VCIC, The Game

Report
VCIC PREP SESSION
“VCIC, THE GAME”
Prepared by
P AT R I C K V E R N O N
Dir. of Venture Initiatives
©2014 UNC Kenan - Flagler
Agenda
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VCIC background
Event Itinerary
Judging Criteria
Tips for Preparing
– Understanding VC
– Dos and Don’ts
• Covered in the other
Prep Session (VC 101)
– VC Job Cycle
– Basic VC math
– The VC ecosystem (LPs,
GPs, etc.)
VCIC Background
• Invented at UNC in 1998: 4 schools, 1 event
• In 2015…
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66 schools in 13 countries on 3 continents
50+ events (40 internals, 11 regions, 1 finals)
1,250 students worldwide
175 VCs donating thousands of hours
125 entrepreneurs
www.vcic.org
Click to see the most
up-to-date bracket.
Hall of Champions
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Agenda
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A little VCIC background
Event Itinerary
Judging Criteria
Tips for Preparing
– Understanding VC
– Dos and Don’ts
Event Itinerary
2
3
Research industries,
markets, technology, etc.
1
Watch entrepreneurs
pitch
7
Read business plans
4
Interview entrepreneurs
The
Negotiate a deal
VCIC®
Experience
Sell your partners
on the deal
6
5
Make investment decisions
Wednesday-Thursday
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Receive business plans by email 5pm Wednesday
Research industry, market, etc.
Hold team strategy meetings
Create lists of questions for entrepreneur
Friday
9:00
9:45
11:30
1:00
1:30
3:45
4:15
4:45
Entrepreneur pitches
Due diligence sessions (15 minutes each)
Working lunch: Pick ONE investment
Written deliverables
Partner Meetings
Negotiations and Q&A
Awards Ceremony
VC Round Robin (feedback)
9:00 Entrepreneur Pitches
• Take copious notes – the presentation is not distributed.
• You should have already created a list of questions for each
entrepreneur. During the presentations, you should pay
close attention and add or revise questions in reaction to
the pitch.
9:45 Due Diligence
• You will have 15 minutes with each startup.
• You must perform well in every room – each judge only
sees you with one startup.
• Enter and quickly introduce yourself to founder(s), but not
to judges.
• You must control the meeting. Be assertive, but courteous.
• Listening is key. Make sure you get answers – don’t just
check off your list of questions.
9:45 Due Diligence
• Practice helps a lot!
• Sit down with local or student entrepreneurs prior to coming
to the event and practice 15-minute due diligence sessions.
• Try to develop your own style – a way to efficiently get
information from a person while building rapport. It’s a tall
order.
1:00 Written Deliverables
• Be aware that judges are time constrained, just as you are.
• They don’t read deliverables until Partner Meeting (next).
• You are encouraged to use the provided deliverables
template so that judges can focus on your message and not
be distracted by design.
• If you choose your own template, keep it simple, or you run
the risk of needlessly confusing judges.
• You can add up to 3 pages of attachments...again, be very
careful to keep it simple.
1:30 Partner Meeting
• You have 15 minutes to sell/explain your deal to your
partners.
• Judges will have your written deliverables, but will not have
read them beforehand (just like partners).
• Be prepared for constant interruptions. VCs don’t stick to
scripts.
• Make sure the whole team participates in the meeting.
3:45 Negotiations
• Only the top two teams will negotiate.
• You’ll have 10 minutes, and judges will want to see real
negotiation, not just more due diligence.
• You are not judged on “getting to a deal” but you should be
making an effort to determine if agreeable terms are
possible.
• See judging criteria (next).
Agenda
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A little VCIC background
Event Itinerary
Judging Criteria
Tips for Preparing
– Understanding VC
– Dos and Don’ts
How do teams “Win”?
• Due Diligence
• Written Deliverables and Partner Meeting
• Negotiations (top two teams only)
• BOTTOM LINE: which team would judges like as a
venture partner?
Due Diligence (20 pts)
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These are the actual questions on the VCIC Judge Form
How well did the team cover what you consider the key issues/questions?
How did the team seem to understand the business opportunity and strategy?
To what level was the team able to establish appropriate rapport with the entrepreneur?
How appropriately did the team lead/control the meeting?
How well did the team dig into the right issues?
How skilled was the team at getting information (not just asking a list of questions)?
To what level did the team appropriately demonstrate their value as a VC firm to the
entrepreneur?
How well did the team demonstrate an understanding of the financial requirements of this
deal?
How well did the group appear to work together as a team (as best you can tell)?
