AGENDA!

•  Venture Capital Overview"

•  Valuation Techniques"
•  Capstone Model"
•  Lunch"
•  Capstone Model"
•  Guest Speaker – David Obstler"
•  Deliverables"
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•  2 competing vendors (A & B) are located along a thoroughfare heavy with pedestrian traffic!
•  Demand along the thoroughfare is constant and there is no difference in either product or price between the
two vendors !
•  Each customer will always choose the nearest shop to their respective location!

With the goal of efficiently maximizing market share, A and B can move in increments of 0.5
or 1.0 digits(s) to the left or right. Alternatively, a vendor can pass a turn and not move.!
CLASS EXERCISE!

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CLASS EXERCISE!

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•  The Hotelling model is referred to as the principle of minimum differentiation. !

•  The street is a metaphor for product differentiation.!
•  As Jet Blue attempts to differentiate its product from the competitors, it also
adopts similar flights schedules & service offerings.!
CLASS EXERCISE!

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The only location these vendors will be able to agree upon is at the midpoint of the street. Here
each still gets one half of the market, but now the average distance customers have to walk is
double what it was when the sellers were located quarter points of the street. !
 Venture Capital 101!
•  Key Questions"
•  Valuation"
•  Raising Capital: SaaSter"
•  Multiples"
•  A Tale of Two Term Sheets"
•  The VC Mindset: Key Considerations"
 Venture Capital 101!

All companies that go out of

business do so for the same
reason - they run out of
money."
"
– Don Valentine,"
Founder"
Sequoia Capital"

The decision of how and when to raise capital—and how much to raise—is
among the most important a company will make"
 Key Questions!

!
3 Fundamental Topics!

Management ! Product !! Market!

 Key Questions!
Management !

•  Is the team intellectually honest?"

•  Have they done this before?"

•  Can the gaps on the team be filled out?"

•  How hard is it to recruit professionals to this space?"

•  Is management willing to put their own skin in the game?"

 Key Questions!
Product!
•  What is the real IP?"

•  What are the barriers to entry?"

•  How easy would it be to replace the technology suppliers?"

•  How acute is the pain point which this product or service

solves?"

•  Is the product “priced to win”?"

 Key Questions!
Market!

•  Are the dogs eating the dog food?"

•  What is the product’s competitive advantage vis-à-vis the
competition?"
•  Does this make the CEO’s “top 10 list?”"
•  Can the gaps on the team be filled out?"
•  Is it possible to build a big company?"
 Valuation!
The public markets can provide a real-time indication of how companies are being valued in
your industry!

Applying a 20%-30% discount to

public revenue multiples is
frequently as “scientific” as VC
valuation gets
 Raising Capital!
SaaSter!
Key Details!

q  $3.5M in 2013 revenue,

q  $5.0M in 2014 revenue
q  Raising $5.0M in institutional
capital

SaaSter is a provider of CRM technology How will investors value

for the financial service industry! the company and approach
their investment?!
 Valuation!
VC Visits! Revenue! Multiple! Valuation Range!

2013: After shopping

4x!
$3.5 M the company to
various VCs,
SaaSy
converges
2014 upon a
3x!
$5.0 M $14M-15M pre-
money
valuation!
 A Tale of Two Term Sheets!
With participating
Term Sheet A! Term Sheet B! preferred, investors
get their investment
Pre-Money Valuation! back plus the pro
$ 15 M! $15 M! rata share of what’s
left over
Series A Investment! $ 5 M! $ 5 M!
VC Ownership !! 25%! 25%!
Security! Participating Preferred! Convertible Preferred!

Outcome: $30M1 Sale! With convertible

$ 11.25 M! $ 7.50 M! preferred, investors
2.25x, 23% IRR! 1.5x, 11% IRR! get just the pro rata
share of what’s left
Outcome: $10M Sale! over
$ 6.25 M! $ 2.50 M!
14 year hold in both scenarios! 1.25x, 6% IRR! 0.5x, -16% IRR!
 The VC Mindset: Key Considerations!
What are the long-term
capital needs of the
How does this fit into my business?
broader portfolio? How can I protect
against my
downside risk?

Can I get above a 3x Who have been the

return in 3-5 years? other winners in this
space?

What resources can

I put around the How can we
CEO to increase his continuously stay
or her chances of 12-18 months ahead
What is the recent of the competition?
success? What will I do if the
M&A activity in the
CEO underperforms?
space?
Top Down vs. Bottoms-Up Modeling!

Top-Down Market Analysis: ! Bottoms-Up Modeling: !

   
An indication of whether a market is A foundation-up view of a business’s
attractive enough to pursue! requirements and potential !
 BrickHouse Data"
A Data Warehousing & Analytics Company!

Key Details
! ! ! Current !
Founded! Business Model! Target Market! Ownership! Market Dynamics!
2012" Software-as-a- Medium-Sized •  Founders: Growth sector,
Service" Businesses" 80%, " increasing number of
•  F&F: 10%, " competitors despite
•  Option Pool: barriers to entry"
10%"
 Model-in-Brief!

