8 Engl Butterworth

LAUNCHING YOUR STARTUP
Understanding Venture Financing
Jim Butterworth
Idea to Market Workshop
Ukraine, September 2008
Launching Your Startup

A Primer on Venture Capital
Financing Your Venture
Other Startup Considerations
Raising Venture Capital

The Transition from Idea to Execution
Business Planning
Peace and Prosperity Through Science and Collaboration www.crdf.org

My Background
28 years in technology-related ventures in all

capacities
Founder / CEO, venture capital firm
Founder / CEO, early Internet company
Corporate finance / M&A, global investment bank
Technology marketing
Programmer / engineer
Owner / inventor of 14 issued and pending

patents worldwide
Education
Bachelor of Industrial and Systems Engineering,
Georgia Institute of Technology
Master of Business Administration,
Amos Tuck School at Dartmouth College

Impact of U.S. Small Businesses
25.8 million U.S. businesses

“Small” businesses represent:
99.9% of total businesses
50% of the private work force
41% of high tech jobs
75% of net new jobs
41% of private sales
52% of private sector output
97% of all U.S. exporters with 29% of export value
Produce 13-14x patents per employee (and

2x likely to be among the 1% most cited)

Impact of Venture-Backed Companies
In the U.S.:
$1.8 trillion in revenue in 2003 (9.6% of all sales)
10.1 million jobs in 2003 (9.4% of employment)
600,000 new net jobs from 2000-2003
In Europe:
1.0 million jobs in 2004
630,000 new net jobs created from 2000-2004
Highest growth rates in biotech, health care and
medical devices
Largest absolute growth in university spin-offs

Impact of U.S. Universities
Established > 4,100 new companies since

1980, 2/3 of which were still operating
Executed > 30,000 active technology
transfer licenses (including > 4,500 in 2003),
generating > $1.3 billion in license income
Launched > 2,200 new commercial products
between 1998-2003
Performed > $30 billion of R&D in 2001
Filed 8,000 U.S. patent applications in 2003

What is Venture Capital?
A cash investment made by

professional, institutionally backed
investors to emerging growth
businesses
Generally made as cash in exchange
for equity (ownership) in the investee
company
Usually high risk, but with the potential
for above-average returns

U.S. Venture Capital Market

European Venture Capital Market

Types of Venture Capital
Private Academic
Professionally Intellectual property
managed Spin-outs
Return on investment Government
focused
Create new jobs and
May bring network, grow economy
business advice, Offer cash, tax
credibility, etc. incentives, in-kind
Stem brain-drain
Corporate
Manage risk Angels
Distribution networks Network, business
advice, credibility, etc.
Product R&D
Live vicariously
Operational skills
Spin-outs The 3Fs

Venture Capital Investment Criteria
Management Team
Track record
Relevancy
Bet on the jockey, not the horse!
Concept
Solves real problem
Favorable market dynamics
Disruptive
Unfair advantages & sustainable
competitive advantages
Proper capitalization
The Venture Capital Numbers Game
Receive 1000s of business plans each

year
Read 100s of plans
Meet with dozens of companies
Fund a handful
Portfolio expectations:
60% die or go nowhere (living dead)
30% yield 2-4x in 4-7 years
10% (hopefully 20%) are tremendous successes
(e.g., 10x, 100x, 1000x!)

How Venture Capital Funds Work
General partners (GPs) manage the fund

Capital comes from institutional “limited
partners” (LPs)
Singularly focused: ROI
GPs get an annual fee
Once LPs get investment back, GPs get a
portion of the profits
LPs get the remaining profits

Venture Capital Economics
LP 3 GP
LP 1 2%
LP 4
LP 2
$100 Management
VC Fund IX, L.P.

