Financing Silicon Valley:

Understanding Venture Capital and

Making a Killer Pitch

J. Alexander Sloan
Partner
Blackwolf Partners
1
 Agenda
I. My Background

II. Some Basics on the Venture Business

III. Making a Killer Presentation

IV. Discussion

2
 My Experience and Perspective

1993 - 1996: The Vietnam Fund Limited

1996 - 1998: Cornell MBA
1999 - 2002: Hambrecht & Quist venture capital unit
 Merged into J.P. Morgan Partners
 Invested in many younger private technology companies
2004 on: Founding Partner, Blackwolf Partners
 Early stage venture fund focus on Cleantech: healthier,
cleaner, more energy efficient products & services.
Board Member, Center for Sustainable Global Enterprise at JGSM

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 The Blackwolf Cleantech Strategy

Blackwolf Ventures
Blackwolf Ventures
$100m.
$100 m.Tech
TechFund
Fund
drivenby
driven bydemands
demandsof:
of:

Clean Technologies
NaturalResource
Natural Resource Differentiated
Differentiated
HealthyLifestyle
Healthy Lifestyle
Sensibility
Sensibility Healthcare
Healthcare
(~33%)
(~33%) (~33%)
(~33%) (~33%)
(~33%)

• Food quality & choice • Air & water utilization • Healthcare solutions
• Clean air & water • Energy efficiency • Complimentary medicine
• Personal development • Environmental management • Cleaner Pharma
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 Financing Lifecycle
Capital IPO/Buy Out/Merger
Required

Risk

$50 m. +

t i o n
al ua
$25 m.
& V
i r e d
R e qu
ita l
< $1 m.
Cap

Startup Expansion Mid to Late Mezzanine Post IPO Mature

Company Stage
Takes months to years to reach IPO/Buy Out 5
Many Types of Financing Partners
• Founders/bootstrap: entrepreneur and personal savings
• Angels:
 Individuals: “friends and family”
“Bands of Angels”: informal groups of “professional” angels
• Specialized v!e
! nture firms: smaller, more specialized: Blackwolf
• Traditional venture capital firms!!: Kleiner, Benchmark, Sequoia, etc.
• Strategic corporate: customers/suppliers who buy into the company.
• Corporate venture units: Intel Ventures, Nokia Ventures, etc.
• Investment banking venture: JP Morgan Partners, Goldman Sachs, etc.
• Investment banks: IPO underwriting.
• Public investors, public stock = currency.
• Debt instruments

 Don’t expect to get traditional venture funding…look for best option.

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“Valuation”: what is a company worth?
Public Company:
• # shares outstanding X market price per share =
market capitalization = valuation.
• Stock price changes minute to minute, set in pubic
market of buyers and sellers.
• This is an “indirect”, secondary market.

Private Company:
• # shares outstanding X negotiated price per share.
• Transaction negotiated directly between investor and
owner, no “market clearing” mechanism.

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 Fuzzy Math:
The Mechanics of Valuation and Dilution

“Pre-Money” Valuation $10 million

(negotiated value for company)
+ Capital invested $5 million
= “Post Money” Valuation
$15 million
(new valuation for company)

• Investor now owes 5/15 or 33% of the company, and the prior
owners are “diluted” to 66% ownership.

• 33%!! of the company “cost” $5 m. But at a $20 m. “pre”, raising

$5 m. only costs 20% of the company. Or 33% of the company at a
$20 m. pre-money valuation raises $10 m.
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 Organization & People
• Firm culture: ranges from small private partnership to more
corporate style.
• Decision making process: rule by consensus of all partners.
• the “Monday meeting”
• Partners have diverse backgrounds: technology, banking, consulting,
engineering, operating, sales, marketing and/or venture experience.
• Classic polarities to each partner’s investment approach:
• quantitative versus qualitative appraisal.
• Business (MBA) versus technical (Ph.D.) perspective.
• Operating versus finance experience.

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What Value do Venture Investors Add after
the Money is Invested?

• Board seat, guidance on strategy, check and balance

for management
• Accessing contracts/customers/introductions
• Hiring key managers
• Interaction with management
• Network of relationships and synergies between
portfolio companies

Long-term, involved, active partner…..(theoretically)

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 Compensation to Venture Firm

1. Fees: 2% - 3% of committed capital, paid annually (covers

salaries, office, overhead, etc.).
2. Carried interest: 20% - 30% of profits after (and only if)
original capital is returned to investors.

