) ØIf money is not obtained through VC, it will have to be obtained from one of the following: §Bank Loans, personal savings, or boot legging (Use of company’s profits early-on to grow)

VENTURE CAPITAL THE HISTORY OF VENTURE CAPITAL ØSome of the first Venture Capitalist include the following: §Vanderbilts §Whitneys §Rockefellers §Warburgs ØVC in the first half of the 20 th century was the domain of wealthy individuals and families ØThe Small Business Investment Act of 1958 was the first step toward a professionally-managed venture capital industry §Officially allowed for the licensing of private "Small Business Investment Companies” §Considered as the first venture capital firm

VENTURE CAPITAL THE HISTORY OF VENTURE CAPITAL ØIn 1960 s and 1970 s, VC firms focused their investment on starting and expanding companies §Companies were primarily exploiting breakthroughs in electronic, medical, or data-processing technology ØIn the 1980 s, the industry was hampered by sharply declining returns and certain venture firms began posting losses for the first time ØThe market for initial public offerings cooled in the mid-1980 s before collapsing after the stock market crash in 1987 NASDAQ Composite Index

VENTURE CAPITAL THE HISTORY OF VENTURE CAPITAL ØThe late 1990 s were a boom time for VC, they benefited from a huge surge of interest in the Internet and other computer technologies §Initial public offerings of stock for technology and other growth companies were in abundance and venture firms were reaping large returns ØIn the 2000 s VC funding has spread widely through the medical field §Many start-ups have become centered around early disease detection and prevention

VENTURE CAPITAL FAILURE Ø Failure – Amp’D Mobile (2007) ØRaised 360 million, crashed into bankruptcy ØLax on customer credit check ØHad 90 days to make payment instead of 30 like Verizon Ø 80, 000 of company’s 175, 000 customers were unable to pay bills ØBurned companies such as MTV Networks, Columbia Capital Equity Partners, Highland Capital Partners

VENTURE CAPITAL 2010 Investments in Industry In Millions of Dollars Biotechnology Software 413. 9 321. 3 245. 8 205. 7 175. 2 171. 1 152. 4 141. 4 133 93. 8 45. 3 37. 9 11. 3 IT services Semiconductors Networking and Equipment Consumer Products and Service Electronic/Instrumentation Healthcare Services Other 0 200 400 600 755. 4 800 1, 035 1000 1, 296. 10 1, 282. 20 1200 1400 [1]

VENTURE CAPITAL WHY DO YOU NEED VENTURE CAPITAL? ØNew companies are often too small and lacking in experience to raise the money needed to produce a new product §Examples of Startup Costs: Continuation of R&D Employee Salaries and Benefits Manufacturing and Production Costs Patent Fees ØVenture capitalists bring much needed capital to the companies but also bring often needed financial expertise

VENTURE CAPITAL WHY VENTURE CAPITAL OVER BANK LOAN? ØAvailability §Banks usually do not offer loans to startups without strict provisions to reduce the risk §Venture capital is usually generated from a pool of investors, which reduces the overall risk of the investment

VENTURE CAPITAL Customers Public Investors Banks Government Grants Friends & Family SOURCES Corporate Investment Angels Venture Capital

VENTURE CAPITAL Friends & Family • Members of your personal network • Have adequate means to make an investment Venture Capital • Professional investment managers Angels • Experienced investors using own wealth Corporate • Corporations make the investment

VENTURE CAPITAL Banks • Commericial/State institutes providing financial services • Loans and such Public Investors • General public can invest by buying shares of the company • For established companies Gov Grants • Department of Defense Customers • Customers make direct investment in the R&D of new products or services

VENTURE CAPITAL Venture Capitalist Corporate Investment • Invest in companies with potential for high return • Raise money and put into funds • Funds vary in size ($50 m to $2 b) • Each fund has a specific profile (eg. Medical devices) & investment horizon (eg. 5 yrs) • Able to povide multiple rounds of funding & have extensive networks of contacts • Made by large companies for strategic & financial reasons • Two ways to provde funds: • Purchase equity in support of R&D or licensing agreement • Traditional venture investments