Term Sheet and Partner Meeting (40 pts)
• Partner Meeting (20 pts)
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• Investment Decision (10pts)
Demonstrated VC knowledge
– Reasons to invest
Adequately explained deal
– Reasons not to invest
Addressed key issues
– Overall decision
Confident and convincing
• Terms (10 pts)
All members contributed
– Valuation, Invest. Size, Syndicate, Fund
Fit, Option Pool, Dividends, Board
Structure, Liquidation Preference, Antidilution, Dates and Other Terms
Negotiations
• Only the top two (2) teams will negotiate
• Entrepreneur will have a copy of your term sheet (not
your executive summary)
• You have 10 minutes
• You are not judged on “getting to a deal,” but judges
want to see negotiating, not more due diligence.
Agenda
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A little VCIC background
Event Itinerary
Judging Criteria
Tips for Preparing
– Understanding “fund fit”
– Tips for valuation
– Dos and Don’ts
Understand the VC Profile
• Strategy: swinging for fences
• Need to “move the needle” on
fund size
• Expect future rounds
• You are the experts at venture
creation
• Eye on the exit
Not 3X
10X on $100k
doesn’t cut it
And plan for them
Make strategic
assertions
Back into your #s
Fund Profile
• You will be given a profile explaining the size of your fund
and focus
• For example:
– $125MM fund formed about 2 years ago
– 20% already committed
– 85% active
• The investment you make must “fit” the profile (not be too
large or small)
Fund Fit Example
$125M Fund
• Really only $100M to invest (fees: 2%/yr x 10 yrs)
• Could be a few different strategies:
– 7-10 deals at $9-15M each
– 8-12 deals at $6-12M each
– 12-16 deals at $4-8M each
8-12 deals at $6-12M each
• Understand that you only have $6-12M to get to exit, which
should include future rounds.
• Always reserve “dry powder” to participate in future rounds.
• In this scenario: maybe invest $1-3M now, reserve $4-8M for
later rounds.
• If you invest $6M in this round, you will be judged poorly.
• Decide: should this deal be a BIG bet for this portfolio?
– If yes, put more $$ to work. If no, limit your exposure.
Example Logic of a Deal: Web
Services Startup
• Cash lean startup wants $1.5M and will not need future
rounds.
• You offer $1M now to hit milestone X.
• You see comps for exits that indicate you should try to
reach milestone Y.
• You coach the founder that you’re expecting another round
in the $3-5M range for accelerated growth before exit.
Example Logic of a Deal: Web
Services Startup
• You find comps that indicate a potential exit at milestone Y
in the $125-150M range.
• If you put in $6M, you’d need $60M for a 10X exit.
• To get $60M, you need 40% of a $150M exit.
• You offer $1M investment on $1.5M pre, yielding 40%
ownership...and you assume pro rata participation going
forward.
Bonus Question
What is flawed about the
logic of the previous
example?
Answer
No syndication.
Very unusual for one firm to go all the way alone.
Bonus Question #2
Can you syndicate this
deal?
Potential Answers (to the judges)
• “No: it is too small to be a good fit for our fund if we
syndicate. We like the deal enough to take it alone.”
• “Yes: it is a small bet for this fund, but worth doing for the
10X potential.”
• “Yes, we’ve found comps that indicate a $500M exit if we
can hit Milestone Z, which will require an addition capital
infusion around $20M, and exit potential of 20X!”
Agenda
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A little VCIC background
Event Itinerary
Judging Criteria
Tips for Preparing
– Understanding “fund fit”
– Tips for valuation
– Dos and Don’ts
Use Fund Fit Logic
• See previous example. We ended up with $1.5M pre-money
valuation based on the need to own 40% of a $50M exit to
get 10X.
• To get valuation:
– Find exit comps
– Estimate total investment over all rounds
– Back into the % ownership you’d need to get __X.
Advice About Valuation
• No DCF! Find comparable investments and exits.
• Back out of exit to current need.
(e.g., $200M exit means we need 50% with our $5M investment to get 20X means pre-money $5M)
• Plan for reasonable % ownership through future rounds (keep
everyone incented).
• Consider syndication.
• Gut check: is a guy in his garage worth $10M?
• VCs hate it when you over-value a venture.
Agenda
•
•
•
•
A little VCIC background
Event Itinerary
Judging Criteria
Tips for Preparing
– Understanding “fund fit”
– Tips for valuation
– Dos and Don’ts
Practice
• VCIC is a role-playing game: due diligence and
negotiations need to be rehearsed.
