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Fund Raising &

Venture Capital Firm


M. Sedighi
Samsung - AUT
November 2018

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Definition of Start-up
• There's no definition any two
entrepreneurs or investors agree on.

• Two main features of a startup:


• Scalability
• Growth

2
What is Fund Raising
• Fundraising is much
more than asking
investors for money
• Financial Support
• Non- financial
supports

3
New Venture Funding Stream

$ IPO
Venture Capital Rounds
Financing to Milestones Cash
Sales Flow

Time

4
Valley of Death

5
Financing Options
 The bad way (Conditional). Debt
 The hard way. Equity
 The really hard way. Bootstrapping

Venture capital consists of purchasing


equity in startup businesses.

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Determine How Much You are Raising
• Burn rate
• Overestimation
• Underestimation

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Fundraising Materials
• Executive summary
• Short description of the business (elevator pitch)
• Presentation
• Business plan
• Detailed financial model
• The assumptions underlying the revenue forecast
• The monthly burn rate or cash consumption of the
business

8
Output of the Business Planning
Process
• Business plan (narrative)
• Financial statements
• PowerPoint pitch (12-13 pages)
• Elevator pitch (1-2 minutes)

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Due Diligence Materials
• Technical due diligence
• Business due diligence
• Market analysis
• Cap table
• Valuation
• Term sheet
• (www.venturedeals.com/resources)

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Common Deck Mistakes
• Too many slides, too much information
• Too many product details, or too many
financial details
• Belittling competitors
• False/silly assumptions you can’t back
up or don’t have data on
• False confidence or arrogance
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How VCs Decide to Invest
• All VCs are different
• Investment strategy
• They need five-year detailed financial
projection

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Fundraising Process
Investor Final
Presentations Documentation

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Business Plan Term Sheet Funding


Submissions Negotiations
Raising money
takes longer than
you expect. Don’t
waste time
Budget 4-5 months, or more chasing the wrong
investors.

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Using Multiple VCs to Create
Competition
• Choice is power
• Time is a critical factor
• Most VCs have a slow processes

14
Closing the Deal
• Closing the deal includes two activities:
• Signing of the term-sheet
• Signing the definitive documents and getting
the cash

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Definition of VC
• The term “venture capital” is typically
associated with high-risk, high-growth
potential start-ups that may depending on a
number of external factors.
• Any investment in a start-up, can be called a
venture capital investment, though a
common hallmark of venture capital
investors is that with their investment they
obtain some level of influence over the
company in which they invest.
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Nature of the Growth
• Demand in your industry is
constantly outstripping the
supply !
• You wish to have growth in
multiples and not in
percentages
• You believe that your service /
product can achieve the
exponential growth and you
have the right strategies in
place!
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Why Venture Capital?
• Bank saying NO to loans
and seed funding !!
• You have a new concept
and friends and family do
not believe the potential !!
They say NO !
• You have limited capital
after initial stage – for
achieving growth

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Examples…

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VC Structure
Venture Capital Entrepreneurs
Institutional Firm (GP)
Startups
Investor (LP)

Liquidity Event
(Sale or IPO)

Carried Interest

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VC Stages

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VC Satges

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VC Funnel

Source: CBINSIGHTS Sep,2018 23


Financing Lifecycle of a Startup
Growth

Fund Size
M&A/IPO
$20M High Risk ICO

Venture
Capitals
$5M

Angels
$2M

FFF Low Risk


$25K

Time-Line

Seed Start-UP Early Growth Sustained Growth


Source: European Business Angel Association 24
Various stages of Investment

Start-up/ Seed & Expansion/


PIPE Buyouts
Early Stage Technology Growth

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Types of Venture Capital Firms
• Micro VC fund
• Seed-stage funds
• Early-stage funds
• Mid-stage funds
• Late-stage funds

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Venture Capital Structure
LP 3 GP
LP 1 2%
LP 4
LP 2
$100 Management Fee

VC Fund IX, L.P.


Portfolio $9.8 $9.8 Portfolio
Company 1 Company 10

Portfolio
$9.8 $9.8 Portfolio
Company 2 Company 9
$9.8 $9.8
Portfolio Portfolio
Company 3 Company 8
$9.8 $9.8
Portfolio $9.8 $9.8 Portfolio
Company 4 Company 7
Portfolio Portfolio
Company 5 Company 6 27
Venture Capital Return
LP 3 GP
LP 1
LP 4
LP 2
$180 $20

VC Fund IX, L.P.


