Technology Venture

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
www.crdf.org
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)
www.crdf.org
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
www.crdf.org
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
www.crdf.org
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
www.crdf.org
U.S. Venture Capital Market
www.crdf.org
European Venture Capital Market
www.crdf.org
Types of Venture Capital

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

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

$10
Portfolio
Company 1
Portfolio
Company 2
Portfolio
Company 3
$10
$10
$10
$10
Portfolio
Company 4
$10
$10
$10
$10
Portfolio
Company 5
$10
Portfolio
Company 6
Portfolio
Company 10
Portfolio
Company 9
Portfolio
Company 8
Portfolio
Company 7
www.crdf.org
Venture Capital Economics

LP 3
LP 1
LP 4
LP 2
GP
$180
$20
VC Fund IX, L.P.

Portfolio
Company 1
Portfolio
Company 10
Portfolio
Company 2
$100
$35
Portfolio
Company 3
Portfolio
Company 4
$40
$25
Portfolio
Company 5
Portfolio
Company 6
Portfolio
Company 9
Portfolio
Company 8
Portfolio
Company 7
www.crdf.org

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
www.crdf.org
Financing Options
Non-Equity
Equity
Personal funds
Personal debt
Grants and awards
Customer pre-sales
Venture leasing
Receivables
financing
Business loans
In-kind contributions
Equity
Joint ventures
Venture capital
Angels
The 3Fs
Friends, Family and
Fools
Corporate direct
investment
is the most
expensive form of capital!
www.crdf.org
Major Financing Questions
How much?
When?
From where / whom?
What terms?
Security
Valuation
Control
Timing
www.crdf.org
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
www.crdf.org
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
www.crdf.org
Fundraising Process
Investor
Presentations
0
Business Plan
Submissions
Final
Documentation
10
11
12
13
14
15
Term Sheet
Negotiations
16
17
18
Funding
Budget 4-5 months, or more
www.crdf.org

Jim Butterworth

Jim Butterworth
Launching Your Startup

A Primer on Venture Capital
Other Startup Considerations

The Transition from Idea to Execution
Business Planning
www.crdf.org
Lifecycle of a Startup
Conception /
Invention
Launch
Seed Stage
Expansion Phase
Formation /
incorporation
Market research
Product research
Growth Stage
Exit
Post-Exit
Early Stage
Product development
Team formation
Infrastructure build-out
www.crdf.org
Lifecycle of a Startup
Conception /
Invention
Launch
Seed Stage
Expansion Phase
Formation /
incorporation
Market research
Product research
Growth Stage
Exit
Post-Exit
Early Stage
Product development
Team formation
Infrastructure build-out
www.crdf.org
Startup Fundamentals
Solid foundation =
best chance of
funding your venture
www.crdf.org
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
www.crdf.org
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
www.crdf.org
Protect Your Assets!
www.crdf.org
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
www.crdf.org
Business Planning
The plan is useless; its the planning

thats 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
www.crdf.org
Output of the Business Planning Process
Business plan (narrative)

Pro forma financial statements
PowerPoint pitch (12-13 pages)
Elevator pitch (1-2 minutes)
www.crdf.org
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 companys structure,
objectives and future plans
www.crdf.org
Uses of a Business Plan (Internal)

Refining your product
/ service strategy
Motivating and
focusing employees
Identifying key
customers
Analyzing capital
budgeting decisions
Identifying
milestones and
timelines
Facilitating new
product development
Helping set
objectives &
performance metrics
Managing risk and
uncertainty
Integrating new
acquisitions
Facilitating restarts,
restructuring and
turnarounds
www.crdf.org
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
www.crdf.org
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.,
$)
www.crdf.org
The Mission Statement

To create [value/EVA]
by [product/service] for/to [customer(s)] by
Strategic
Objective 1
Strategic
Objective 2
Strategic
Objective 3
www.crdf.org
The Mission Statement
www.crdf.org
Mission Statement Example
To be Ukraines leading producer of Aclass 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.
www.crdf.org

1.
Summary (1)
Mission statement
What is the idea?
How will it create
value?
Expected results
$)
2.
Market Overview (2)

Substantiation of need
The opportunity (size,
trends, etc.)
Markey validation
Identification of
prospective customers
www.crdf.org
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 wont this change?
www.crdf.org
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
www.crdf.org

1.
Summary (1)
Mission statement
What is the idea?
How will it create
value?
Expected results
$)
2.
Market Overview (2)

Substantiation of need
The opportunity (size,
trends, etc.)
Markey validation
Identification of
prospective customers
3.
Description of
Product / Service
(2)
Overview of product /
service, including highlevel technology
description
Specific value
proposition (including
qualitative &
quantitative customer
benefits)
Correlate product /
service features &
benefits with market
needs
Value chain dynamics
www.crdf.org