• The more often your team plays the role before the event,
the more natural you will perform.
• The best performers/presenters are the best prepared.
• Find local startups and local VCs and request 15 minute
meetings rather than informational meetings.
Practice With Classmates
• Practice with classmates who have startup ideas.
– Set the clock for 15 minutes and start asking questions.
– You’ll learn techniques for getting to good information quickly
while still building rapport.
• Practice pitching your investment to classmates, professors
or advisors who have some VC or VCIC experience.
– You’ll learn how to answer tough questions on the fly.
– You’ll get practice doing VC algebra in front of people.
Do’s
• Be well-versed in simple VC math and jargon (premoney, post-money, options, etc.)
• Understand that VCs need to spend ~$1M+ on each
round and ~$5M+ on each deal total (amount will
depend on fund profile)
• Expect follow-on rounds, even if the entrepreneurs
don’t think they’ll need it
• Nail the due diligence for all the deals
Don’t’s
• Don’t use DCF to calculate valuation.
• Don’t use VC jargon if you aren’t comfortable with it.
• Don’t hold to your guns in Q&A. If judges are
pushing back on something you did, consider the
possibility that you screwed up.
• Don’t get fancy with the term sheet. VCs tend to see
creativity on the term sheet as unnecessary risk.
(optional)
Organizers, put in
typical terms for
deals in your area
Term Sheet Cheat Sheet for IT
• 1st round investments usually $1-3M
• Don’t take more than 50% (maybe 40%) in first round
• Use higher option pool if new CEO or other major
management needed (15-20%)
• Make sure board seats correspond to % ownership
(optional)
Organizers, put in
typical terms for
deals in your area
Term Sheet Cheat Sheet for IT
Use “vanilla” terms (the industry standard*)
• Dividends: 8%
• Liquidation preference: 1x
• Anti-dilution: “half-ratchet”
*Industry standards change year to year and region to region. It is important for teams to get
coaching from VCs about local conditions. These terms are negotiable, but be careful if you don’t
fully understand them.
Appendix
• Extra VC math advice
Lingo
• A round is often described as:
“$X investment on $Y pre-money”
• E.g., “10 on 5” means a
$10M investment on a
$5M pre-money valuation, resulting in a
$15M post-money valuation
Example: “2 on 2”
New equity owned
by investors
Preferred
Shares
Investment
($2M)
50%
Pre-Money
Valuation
($2M)
50%
Ownership
retained by
founders
Common
Shares
Adding Option Pools
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Generally 10-20%
Higher pool when lots of talent needed, e.g., new CEO
% of option pool refers to POST money %
Conventionally, pool always comes out of founders’ side
Example: “2 on 2”
with 10% Option Pool
New equity owned
by investors
Preferred
Shares
Investment
($2M)
50%
Pre-Money
Valuation
($2M)
40%
Ownership
retained by
founders
Option Pool
10%
Common
Shares
Example: “2 on 2”
with 20% Option Pool
New equity owned
by investors
Preferred
Shares
Investment
($2M)
50%
Pre-Money
Valuation
($2M)
30%
Option Pool
20%
Ownership
retained by
founders
Pre-money is
effectively $1.2M
Common
Shares
Math Advice
• Round everything
• Make broad assumptions about future rounds and exit
E.g., “Assuming 50% ownership at exit…”
Estimating X Return
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“Cash on cash”
Simple algebra: proceeds/investment
Proceeds = exit Value * % ownership
Investment includes all rounds
Example:
– 25 out / 5 in = 5X return in __ years (estimate)
• Always include estimate of YEARS
Estimating X Return
Example
• Venture needs $1M now
• Anticipate future round of $3M
• Find comps for exit around $50M
• Anticipate total ownership of 60% at exit
• Proceeds: $50M * 0.6 = $30M
• 30/4 = 7X in __ years
Estimating X Return
Same example with syndication:
• Venture needs $1M now; anticipate future round of $3M;
we’re in for half
• Find comps for exit around $50M
• Anticipate total ownership of 30% at exit
• Proceeds: $50M * 0.3 = $15M
• 15/2 = 7.5X in __ years
Estimating X Return
Same example with option pool:
• Trick question
• No different for investors
Don’t be shy with assumptions!
• VCs have to assume a lot
• You need to indicate you understand the ecosystem
• When you cannot find data, say so and make an assumption
VCIC PREP SESSION
“VCIC, THE GAME”
Prepared by
P a t r i c k Ve r n o n
Dir. of Venture Initiatives
©2014 UNC Kenan -Flagler

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