• Fees can drive bigger fund size (bigger base) and faster
timing to raise the next fund (double dipping).
• Larger f!und size can drive up average size of
investments sought: bigger bets.

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 Exit and Timing are Key
• We need to get our investment out of the company to make money.

• Primary means to exit: acquisition/trade sale or IPO.

• Time horizon from investment to exit: months to 5-7 years.

• Returns calculated and compensation paid to venture managers only
when cash or securities are actually distributed to investors.

$45
• Lock-ups and other selling $40
restrictions can dramatically $35
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II. Making Killer Presentations

So, you have:

 a winning team,
 a compelling and practical product,
 a clear business plan,

…and you want to pitch to a venture firm or

other investor?
 Your Overall Challenge

• You must clearly convey TWO value propositions:

1. To the customer
2. To the investor

• They are related but not the same.

• Convince me that both are highly attractive and likely

to be realized.

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 Understand Your Audience
• Try to learn the backgrounds and perspectives of your expected
audience.

• Research the firm’s website and Google the team.

– Prior successful and loser deals in your space?
– MBA or Ph.D. “mentality” or both? Adjust your pitch.
– Understands your industry?

• In larger firms, an associate or EIR will likely meet with you first.
Partners can drift in and out.
– Play to the firm’s point person. Get an advocate.

• No venture investor ever got fired for saying “Pass”.

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 What Do Venture Investors Look for?
• Our Needs:
– Company matches current Fund’s investment strategy and timing?
• The Opportunity:
– What is the core business opportunity? How big?
• Management:
– Great management team? Done this before? Done it together? Can I work
with them?
• Well Planned:
– Clear business plan? Plan B & C?
– Unique approach/technology that can be defended?
• The “Deal”:
– Attractive price/valuation? Potential for up-rounds?
– Extent of future financing needs before profitability?
– What are the exit opportunities, how long to get there?

 You need to communicate answers clearly through a written

business plan and sharp presentation. 16
 General Tips to Knock Em Dead
• This is not a corporate presentation. Totally different dynamic.

• One hour (including Q&A), one shot.

• The audience is unprepared and has A.D.D. (and has a Blackberry

under the table).

• Expect to be interrupted.

• It’s not about your slides or your planned order. Feel the flow of
each meeting. Give them what they want.

• Smile and make good eye contact.

• “Touch, Turn, Talk.”

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 Interruptions & Flow Management
• You will be interrupted and asked questions out of your planned
sequence. Expect it, and go with it happily.

• Answer the question, then try to get back to your order.

• Be prepared to jump to a supporting “go-to” slide if asked

something out of your planned order.
– Have a printed reference guide of your slide order for yourself.

• A presentation is ideally a give and take of what you want to say

and the audience wants to hear.
– Respect both.

• Go with the flow of each meeting, but maintain control.

– Yes, it is a test…

• Watch your time. 18

 Manage Your Content

• Carefully balance your allocation (time and content) to:

1. Your market and its dynamics and opportunities.
2. Your product/service.
3. Competition: lessons, successes, opportunities.
4. Management team and advisors.
5. Business model.

• If I don’t get the info, then you get zero credit for it.

 Let’s discuss some additional venture investor-oriented

needs for each of these section…

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 First, Just the Facts…please!
On slide 1 or 2, no later, explain:
1. How big is the company: age, stage, # of employees,
product status, revenue/customers (if any)?
2. How much money has been raised/invested to date, when,
valuations used?
3. How much investment are you looking for now?

 I need to put your company into

investment & portfolio context. ?
?
 Don’t make me wait or dig for it.
? ?
Startup Mid to Late Post IPO

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 Market Opportunity
• Be highly specific to your product’s target market segment.
– Don’t just use the biggest market research numbers you can find.
– IDC and Gartner are often wrong…and we know it (just check our track
records).

• Who are your customers? Explain customers’ current buying behaviors.

• Where is their demand need/pain? What is the current solution? Why

is this solution insufficient?

• Go quickly into discussing your product as the solution.

 Too much time is typically spent on this section. Keep moving.

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 Your Product/Service
• What is the technology?
– How does it work? Is it new or repurposed?
– Is it yours?

• What are the next phases/applications/opportunities for

your core product/service if Plan A fails?

• How will your product sell? Nice or need to have?

– Push or Pull market dynamic? Build it and they will come?
– Did you start with a technology or with a market need?

• How will you defend your technology/advantage?

– Patents: yeah, and….

