Raising Venture

Capital for the Serious

Entrepreneur

Book by Dermot Berkery

GoogleBooks: XXX
Creating a set of "stepping stones:
Step 5 Milestone 12
Milestone 13
Milestone 14

Step 4 Milestone 9
Milestone 10
Milestone 11

Step 3 Milestone 7
Milestone 8

Step 2 Milestone 4
Milestone 5
Milestone 6

Step 1 Milestone 1
Milestone 2
Milestone 3
Main Path and Alternatives:
Step 5.1

Step 2.3 Step 5

Step 2.2
Step 4 Step 5.2

Step 2.1 Step 5.3

Step 3

Step 2

Step 1
Worst Case Szenario:
proceed

accelerate
Yes

partnering
Step 2
Step 1 reached
?
Abandon the project
No

Restructuring the
company

"bridging" to step 1
Large and Small Companies:

innovation incremental
breakthrough product and
manufacturing distribution
products and service
services improvement

core core competence of large companies

competence
of small
companies
 start-up company
"J" Cash Curve of a Busniess: start-up biotech company (ultimately
sold)

cumulative start-
generated up company
cash
($)

0
time (years)
total
investment start-up
required biotech company
(ultimately sold)
total
investment
required

operating cash cash flow

flow break even break even
The seven-year marathon...

It takes at least five to seven years to build

a business.
There are three to four common financing
stages in the development of a business
The really big hits in a venture capital
portfolio tend to be the ones held onto for
seven to ten years.
Activities in a new business that absorb capital...

Capital Assets
Product development costs
Leadership and administration
Working capital (Working Capital =
Current Assets Current Liabilities)
Sales ramp-up financing
Evidence to include in a business plan:

Evidence for opportunity...

Potential for accelerated growth in a

big, accessible market
An achievable position of market
power - a sustainable, differentiated
product or service proposition
Capable, ambitious, trustworthy
management
Evidence for opportunity...
Tools and arguments

"ROI-spreadsheet": Focus on the economic benefits of the

company's product or service: What is the company's
superlative values proposition to customers and why is the
company better placed than the competition to deliver this
value?
Sustainable and defensible position (e.g. patents, know-how,
first-to-market,...) to allow market power to be exploited
Very high gross margins (greater than 70%)

Balanced team with deep domain knowledge and prior

experiences and records
Evidence to include in a business plan:

Evidence for a good deal...

Plausible, value-enhancing stepping

stones
Realistic valuation to allow the
investor to earn a sizable multiple
Promising exit possibilities
Evidence for a good deal...

Tools and arguments:

Outline of milestones / stepping stones and

Alternative sets of milestones
possibility of an initial public offering (IPO)
exit strategy
Companies that have the potential to provide
very high returns on investment share three
simple factors:

1. Fast growth
2. High gross margins
3. Low capital intensity
How venture capitalists value early-stage
companies

1. They look at the long-term and short-

term future to identify possible value
2. They discount the future values back
using multiples
 Long-term and short-term future value

short-term future value

= value at the next financing round
investors will see a higher company value in the next round (in
12-18 months) to be compensated for the risks
valuation method: find examples of similar companies in other
sectors

long-term future value

= maximum valuation of the company = "exit value"
only possible if the company stays independent - i.e. an IPO is
possible and plausible to explain
valuation method: compare with similar company
Discounting the future values

10 to 20 6 to 8 3 to 5
times times times

First Round Second Pre-IPO final (max.)

Round value
Why big companies buy small companies

Small companies are better at innovation than big

companies!

Distribution Benefit

small company small company

(stand alone) (acquired by a big one)
revenue 10$ (100 %) 40$ (100 %)
development costs -4$ (-40 %) -4$ (-10 %)
administration costs -2$ (-20 %) -0,8$ (-2 %)

sales and distribution costs -6$ (-60%) 0$ (0 %)

net profit -2$ (-20%) -35,2$ (88%)