VENTURE CAPITAL Government Grants • Do. D gives $1 b/yr to earlystage R&D • Projects must serve Do. D need & have commercial applications • There are two programs: SBIR and STTR SBIR • Small Business Innovation Research • Small technology companies or Individual innovators who form a company • Up to $850, 000 STTR • Small Business Technology Transfer • Small companies working cooperatively with researchers at universities & other research institutions • Up to $850, 000

VENTURE CAPITAL GET STARTED Ø Be a people person Ø Know your capital investors Ø Be active about your managerial decisions [2]

VENTURE CAPITAL HOW TO OBTAIN VC? Ø Ensure the investors your company/idea fits their investment profile Ø Research & find your target §Which partner of the firm should you speak to about your idea § Who has a history of supporting ideas or companies similar to yours ØDo: § NOT Send a “cold” email § Have someone introduce you (e. g. Linked. In) § Set up a meeting with the investors

ELEVATOR PITCH ow n K ho W Tailor speech Potential Rewards e Better How much capital do you need make them want to hear more is W h y How do investors get their reward 30 sec nc rn u t e R Who are you speaking to? Know your audience Co $$ Needs What does your idea/product fulfill

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VENTURE CAPITAL BUSINESS PLAN Ø Once Elevator Pitch worked, business plan is used to provide the detailed plan How much you plan to make? Where do you plan to make the products? What is the cost of production? What is already in the market & how you compare? Ø Answer all the questions VCs have before giving you their money [2]

VENTURE CAPITAL SOUCE OF FUNDS ADVANTAGES DISADVANATGES Family and friends • Least expensive funding source • Flexible alternative for early-stage funding • Limited expertise • Do not understand level of inherent risk • Not able to participate in subsequent rounds of funding Angels • Moderately priced, early-stage funding source • Take on considerable risk • Exercise less control than venture capitalists and corporate money • Act more quickly than venture capitalists • Limited expertise • Not able to invest in subsequent rounds • Negatively affect terms and level of control by company’s perspective • Multiple angels to meet funding needs • Valuable experience to share with innovators • Provide access to vast network of contacts • Ablility to take on considerable risk • Participate in multiple rounds of funding • Exercise considerable control over venture’s direction, management, and exit • Require considerable share of ownership in exchange for investment • Expect high returns or other terms not favorable to company • Lead to meaningful product/project synergies • Provide accesss to valuable resources • Less expensive than venture capitalists funding • Lend to young company’s credibility • Provide company with a “built-in” exit strategy • Limited value in return for building business • Conflicts with corporate investors • Issues with intellectual property ownership • Limit value realized from exit stragety if corporate investor has “right of first refusal” Venture capitalists Corporate investment [2]

VENTURE CAPITAL SOUCE OF FUNDS ADVANTAGES DISADVANATGES Customers • Extremely inexpensive funding • Potential for young company’s credibility • Provide valuable market-based insights revelant to product development • Lead to conflicts if company seeks to sell the innovation to customer’s competitor • Customer seeks to limit way in which innovation is marketed to match its best interest Government grants • Inexpensive funding • Founders not require to part with any equity in the company • No influence over any business decisions • Strengthen a young company’s credibility • Highly competitive • High expectations based on rigorousness of research performed • Lengthy funding review cycles • Funding capped at $850, 000 per project Banks • Access to funds usually does not require the company to share ownership • No influence over any business decisions • Interest payments are tax deductibles • Secured relatively quickly and used to help bridge short-term financing gaps • Business assets can be used as collateral • Affect cash flow as regular payments of principal and interest must be made • Start-ups pay a premium on their loans • Start-ups may have difficuilty getting loans if no revenue or tradeable assests [2]

VENTURE CAPITAL ALTERNATIVE PATHWAYS Ø Partnering Two entities share responsibility for the development or commercialization of an idea or invention Ø Licensing Transfer of an idea or invention from the innovator to a licensee in exchange for ongoing royalties and/or other payments Ø Sale/Acquisition Innovator chooses to sell an idea outright, completely relinquishing control to acquirer Ø Crowd-Funding [2]

VENTURE CAPITAL REFERENCES [1] Berkeley Entrepreneurs Forum Shaking the Money. Tree presentation: http: //entrepreneurship. berkeley. edu/main/index. html [2] Zenios, Makower, and Yock. Biodesign: The Processing of Innovating Medical Technologies. Ann Arbor, Michigan: Edwards Brothers Inc. , 2010.