Raising Venture Capital for the Serious Entrepreneur
Have the negotiating edge when getting your new business off the ground\ Written by Dermot Berkery, an internationally known venture capitalist with Delta Partners, this complete toolbook thoroughly details how venture capitalists arrange the financing for a company; what they look for in a business plan; how they value a business; and how they structure the terms of an agreement. Within its pages, you'll find everything you need to successfully raise new business capital with the most...
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Have the negotiating edge when getting your new business off the groundWritten by Dermot Berkery, an internationally known venture capitalist with Delta Partners, this complete toolbook thoroughly details how venture capitalists arrange the financing for a company; what they look for in a business plan; how they value a business; and how they structure the terms of an agreement. Within its pages, you'll find everything you need to successfully raise new business capital with the most attractive terms possible.Using informative case studies, detailed charts, and term sheet exercises, Raising Venture Capital for the Serious Entrepreneur discusses the basic principles of the venture capital method, strategies for raising capital, methods of valuing the early-stage venture, and proven techniques for negotiating the deal. The author leads you step-by-step through:Developing a Financing Map Getting to the First Stepping Stone Understanding the Unique Cash Flow and Risk Dynamics of Early StageVentures Determining the Amount of Capital to Raise and What to Spend It on Learning How Venture Capital Firms Think Creating a Winning Business Plan Funding Early-Stage Companies Agreeing on a Term Sheet with a Venture Capitalist Setting Terms for Splitting the Rewards Allocating Control between Founders/Management and Investors Aligning the Interests of Founders/Management and InvestorsThis invaluable guide also includes term sheet exercises that test your understanding of various financing situations facing companies. In addition, the book features three extensive case studies: the first covering a fictional start-up company used throughout the book, the second offering a stepping stone map, and the third presenting a term sheet used in practice by venture capitalists.Dermot Berkery is a general partner with Delta Partners, a leading European venture capital company that invests in Ireland and the United Kingdom. He has led investments in early-stage companies in sectors such as software, electronics, mobile services, medical components, and security equipment. Mr. Berkery was formerly a Senior Manager with McKinsey & Co., where he served clients across the U.S., Europe, Australia, and Asia, focusing mainly on financial services and energy. He also lectures on entrepreneurial finance at the MBA program at University College Dublin.
Foreword xiiiPreface xvAcknowledgments xviiIntroduction 1Creditica Software Inc. Case Study 7Understanding the Basics of the Venture Capital MethodDeveloping a Financing Map 19Creating a Set of Stepping-Stones for a New Business 20Matching the Financing Strategy to the Stepping-Stones 21Developing a Map of Possible Stepping-Stones 23Capturing as Much of the Prize as You Can 31Getting to the First Stepping-Stone 33Why New Ventures Are Not Fully Funded from the Start 34Fleshing Out the First Stepping-Stone 35Options at the End of Each Stage of Investment 38The Chief Financial Officer as Strategist 39Why Corporations Fail in Creating New Businesses 43The Unique Cash Flow and Risk Dynamics of Early-Stage Ventures 47Costs Known-Revenues Unknown 48J Curves and Peak Cash Needs 53Milestone Funding: Option or Investment? 59A 12- to 24-Month Ticking Clock 63Timing Is Everything-Buy Low, Sell High 65A Five- to Seven-Year Marathon in Three to Four Stages 66Gross Margins of 80 to 100% 68No Correlation between the Amount of Money Raised and the Company's Success 70A Tension between the "Lemons Ripening Early" and the "Valley of Death" 70A Binary Payoff Profile 72Raising the FinanceDetermining the Amount of Capital to Raise and What to Spend It On 77An Established Company-Estimating the Amount of Capital to Raise 78A New Company-Estimating the Amount of Capital to Raise 78Activities in a New Business That Absorb Capital 79Investors' Views of the Five Capital-Absorbing Activities 90Businesses with Different Capital-Absorbing Profiles 93Getting Behind How Venture Capital Firms Think 97Structure of Venture Capital Funds 97Types of Investors in Venture Capital Funds 100Size and Internal Structure of VC Firms 102How VC Firms Are Compensated 103Valuation of Investments within a VC Portfolio 106Cash Flows and J Curve at a Fund Level 108Expected Returns on a VC Fund 111Expected Returns on Individual Investments in a VC Fund 114It's All about Big Winners 117Portfolio Construction 118Sorting Out Conflicts of Interest 120Creating a Winning Business Plan 123Market Power-the Key Ingredient Missing in Most Business Plans 124Evidence to Include in the Business Plan 125Potential for Accelerated Growth in a Big, Accessible Market 125Achievable Position of Market Power 130Capable, Ambitious, Trustworthy Management 135Plausible, Value-Enhancing Stepping-Stones 136Realistic Valuation 137Promising Exit Possibilities 137Valuing the Early-Stage VentureValuing Early-Stage Companies 141Traditional Valuation Methods-Why They Don't Work for Early-Stage Ventures 142Are Valuations of Technology Companies Crazy? 145Corporate Finance Theory-Technology Company Valuation 147Triangulation Process of Venture Capitalists 150How the Company Can Maximize Its Valuation 160Why Big Companies Buy Small Companies 161Value of Small Companies Compared to Large Companies 162Negotiating the Deal: Term SheetsAgreeing on a Term Sheet with a Venture Capitalist 169Percentage Ownership of the Company Granted to the Investor 169What Each Side Tries to Achieve in a Term Sheet 173Why It Isn't Like Investing in a Public Company 175Terms for Splitting the Rewards 177Exit Preferences, Linked to the Type of Preferred Stock 178Staging of Investment against Milestones 191Options to Invest More Money at a Defined Price per Share 192Preferred Dividends 193Antidilution 194Problems with Ratchets 204Pay-to-Play Clauses 207Washout Financing Rounds-Down (and Out!) Rounds 210Allocating Control Between Founders/Management and Investors 213Restricted Transactions/Protective Covenants 213Structure of the Board of Directors 219Redemption 226Forced Sale 227Registration Rights 229Tagalong Rights, Dragalong Rights 230Information Rights 233Right of Access to the Premises and Records and Right to Appoint a Consultant 233Preemption Rights 233Transfer Provisions 234Exclusivity Clause 235Aligning the Interests of Founders/Management and Investors 237Founders' Stock 238Option Pool 238Vesting Arrangements 240Noncompete Agreements 245Intellectual Property Assignment 246Warranties and Representations 246ExercisesTerm Sheet Exercises 251Security Portal Inc. 267Standard Term Sheet Clauses 273Index 281
