High Tech Startup - John L Nesheim

The complete how-to handbook for creating successful new high tech companies

Time Date 01-Jan-9999 Venue Speaker Seat Available: N/A

Seats Required:

John L. Nesheim
Publisher: Saratoga, CA: Electronic Trends Publications
ISBN: 0914405713

Business Plan:  

• Confidentiality of your Intellectual Property is a big concern

• Venture Capitalists won’t sign Non Disclosure Agreements yet they are a major source of leaks

• VC’s may be just interviewing you because they have invested in a competitor already

• Be careful of who you give business plan to and ask for its return (un-copied) 

Dealing with Venture Capitalists 

• Choose VC’s as carefully as you would top employees – you need to have complete faith in them

• Make sure they are experienced and focused in your area of business (not generalists) Check their references (vital) – talk to other startup CEO’s they have worked with to get a warts and all appraisal of their professionalism (don’t let yourself be fooled by their flattery or by the first one that shows you interest – reference check all firms you do business with – including investment bankers etc when preparing for IPO’s)

• Start looking for capital well before you need it!! (Don’t wait until you are under pressure to pay salaries)

• Get a personal introduction to VC’s if possible

• Visit them first – do not provide business plan until after 1^st meeting

• Query them for conflicts of interest – be suspicious

• Tell your story verbally only – you can control the information flow

• Keep handouts to a minimum

• Never leave any proprietary material

• Focus on the executive summary only

• Negotiate – don’t teach!  If they do not understand your concept straight away they will not fund it so don’t waste your time

• Treat every meeting as if it were a future negotiation for money and answer questions accordingly (ie if they get you to admit any weaknesses, they will use your admissions later as bargaining chips for a lower share price or greater ownership %)

• Make them think they are under pressure to act as you have hot interest from other VC’s (get as many as possible chasing you!)

• Never count the cash until you see it in your bank account – promises mean nothing!

• Expect a lot of “No’s” VC’s only fund 6/1000 plans they see

• 10% of startups that succeed make up for the 90% that fail in the VC’s portfolio. You are paying for their bad investments – hence why they are looking to highly dilute your ownership to maximise their gain

• They are looking for a Return On Investment of 20%+

• They get preferred shares (preferential tax treatment / first call on assets in bankruptcy) which are converted to common shares at IPO or sale of company

• If you suspect that they desperately need a winner (ie your company’s hot future prospects) then you have a better chance of retaining more of your company in the negotiations (thus reducing your cost of capital)

What Venture Capitalists are looking for: 

• A large, rapidly expanding market

• Competent management

• A revolutionary / unique idea or technology that can be commercialized

• Sustainable competitive advantage

• Reasonable purchase price per share
  

• They are looking for a complete, high calibre management team with proven track record or startup experience (they will do reference checks etc)

• They may aim to appoint their own CEO and want to get control of board of directors to manage their risk (You will need to fight for your own interests unless you agree it is in the company’s best interests. This can be difficult to let go of leadership when you are emotionally attached)

• The flip side is that they often have vast expertise and contacts to share that can make a positive difference, and can help you avoid mistakes – and they want the kudos of backing a winner

• When things are going great they are supportive and can expedite growth

• When times are tough they can be ruthless (“vulture” capitalists) and will do whatever it takes to protect their money (including replacing the founders)

• They will want to get you to IPO – or sell as fast as possible to get their money back (even though this may be a distraction, or not in its best interests of the business at that particular time)

• They will endeavour to exert control over the following:  salaries / employee share options / structures of deals with suppliers and customers / veto over & timing and pricing of additional capital rounds / choice of CEO & CFO / monthly cash burn rates / approval of budgets and operational plans

  
  

• Strategy – they will want to know:

  • Product Development

  • Positioning

  • Size of the market

  • Path to market

  • How you are going to get ahead

  • How you are going to stay ahead when large competitors enter the market

  • Product evolution / development pipeline 

  • 5 year financial projections

Presenting to Venture Capitalists  

• Be persistent – expect to have to call/email them 6 x before reply for appointment

• May have to present to 20 VC’s before you get real interest

• Don’t rely on one source – stimulate competition amongst several VC’s

• Brush up on your negotiation skills / get professional advisor to accompany you if necessary

• Do not present anything proprietary at the first meeting

• Present executive summary – 15-20 PowerPoint slides max

• Be able to discuss your presentation in detail and be able to back your financial projections

• Most sales estimates are overly optimistic and VC’s will grill you on these

• Most capital estimates and development times are grossly underestimated (VC’s will double your estimates in their valuation calculations)

• Expect them to ask a lot of negative sounding questions

• Be able to back your share price valuations but be willing to negotiate

• Rehearse and prepare your presentation and likely question responses prior to the real thing (don’t wing it – they are seeing great presentations every day)

• Ask for double the funding you want or think you are going to get

• Even if you get a refusal, ask for their feedback on how the business plan can be improved

• Get your business plan back!

The Core Team:  

• Pick the most outstanding talent that you can afford in sync with your company culture

• Talent attracts talent

• Try to get a “name” CEO

• Try to get “name” investors

• Team is usually built in the following order; Technical experts, CEO, Marketing, Sales (business development) , Operations, Finance

• Outsource key roles / contractors if necessary – consider using share options to keep costs down

Ownership / Dilution / Negotiation / Valuation: 

• Make sure your lawyer is very experienced in venture capital and can structure a deal today that will take into account likely scenarios tomorrow

  • What % of the company the founders will own at IPO time

  • What each share will be worth at IPO time

  • How many shares will be available to the public at IPO

  • (Ownership%) x (total # of shares outstanding) x ($/share) = $wealth

• Create classes / layers of jobs to determine share options allocations for new hires

• Founders on average own only 4% of their companies by the time they get to IPO (can be higher in companies with low capital requirements)

• Get agreement from founders how much they are willing to dilute their ownership prior to starting any funding negotiations

• Founders get greater % of ownership than those joining later (regardless of how much more experienced or capable the new hires may be), to compensate for the founders’ risk (personal funds invested / leaving employment before money is raised / creating business plan / convincing others to invest in or join their quest / staking their reputations on the business outcome)

• Ensure enough shares are set aside to attract talented employees later and tie them in to the success of the company with share options

• Get agreement on how much ownership you are willing to give up to VC’s in return for what level of investment

• The greater amount of capital to be raised = the lower the % of ownership retained by the founders

• VC’s typically own 60-70% of a company by IPO time (but negotiate your own terms)

• The quicker you can get to IPO, typically the less ownership is given away

• Each round of funding typically adds another VC investor to the board

• Be wary of any veto rights VC’s may insist on as they can be restrictive later on

• The founder/CEO should be responsible for securing (additional) funding. Do not count on lead VC’s to do it on your behalf, they have other interests

• Be honest - keep VC’s informed of slippage in terms of development times & budgets and payroll requirements to maintain your credibility with them

• It is dangerous (and bad form) to raise money prior to releasing hidden bad news – you expose yourself to legal action and investor resentment all round

• Aim to exist on low salaries until the company becomes profitable (keep lean and mean) 

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