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 Business Model
• Gets the least attention in presentations. Get to it quickly.
– Not just excel sheets at the back. Tell a story.
– Clearly walk through the growth milestones of the business:
• Capital needs, hiring, spending, inflection/decision points, alternatives...

• Reasonable projections and assumptions are more

impressive (and believable) than highly optimistic ones.
– Seen too many “hockey sticks”.

• What is Plan B and C for your technology/product?

– Think about downside protection, not just upside.
– Investor is buying into the company, not into the product.

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 More Business Model Questions
• How much money will this company need to get profitable?

• Minimum and maximum manageable investment load?

– What would you do with 1/2 or 2x or 3x the money you are looking
for now?

• Can my fund invest its per deal minimum (could be up to

$15-$20 m.) in this company within 3 years.

• Exit strategies are key. Investors need to get out. How?

– IPO only? Trade sale options? Likely buyers?
– Comps of similar deals done?
– Timing counts. A fund has its own specific timing needs.
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Connect the Dots and Tell a Story
FYE FYE FYE FC Revised Projections
($ Millions) 2005 6/30/03
6/30/02 2006 6/30/04
2007 (1) 2008
Year 1 (2) 2009
Year 2 2010
Year 3 2011
Year 4 2012
Year 5

Revenue 5.4 4.8 6.6 10.8 16.5 23.2 29.4 35.0

Gross Profit 4.0 3.4 4.8 7.1 9.6 12.6 15.6 18.2
Gross Margin 74.1% 70.8% 72.7% 65.7% 58.2% 54.3% 53.1% 52.0%

Operating Expense 3.2 2.5 3.2 4.3 4.6 5.6 6.4 7.2

EBITDA 0.8 0.9 1.6 2.8 5.0 7.0 9.2 11.0

EBITDA Margin 14.8% 18.8% 24.2% 25.9% 30.3% 30.2% 31.3% 31.4%

(1) Preliminary, audit to be received prior to close.

(2) Revenue already under contract for year 1 is $7.6 million. Revenue relating to new system sales is projected to be $2.6 million.
New rental contracts in year 1 are assumed to generate only 3 months of revenue for the year ($0.3 million).

Staff 8 12 25 30 40 55
Capital Invested $ 4,000,000 $ - $ - $ 15,000,000 $ - $ -
Cash Burn/month $ 100,000 $ 250,000 $ 323,000 $ 500,000 $ 800,000 $ 1,200,000
Cash Burn/year $ 1,200,000 $ 3,000,000 $ 3,876,000 $ 6,000,000 $ 9,600,000 $ 14,400,000
Cash Balance $ 2,800,000 $ 1,000,000 $ 124,000 $ 9,000,000 $ 5,400,000 $ 600,000

Product v1.0 v1.5 V 2.0

Exit Plan M&A IPO

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 Explain Your Competition
• Who is doing your business idea now?

• What do they do wrong or right? What have they taught

you?

• Very few new companies have no competition. If you

have none, then are you smart or dumb for entering the
space?

• Is your competition a potential threat, partner, target

or source of acquisition…or all of those? How will you
manage this?

• Know case studies of your product area and industry

that show success, including a money-making exit for
investor.
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 The Team
• Backgrounds? Done this sector/product before?

• Worked together before?

• Made mistakes before? Learned what?

• Made money for investors before?

• Worked in startup, midsized, and/or larger companies?

• Worked with venture investors before? Whom?

• Relevant connections to this industry and product?

• Board of directors, advisors and investors? 27

 The Softer Stuff
• Venture decisions are made on imperfect, “soft”
qualitative data, this applies to decisions about working
with people.

• Personality & chemistry matters.

– Do I want to work with you for years, through tough times?
– Let your personality come through.
– Do you know your stuff?
– How well and openly do you respond to questions?
– Are you honest about weaknesses and needs?

• Is this just a one-person show?

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 Talking Valuation
A venture investor will ask,
“So, what do you think your company is worth today?”

Yes, it’s a sucker question, but be ready:

• Have a reasonable pre-money valuation range prepared.

• Have a plausible answer related to the current status of

the product, sales and business.

• We love “comps”. Be ready with some examples and

stories. 29
 Summary
• Much easier for a venture investor to say “no” to a deal.

• Lots of deals come our way. You need to stand out.

• Great presentations are honest, clear, exciting, direct and flexible.

• It’s about the business opportunity, not just cool technology.

– We call it a “deal” for a reason.

• How can an investor buy low and sell high, and on time?

• Avoid seeking professional money until you have to (or never at all).

• Choose your investors as carefully as we choose you.

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Thanks for your attention!