Portfolio $10 $10 Portfolio
Company 1 Company 10
Portfolio
$10 $10 Portfolio
Company 2 Company 9
$10 $10
Portfolio Portfolio
Company 3 Company 8
$10 $10
Portfolio $10 $10 Portfolio
Company 4 Company 7
Portfolio Portfolio
Company 5 Company 6

Venture Capital Economics
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

Not all startups require external funding

Cash flow comes ultimately and most
importantly from customers, NOT from
investors
Benefits of external funding
Cash
– Faster growth
– Staying power
– Competitive positioning
– Credibility
Value-add investors
– Credibility
– Customer/partner introductions (“Keiretsu” effect)
– Management expertise
Financing Options
Non-Equity Equity
Personal funds Venture capital
Personal debt Angels
Grants and awards
The “3Fs” –
Customer pre-sales Friends, Family and
Venture leasing Fools
Receivables
Corporate direct
financing
investment
Business loans
In-kind
contributions Equity is the most
Joint ventures expensive form of capital!

Major Financing Questions
How much?
When?
From where / whom?
What terms?
Security
Valuation
Control
Timing

Raise Money from a Position of Strength
Have cash in the bank

Prepare to build your company without
any outside investment (bootstrap)
Seek to secure multiple competing
offers
Raise money when you can, not when
you have to (Sun Tzu – “In times of
war, prepare for peace”)
Have a call to action
Seek True Value-Added Investors
Understand your business

Operating experience
Domain and/or geographic experience
Rolodex / network
Relevant portfolio
Relevant limited partners (in your
space)
Deep pockets / courage to stay the
course
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
Budget 4-5 months, or more

Jim Butterworth
Jim Butterworth
Launching Your Startup

A Primer on Venture Capital
Other Startup Considerations

The Transition from Idea to Execution
Business Planning

Lifecycle of a Startup
Conception / Launch
Invention Growth Stage
Seed Stage Expansion Phase
Formation /
incorporation Exit
Market research
Product research Post-Exit
Early Stage
Product development
Team formation
Infrastructure build-out

Lifecycle of a Startup
Conception / Launch
Invention Growth Stage
Seed Stage Expansion Phase
Formation /
incorporation Exit
Market research
Product research Post-Exit
Early Stage
Product development
Team formation
Infrastructure build-out

Startup Fundamentals
Solid foundation =
best chance of
funding your venture

Pour a Solid Foundation
Market-driven concept
Talk to prospective customers
Assess market and competition
Resolve legal issues upfront
Satisfy prior employment obligations
Incorporate properly
Check intellectual property rights
Spin-out cleanly
Form a solid team
Management, board, advisors, professionals
Teamwork begets success
If possible, kick-start the business
Spin-out / acquisition
Key customer

Be Market-Driven!
Purchase decisions are based on

relationships – understand your customers
Understand and model your customers’
economic benefit:
How are they currently solving the problem?
How will their work processes change by using your
product?
What is their economic benefit / ROI?
Your product / service must be better, faster

and cheaper

Protect Your Assets!

Cash Flow is Your Life Blood!
CFIMITYM
Cash flow comes ultimately and most
importantly from customers, not from
investors
Profit is not cash flow
Capitalize properly

Business Planning
“The plan is useless; it’s the planning

that’s important.”
General Dwight D. Eisenhower,
on the success of his D-Day invasion plan
The process of uncovering and

identifying what creates and drives
value in your business, and the risks
involved
A business plan is an output of the
business planning process

Output of the Business Planning Process
Business plan (narrative)

Pro forma financial statements
PowerPoint pitch (12-13 pages)
Elevator pitch (1-2 minutes)

A Business Plan…
Describes all the critical internal and

external elements and strategies for
guiding the direction of your company
Communicates how you will create
sustainable value
Identifies risks and uncertainties and
communicates how you will manage
them
Describes the company’s structure,
objectives and future plans

Uses of a Business Plan (Internal)
Refining your product Motivating and

/ service strategy focusing employees
Identifying key Analyzing capital
customers budgeting decisions
Identifying Facilitating new
milestones and product development
timelines Integrating new
Helping set acquisitions
objectives & Facilitating restarts,
performance metrics restructuring and
Managing risk and turnarounds
uncertainty
Uses of a Business Plan (External)
Attracting key employees

Educating potential investors
Arranging strategic alliances
Obtaining large contracts with strategic
customers
Facilitating mergers and acquisitions

The 12-13 Page PowerPoint Pitch
1. Summary (1)
Mission statement
What is the idea?
How will it create
value?
Timeline / milestones
Expected results
Specific request (e.g.,
$)

The Mission Statement
To create [value/EVA]
by [product/service] for/to [customer(s)] by…
Strategic Strategic Strategic

Objective 1 Objective 2 Objective 3

The Mission Statement

Mission Statement Example
To be Ukraine’s leading producer of “A-

class” widgets to the _______ sector by:
Securing exclusive purchase contracts with 3 of
the top 10 customers of A-class widgets in
Ukraine;
Creating proprietary manufacturing methods for
the highest yield of A-class widgets; and
Building a world-class team of research &
development scientists and engineers.