Portfolio Portfolio
Company 1 Company 10

Portfolio
$100 $35 Portfolio
Company 2 Company 9

Portfolio Portfolio
Company 8
Company 3
$40
Portfolio $25 Portfolio
Company 4 Company 7
Portfolio Portfolio
Company 5 Company 6 28
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Startup Valuation
• What is the difference
between Pricing &
Valuation?
• Company valuation vs.
startup valuation

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Principles of Startups’ Valuation
• The book value of a startup is close to zero
• The valuation is different for different
proposes (fundraising or equity buying)
• Undervalue is not healthy
• Overvalue is not healthy either
• Over-fundraising is not healthy
• From pure communism to pure capitalism

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Buying Equity vs. Fundraising
• Investors become shareholder in two
ways:
• Buying equity: You buy some amount of
shares from current shareholder, and money
goes to his pocket.
• Fundraising: New shares will be issued, and
money goes to company account.

32
Dilution Example

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Low valuation Example
Year 1 2 3
Cash need T1B T3B T10B
Valuation (pre money) T4B T12B T40B
Low Valuation (75%) T3B T9B T30B
Cap table in healthy Founders: 80% Founders: 64% Founders: 51.2%
VC1: 20% VC1:16% VC1:12.8%
valuation VC2: 20% VC2: 16%
VC3: 20%
Cap table in low Founders: 75% Founders: 60% Founders: 45%
VC1:25% VC1:15% VC1:11.25%
valuation VC2: 25% VC2: 18.75%
VC3: 25%

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Valuation Methods
• Asset based methods:
• Cost to duplicate
• Cash flow based methods:
• DCF
• Relative methods:
• Analytical benchmark
• Multiples (Revenue, EBIDTA)
• Intuitive and heuristic methods:
• Scorecard
• Other methods:
• VC Method
• Dave Berkus Method
• ...
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Methods Application in Different Stages
of Developments

Source: AD4Ventures 36
Definition of WACC

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Discounted Cash Flows
• Calculating the Enterprise Value (EV) as the
present value of future cash flows
• Discount rate (WACC) which will be higher
regarding the uncertainty of the risk profile
• It needs a rich set of data-points:
• Sales, Users, Costs, etc. that is realized
• Financial projections with plausible assumptions

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DCF Method
• Valuation from DCF method consists of three
elements:
• +All profits in short term (usually 3-10 years)
• estimated with financial projection table
• + Plus all profits for long-term (for years after short
period to ∞)
• it’s a geometric series based on last year profit and
fundamental growth rate
• - Minus all fund raising
• Valuation = Short term Profit + Long term profit – fund
raising

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Failure rate of startups in different
stages

Proof of
Team MVP
Concept

Scale Monetization

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DCF Method

Investors:
• Average of upper bound interest rate used: 67.5%
• Average of lower bound interest rate used: 39.5%
Startups:
• Startups said interest rate used for their valuation was 57%

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Multiple Method
• Indication of EV based on trading prices
(stock market or M&A transaction prices)
• It is very similar to P/E and EBITDA
multiples.
• What to compare?
• Sale/GMV (Gross Merchandise Value)
• Revenue: Your real earning; your commission.
• EBITDA
• Earnings (net profit)

42
How to find Revenue and Profit
multiples
• How to find Revenue and Profit multiples:
• We have a data from public company (from tsetmc.com) :
• 200M number of shares
• Price: T1200 per share
• Market cap: T240B
• Adjustments: Valuation = Market cap – Physical capital +
Debt – Payables ≈ T170b
• Also we know (from codal.ir):
• Revenue= T20b - EBITDA= T10b
• So: Valuation / Revenue = 170/ 20 = 8.5
• Valuation / EBITDA = 170/10 = 17

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EBITDA Multiples Valuation

Source: AD4Ventures 45
EV/R Multiple

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Case: online taxi service
• Assumptions:
• Market Size: 200 K
• Market Share: 50%
• Average Ride/Day: 5
• Average Fare: T15K
• Commission: 13%

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Valuation (Multiple method)
• Growth assumptions:
• Drivers right now: 30K
• Drivers @ 2 years: 80k
• Revenue = number of drivers* ride/day * fare
* commission * number of days in year
Revenue
• 80,000 * 5 * 15,000 * 13% * 365 = T284.7b

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Valuation (Multiple method)
• Valuation (from revenue multiple) =
(𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ∗𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒)/ (1+𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑟𝑎𝑡𝑒)^𝑛
• Valuation = 284.7 * 2.65 / (1 + 0.5) ^2 =
T335.3b
• Valuation (from profit multiple) = (𝐸𝐵𝐼𝑇𝐷𝐴
∗𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒) /(1+𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒)^𝑛
• Valuation = 284.7 * 40% * 13.5 / (1 + 0.5) ^2
= T683.2b

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Exit Strategy
• Young founders are often surprised that investors
expect them either to sell the company or go public.
• Investors need to get their capital back
• Exit Types
• M&A (Mergers & Acquisitions)
• IPO (Initial Public Offering)
• ICO (Initial Coin Offering)
• Sell to a friendly individual
• SME
• Liquidation and close

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Term Sheet
• Price
• Liquidation Preference
• Pay-to-Play
• Vesting
• Exercise Period
• Employee Pool
• Anti-dilution
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