4.
Operating Plan (2)

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

4.
Operating Plan (2)
6.
& relevance
Board, advisors,
professionals & others
Identify key hiring
needs
Production /
manufacturing
5.
Competitive
Environment (2)
Sustainable
competitive
advantages
Alternatives
and potential
The Team (1)
7.
Financials (1-2)
Pro forma snapshot
Key metrics / drivers
Funding requirements
(optional)
www.crdf.org
Financial Projections
(in thousands)
2007
Revenue driver 1 (1)

Revenue driver 2 (2)
Cost driver 1 (3)
Net Revenue
2008
2009
2010
Key is to
understand
drivers and
assumptions
since
Cost of Sales (4)

= Gross Profit
SG&A (5)
Numbers will
prove wrong!
= Pre-tax Income (Loss)

Notes
(1) Assumption 1
(2) Assumption 2
(3) Assumption 3
(4) Assumption 4
(5) Assumption 5
www.crdf.org
Funding Requirements
Does your venture need external financing?
How much & when?
Venture capital, debt, etc.
Capital structure considerations

Options plans, etc.
Position vis--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
www.crdf.org

4.
Operating Plan (2)
6.
& relevance
Board, advisors,
professionals & others
Identify key hiring needs
Production /
manufacturing
5.
Competitive
Environment (2)
Sustainable
competitive
advantages
Alternatives
and potential
The Team (1)
7.
Financials (1-2)
Pro forma snapshot
Key metrics / drivers
Funding requirements
(optional)
8.
Road Map (1)

Major accomplishments
90-day plan
Horizon
www.crdf.org

9.
Appendix (as long as you want)

Market details (e.g., surveys)
Product details
Operating & financial details
Rsums (CVs)
Articles / research reports
Patents & IPRs
Key contracts
Brochures
www.crdf.org
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!
www.crdf.org
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
www.crdf.org
Fundraising Lessons
Network to gains access to VCs

Dont 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!)
www.crdf.org
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
Theres 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
www.crdf.org
Attributes of a Successful Entrepreneur

Problem solver
High integrity
Decisive
Critical path doer
Leader & motivator
Impatient / bias
toward action (with
analysis)
Humble
Passionate
Persistent
Optimistic
Professional
Rejoices in others
victories
Focused on the
long-term goal
www.crdf.org
and Just Do It!
www.crdf.org
Closing thoughts
Focus on the long-run

What goes around comes around
Friendships last longer than jobs
Dont 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
Lifes short, have fun!
www.crdf.org

Jim Butterworth

Technology Venture

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LAUNCHING YOUR STARTUP

Understanding Venture Financing

Launching Your Startup

Understanding Venture Financing

Raising Venture Capital

Peace and Prosperity Through Science and Collaboration

Owner / inventor of 14 issued and pending

Impact of U.S. Small Businesses

Produce 13-14x patents per employee (and

Peace and Prosperity Through Science and Collaboration

Impact of Venture-Backed Companies

Peace and Prosperity Through Science and Collaboration

Impact of U.S. Universities

Peace and Prosperity Through Science and Collaboration

What is Venture Capital?

A cash investment made by

U.S. Venture Capital Market

Peace and Prosperity Through Science and Collaboration

European Venture Capital Market

Peace and Prosperity Through Science and Collaboration

Types of Venture Capital

Venture Capital Investment Criteria

Unfair advantages & sustainable

The Venture Capital Numbers Game

Receive 1000s of business plans each

How Venture Capital Funds Work

Peace and Prosperity Through Science and Collaboration

Venture Capital Economics

VC Fund IX, L.P.

Peace and Prosperity Through Science and Collaboration

Venture Capital Economics

VC Fund IX, L.P.

Peace and Prosperity Through Science and Collaboration

Financing Your Venture

Peace and Prosperity Through Science and Collaboration

Major Financing Questions

Peace and Prosperity Through Science and Collaboration

Raise Money from a Position of Strength

Have cash in the bank

Seek True Value-Added Investors

Understand your business

Budget 4-5 months, or more

Peace and Prosperity Through Science and Collaboration

LAUNCHING YOUR STARTUP

LAUNCHING YOUR STARTUP

Launching Your Startup

Understanding Venture Financing

Raising Venture Capital

Peace and Prosperity Through Science and Collaboration

Peace and Prosperity Through Science and Collaboration

Peace and Prosperity Through Science and Collaboration

Peace and Prosperity Through Science and Collaboration

Pour a Solid Foundation

Resolve legal issues upfront

Form a solid team

If possible, kick-start the business

Your product / service must be better, faster

Peace and Prosperity Through Science and Collaboration

Protect Your Assets!

Peace and Prosperity Through Science and Collaboration

Cash Flow is Your Life Blood!

Peace and Prosperity Through Science and Collaboration

The plan is useless; its the planning

The process of uncovering and