1. Business 16 Stanford Department of Continuing Education Class # 4, 10/19/09 Venture Capital, Angels, Banks www.alloyventures.com/class.html

2. Financing o Comes in several flavors  Equity vs. debt vs. bootstrapping o Best depends on several factors  How much you need  When you need it  Your experience/How much help you need  Your confidence in your idea/When you can pay it back  Attractiveness of investment  Control

3. Equity: Venture Capital o Structure o A group of partners raise OPM o Typically foundations, endowments, companies o These groups like the high returns from good firms o Typically, $100,000,000+ o Promise to invest in 20-30 companies o Invest over 2-3 years, then raise new fund o Goal is to at least triple the fund o To do that, each investment must have the potential to make 10X

4. Equity: Venture Capital o Incentive o Partnerships take 20% to 30% of profits o For a $100M fund that goes 3X, $200M in profit, of which $40M goes to the VC partners o 2.5% management fee for salaries, expenses

5. Equity: Venture Capital o So why doesn’t everybody do it? o A lot of people tried, and they got destroyed o However, I got a great house out of it o It’s really hard o It takes a long time to make money o It is extremely stressful o It takes a network of relationships o Investors o Entrepreneurs o Bankers o Lawyers o Academics o Industrial leaders

6. Equity: Venture Capital o So why doesn’t everybody do it? o It takes time to build a reputation o Like an ER; triage management o Success begets success o For the same amount of work, I-bankers make, ah, hmm, made a lot more

7. What does a VC do? o Gets 200-400 business plans/yr o Actually does 2 to 4 investments/yr o Ave. investment $2-10MM o If co. needs more, VCs group together into a “syndicate” o The finder typically “leads” the deal/does the work o Sets up meeting with entrepreneurs o If it goes well, does “due diligence” o Calls references, industry people, academics, customers o Most VCs look for good people and big markets o If that goes well, presents to partners o If that goes well, puts together a draft “term sheet” and circulates it to partners o Says how much to be invested and terms of the deal

8. What does a VC do? o Usually, negotiations ensue between the entrepreneur and the VC o There may be competitive term sheets o Anything goes; collusion is common o When deal is struck, term sheet goes to lawyers o More negotiations between VCs and entrepreneurs o The deal closes, co. gets the money o Usually at least one VC on the Board of Directors o VC works w/management to: o Set strategy & tactics o Make intros o Recruit key management o Resolve ongoing problems o Hold management to milestones o Raise additional capital o Take company to liquidity

9. A good venture capitalist: o Has a track record of success o Has a ton of contacts o Predictable, won’t freak out when times get tough o A solver, not a blamer o Resolves issues before BOD mtgs. o Has unquestionable integrity o Likes & respects you, and vice versa o Has a clear vision of where the company is going

10. A good venture capitalist: o Has partners who trust him/her o Is always available o Is not too busy with other companies o Is technically fluent o Can see synergies o Doesn’t let you get away with anything

11. How do you know if you have a bad venture capitalist? o Too busy o Likes to hear himself talk/doesn’t listen o Yells when the stuff hits the fan o Takes credit for your work o No experience in a company but micromanages o Not interested in what your needs are o Focuses on “going public” instead of building a big company o Doesn’t know anybody o Has no/poor references o Name dropper at the wrong altitude

12. How does a venture capitalist figure out how much of my company to buy? o Investment in o 10X that investment in 5 years o Terminal value of company in 5 years o What percentage of the company is that? o That’s the percentage he has to buy

13. Equity: Angels o Incentives o Ex-entrepreneurs o Rich, want to keep a hand in o Rich, want to get richer o Rich, want to show how smart they are to their rich friends o Want to stay relevant

14. Equity: Angels o Good points o Typically pay more than VCs o Typically ask fewer questions o Have a reputation in your field o Many are well-connected o May make personal introductions o Willing to get involved early o Have lower expectations than VCs o May be willing to devote a huge amount of time

15. Equity: Angels o Bad points o Busy playing golf o Busy flying their jet o Busy sailing their yacht o Busy in Provence with no answering machine and a maid that doesn’t speak English o Often first round players only o May not be stable in a pinch

16. Equity: Angels o Bad points o Predictability? o Motives? o Overpaying makes later rounds harder o May be seen as flakey, which may taint you o Angels work best with: o seasoned entrepreneurs who need little help o entrepreneurs who know they will get mindshare

17. Angels o Angels Forum (www.angelsforum.com)www.angelsforum.com o Life Sciences Angels (www.lifesciencesangels.com) o Band of Angels (www.bandangels.com), monthly meetings o Loose affiliations o Many have invested in VC firms, and use these contacts

18. Loans: Banks/Companies o When you are sure you can pay it back o Will want a business plan o Likely to give you money only for fixed assets o May be a lot of strings attached o You remain undiluted, just pay it off with interest o Can make a lot of sense o Will provide no help o Cannot differentiate good contacts from bad o Beware of quick-start loans

19. Loans: Relatives o You may never live it down o No help other than green o Can put you in a weird position if your company starts to crater

20. Bootstrapping o Don’t take money from anybody o Difficult in high-growth businesses o Bad idea when there is a lot of competition o A competitor with equity money could kick your butt o You don’t get any help unless you set up the other boards o A reasonable solution for smaller companies o Forget about a spouse and children