1. Summary (1)
Mission statement
What is the idea?
How will it create
value?
Timeline / milestones
Expected results
Specific request (e.g.,
$)
2. Market Overview (2)

Substantiation of need
The opportunity (size,
trends, etc.)
Markey validation
Identification of
prospective customers

Major Pain Points
What is the major pain your customers

face currently and/or in the future?
Cost
Convenience
Growth
Focus
Time-to-market
Regulatory compliance
Why are alternative products/services

not addressing the pain (fully)?
Why won’t this change?
Favorable Market Dynamics
The market is large for our product/service:

Size stat 1
Size stat 2
Size stat 3
The market is growing for our product /

service:
Growth stat 1
Growth stat 2
Growth stat 3
Market trends favor us:

Trend 1
Trend 2
Trend 3

1. Summary (1) 3. Description of

Mission statement Product / Service
What is the idea? (2)
How will it create
Overview of product /
value?
service, including high-
Timeline / milestones level technology
Expected results description
Specific request (e.g., Specific value
$) proposition (including
qualitative &
2. Market Overview (2) quantitative customer
Substantiation of need benefits)
The opportunity (size, Correlate product /
trends, etc.) service features &
Markey validation benefits with market
Identification of needs
prospective customers Value chain dynamics

4. Operating Plan (2)

Production /
manufacturing
Marketing / distribution
Sales & marketing plan
5. Competitive
Environment (2)
Sustainable
competitive advantages
Alternatives
Competition (existing
and potential

What’s Proprietary About Your Idea?
Competitive Advantages
Proprietary IPR
Exclusive distribution
Exclusive content / sources
Proprietary manufacturing
Proprietary integration
Installed base / customer contracts
Unparalleled capital structure
Unparalleled scale, scope and/or focus
Team with unique expertise and/or access
First mover advantage
Distinguish between momentary and

sustainable
Must correlate to strategic objectives

4. Operating Plan (2) 6. The Team (1)

Production / Management expertise
manufacturing & relevance
Board, advisors,
professionals & others
Sales & marketing plan Identify key hiring
needs
5. Competitive
Environment (2) 7. Financials (1-2)
Sustainable Pro forma snapshot
competitive advantages Key metrics / drivers
Funding requirements
Alternatives
(optional)
and potential

Financial Projections
(in thousands) 2007 2008 2009 2010

Revenue driver 1 (1) Key is to
understand
Revenue driver 2 (2) drivers and
Cost driver 1 (3) assumptions
since…
Net Revenue
– Cost of Sales (4)
Numbers will
= Gross Profit
prove wrong!
– SG&A (5)
= Pre-tax Income (Loss)
Notes
(1) Assumption 1
(2) Assumption 2
(3) Assumption 3
(4) Assumption 4
(5) Assumption 5

Funding Requirements
Does your venture need external financing?

How much & when?
Venture capital, debt, etc.
Capital structure considerations

Options plans, etc.
Position vis-à-vis in-kind contributions
Use of proceeds; e.g.:

Staff $200,000
Technology & IPR development 150,000
Equipment & facilities 200,000
Other legal, operations, SG&A and misc. 100,000
Reserve (net of cash on hand) 100,000
Total $750,000

4. Operating Plan (2) 6. The Team (1)

Production / Management expertise
manufacturing & relevance
Board, advisors,
professionals & others
Sales & marketing plan Identify key hiring
needs
5. Competitive
Environment (2) 7. Financials (1-2)
Sustainable Pro forma snapshot
competitive advantages Key metrics / drivers
Funding requirements
Alternatives
(optional)
and potential 8. Road Map (1)
Major accomplishments
90-day plan
Horizon
9. Appendix (as long as you want)

Market details (e.g., surveys)
Product details
Operating & financial details
Résumés (CVs)
Articles / research reports
Patents & IPRs
Key contracts
Brochures

The Elevator Pitch
One of the most important “outputs” of

business planning
Convinces the “target person” to schedule a
longer meeting with you
Empowers and enables the “target person”
to convince other appropriate people to
become interested in your idea
Resonates, demonstrates sincerity
Communicates a sense of value, empathy
and urgency
No more than 1-2 minutes!