Profit and Revenue Payroll NP Sensitivity Investor

Loss! Drivers! Expenses! Expenses! Analysis! Model!

High-level, 5- Pricing, sales Salary, bonus, All non-payroll All non-payroll A VC’s!
year cycles, contract taxes and COGS & COGS & perspective into
benefits across overhead overhead
summary structure, the risk-return
life of business! required for required for
view of revenue mix! ! business to business to dynamics for
business! ! operate! operate! BrickHouse!
! !
!
 Note on internal project models….!

NPV! Revenue! Project ! Discount Rate! Sensitivity External

! ! Costs! Analysis! Variables!

Project out Full range of Costs directly What is the How does Which external
cash flows incremental associated with appropriate rate tweaking variables can
associated with revenues pursuing a for a particular individual affect my
project! associated with particular project and why?! variable affect project
! project! project! ! my NPV?! outcome?!
! ! ! ! ! !
! ! !
P&L: Beginning with the End!

Revenue separated
by category!

Major P&L expense

categories flow
through model!

SANITY CHECK: Is the model

realistic? How do your gross
margins at maturity compare
with other companies in your
same industry?"
 Revenue Drivers!
Profit and Loss! •  What is the size of your typical
client?!
•  What is the willingness to pay?!
•  How will you structure your
contracts?!
•  What is the implementation period?!

Sales Productivity!
•  What are the metrics relevant to
your sales cycle?!
•  How many customers will you
acquire in year 1 and year 2—and
what infrastructure is needed?!
Revenue Drivers!

Revenues are
recognized as
contracts are
delivered!

Reflects sales cycle

defined on previous
slide!

Renewals are toggled

on and off as contracts
expire"
 Payroll Expenses!

P&L Category:! P&L Category:! Benefits and Bonus:!

What major function will What is market salary for What is the fully-loaded
this employee assume?" the position?" cost per employee?"

Title: ! Monthly Headcount: !

Who are your initial P&L Category:! What is your employee
hires, and in what order What is market salary for
account and mix at
will you bring them on?" the position?" various stages? "
 Payroll Expenses!
Monthly headcount… ..drives monthly expense!
Non-Payroll Expenses!

Which items scale directly

Same P&L Taxonomy used
with revenue? Which are
throughout model"
fixed?"
Non-Payroll Expenses!
Same Monthly Roll-Up!

Key Questions!
!
•  What are the costs associated
with my technology suppliers?"

•  How can I optimize gross margin?"

•  How can I use lower-cost

resources?"
•  How will I phase in non-essential
expenses?"

•  How do my capital requirements

change over time?"
 Investment Model: Baseline!
Pre-Transaction Cap Table!
Targeted Raise!
  Shares   FD  

Founders   1,000,000   100%  

$1.5M!
  1,000,000   100%  

Summary P&L!
 Investment Model: Valuation!
Pre-Transaction Cap Table! Targeted Raise!
Company Name TEV/Total Revenues
Adobe Systems Inc. 4.0x Forward Revenue Multiple!
Autodesk, Inc. ( 6.0x
Citrix Systems, Inc. 3.2x
3.5x!
Intuit Inc. 4.3x
Oracle Corporation 2.6x Share Price!
Red Hat, Inc. 5.4x
$3.16!
Sage Group plc 6.9x
SAP AG (DB:SAP) 0.0x
Verint Systems Inc. 0.0x Pre-Money Valuation!
VMware, Inc. 0.0x
Summary Statistics TEV/Total Revenues
$3.2 M!
High 6.9x
Low - Post-Money Valuation!
Mean 3.2x
Median 3.6x $4.7 M!
Investment Model: Returns!
Post-Money Cap Table!

Founders   1,000,000   68%  

Series  A  Investors    474,695     32%  

  1,474,695   100%  

Investor Returns!
 Sensitivities!
How will manipulating my key business drivers affect business performance?!

Closure Rate vs. Contract

Pricing vs. Revenue Revenue Size vs Revenue
The drivers
relevant to a
business vary
widely by sector
and market.
Decide which 5-7
metrics are worth
pressure testing
in your model
 Key Questions

!
•  What is the size of your market? "
•  Who is the target customer? "
•  Where is the competitive matrix?"
•  What is your competitive advantage / value proposition?"
•  Internal projects – build, buy, or partner?"
•  Do you have supporting documentation / research for your
discount rate?"
•  Did you break out your sales plan into the underlying
details that drive "
"customer adoption?"
33  
 Key Questions

!
•  Do your expenses scale in a reasonable fashion against
revenue?"
•  Did you conduct sensitivity analysis by identifying the 3 key
drivers to your "
"project? "
•  What is your renewal rate?"
•  Did you use market comps to determine the market value of
the enterprise and then back into associated returns if doing
a start up?"
•  Did you use payback period for the internal project?"