Part I Summary
Pour a solid foundation

Protect your strategic assets (like IPRs)
Value is in the business planning, not
the business plan
Be concise and to the point with pitch
materials
Be top-down customer-driven, not
bottom-up product-driven

Fundraising Lessons
Network to gains access to VCs

Don’t get hung-up on confidentiality
Be persistent
Be humble yet confident, and always
courteous and professional
Embrace and learn from rejection
Be greedy in the long-run (any % of
something > 100% of nothing!)

Believe In Your Idea!
“We don't like their sound, and guitar music is on the way out.”
Decca Recording Co., rejecting the Beatles in 1962
“The wireless music box has no imaginable commercial value.”

David Sarnoff Associates, in rejecting a proposal for investment in the radio in the 1920s
“Who the hell wants to copy a document on plain paper?”

National Inventors Council, as told in 1940 to Chester Carlson, founder of XEROX
“There’s never going to be a market for the telephone, and

therefore we have declined the offer to take a license.”
Chairman of Western Union, in its annual report from the late 1800s

Attributes of a Successful Entrepreneur
Problem solver High integrity

Decisive Critical path doer
Leader & motivator Impatient / bias
Humble toward action (with
analysis)
Passionate
Rejoices in others’
Persistent victories
Optimistic Focused on the
Professional long-term goal

and … Just Do It!

Closing thoughts…
Focus on the long-run

What goes around comes around
Friendships last longer than jobs
Don’t let greed blind the objective
Make the most of the experience

Listen & learn
Failure or rejection is what you make of it
Entrepreneurship is a lifestyle choice

Balance your risk & return
Seize opportunities
Life’s short, have fun!

Jim Butterworth

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LAUNCHING YOUR STARTUP

Understanding Venture Financing

Understanding Venture Financing

Raising Venture Capital

Peace and Prosperity Through Science and Collaboration www.crdf.org

28 years in technology-related ventures in all

Owner / inventor of 14 issued and pending

Peace and Prosperity Through Science and Collaboration www.crdf.org

25.8 million U.S. businesses

Produce 13-14x patents per employee (and

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Established > 4,100 new companies since

Peace and Prosperity Through Science and Collaboration www.crdf.org

A cash investment made by

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Receive 1000s of business plans each

Peace and Prosperity Through Science and Collaboration www.crdf.org

General partners (GPs) manage the fund

Peace and Prosperity Through Science and Collaboration www.crdf.org

VC Fund IX, L.P.

Peace and Prosperity Through Science and Collaboration www.crdf.org

VC Fund IX, L.P.

Peace and Prosperity Through Science and Collaboration www.crdf.org

Not all startups require external funding

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Have cash in the bank

Understand your business

Business Plan Term Sheet Funding

Budget 4-5 months, or more

Peace and Prosperity Through Science and Collaboration www.crdf.org

Understanding Venture Financing

Raising Venture Capital

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Purchase decisions are based on

Your product / service must be better, faster

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

“The plan is useless; it’s the planning

The process of uncovering and

Peace and Prosperity Through Science and Collaboration www.crdf.org

Business plan (narrative)

Peace and Prosperity Through Science and Collaboration www.crdf.org

Describes all the critical internal and

Peace and Prosperity Through Science and Collaboration www.crdf.org

Refining your product Motivating and

Attracting key employees

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

Strategic Strategic Strategic

Peace and Prosperity Through Science and Collaboration www.crdf.org

Peace and Prosperity Through Science and Collaboration www.crdf.org

To be Ukraine’s leading producer of “A-

Peace and Prosperity Through Science and Collaboration www.crdf.org

2. Market Overview (2)