The State of the Venture Capital Market in 2019 | John Colley | Skillshare

The State of the Venture Capital Market in 2019

John Colley, Digital Entrepreneurship jbdcolley.com

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13 Lessons (27m)
    • 1. Introduction to the Course

      2:36
    • 2. The State Of The VC Market In 2019

      2:20
    • 3. What Can We Say About Valuations In 2019

      2:47
    • 4. How Do You Select VCs

      1:32
    • 5. What Are VCs Looking For

      2:27
    • 6. How Much Money Should I Try To Raise

      1:07
    • 7. How Long Does The Investment Process Take

      0:57
    • 8. When Is Debt Suitable For A Growing Business

      2:19
    • 9. How Should A Founder Think About The Mix Of Debt And Equity

      1:20
    • 10. What Documentation Do You Need

      1:59
    • 11. How Should A Founder Sell To An Investor

      1:03
    • 12. What Is The Deal Process From Signed Term Sheet To Cash In The Bank

      3:24
    • 13. Course Summary and Wrap Up

      3:22

About This Class

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I was fortunate to be invited to an investment breakfast hosted by leading London Technology lawyer Simon Halberstam. Simon is a Partner and the Head of Technology Law at Simons Muirhead & Burton

At the seminar an expert panel debated the state of the Venture Capital market for early stage, Series A and Series B funding in 2019.

This training summarises many of the key points discussed and I have included my own views, comments and opinions based on 30 years of investment banking experience, 20 of them spent advising technology companies.

The opinions, errors and omissions are mine and mine alone.

This training is important if you are an entrepreneur or founder who is looking to raise capital from VCs in the foreseeable future. As we discuss the key questions, the information will help you to position your company for funding and avoid many common mistakes and errors.

This easy to follow training addresses key questions that you are almost certainly asking already and provides clear guidance and answers that I am confident will contribute to making your next funding even more successful.

These are the key questions that were discussed by the panel of experts during the seminar.

  • The State Of The Market In 2019
  • What Can We Say About Valuations In 2019?
  • How Do You Select VCs?
  • What Are VCs Looking For?
  • How Much Money Should I Try To Raise?
  • How Long Does The Investment Process Take?
  • When Is Debt Suitable For A Growing Business?
  • How Should A Founder Think About The Mix Of Debt And Equity?
  • What Documentation Do You Need?
  • How Should A Founder Sell To An Investor?
  • What Is The Deal Process From Signed Term Sheet To Cash In The Bank ?

I hope you enjoy this training as we work through it together I f you have any questions, please reach out to me – [email protected]and don’t forget to check out my other Corporate Finance and Capital Raising courses.

Enroll today and I look forward to working with you in the course!

Best regards

John

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Transcripts

1. Introduction to the Course: I was recently invited to attend a seminar held by a leading London technology law firm. At the seminar on expert panel debated the state off the venture capital market for Early stage Siri's A and Siri's Be Funding in 2000 and 19. This training summarizes many off the key points discussed. Andi. I have included my own views, comments and opinions based on 30 years of investment banking experience. 20 off them spent advising technology companies, I have to say up front the opinions, errors and emissions are mine and mine alone. This training is important if you are an entrepreneur or founder who is looking to raise capital from veces in the foreseeable future as we discussed the key questions, The information will help you to position your company for funding Onda. Avoid many common mistakes and errors. This easy to follow training addresses key questions that you are almost certainly asking already and provides clear guidance and answers that I am confident will contribute to making your next funding even more successful. These are the key questions that were discussed by the panel of experts during the seminar . The state of the market in 2000 and 19. What can we say about valuations in 2000 and 19? How do you select veces What are veces looking for? How much money should I try to raise? How long does the investment process take? When is debt suitable for growing business? How should have founder think about the mix off debt and equity? What documentation do you need? How should have found a cell to an investor? What is the deal? Process from signed term sheet to cash in the bank. I hope you enjoy this training as we work through it together. If you have any questions, please reach out to me, John J. B d Cali dot com. And don't forget to check out my other corporate finance and capital raising courses. 2. The State Of The VC Market In 2019: the state of the V C market in 2000 and 19. The 2019 venture capital market has seen fewer deals completed, but those that are successfully closing have bean larger and at higher valuations. What does this tell us about the market? Despite there being no shortage of money looking for investments, veces remain risk averse and prefer post revenue deals at higher valuations toe earlier pre revenue investments, which are, by their stage of maturity, higher risk. This indicates that investors are keen to see at least proof of concept Andi some customer conversion before getting off the fence. The changes to the VCT rules a couple of years ago mean that this money is more tightly focused on riel growth investment rather than on secondary transactions such as buyouts. This has done nothing to address the appetite for risk that these funds prefer to mitigate by investing at later stages. Sources of capital include corporate who are setting up venture funds which compete with the more traditional institutional investment funds. The corporate often try to offer strategic advantages rather than simply financial ones, but this can lead to exclusivity clauses. Onda conflicts of interest further down the road. Corporate funds are now seen to be involved in approximately 20% of deals the market is chasing. Quality on the competition for the best investments is driving valuations higher, particularly at the Siri's A and B investment stages. Another interesting development is the emergence of tightly focused micro veces, which might prove to be a useful source of earlier stage funding. Going forward, they have the opportunity to fill the funding gap left by more traditional BC's moving away from pre revenue opportunities. 3. What Can We Say About Valuations In 2019: What can we say about valuations in 2000 and 19? Right now, valuations are very attractive, with weight of money and the competition for the best deals being the two main driving forces. It is true to say that V. C investors prefer to invest in a quality company at a high evaluation than a mediocre one at a lower evaluation. In simple terms, with more money chasing these deals, valuations are going up. There is a risk here, and it's important that entrepreneurs are honest with themselves about valuations, as this can come back to bite them in the next funding round on unsustainable valuation in a Siri's A can make a Series B round difficult or impossible to raise without the company accepting a lower evaluation leading to a down round. In industry parlance, this can lead to all sorts of difficulties reconcile in the interests off the existing and new investors. Bear in mind, too, that investors are still looking for a meaningful stake of 20 to 30% in your business. They may also protect themselves by structuring the deal with low notes or preference share to give themselves downside protection. So it's not all about the valuation itself. These can protect their returns, but only at the expense off the management and existing investors. It is true to say that for a pre revenue start up, capital remains very difficult to raise, and entrepreneurs should not assume that VCs are the answer. Other sources of capital include family offices, high net worth individuals and angel investors. Some accelerator programs offer small amounts of start up capital. It is worth looking at government grounds across Europe as well. Another option is bootstrapping. Easier to say than do and trying to raise your initial capital from your first customer in return for preferential terms and a special long term relationship. Venture debt should be seen as complementary and not as an alternative to equity funding and is normally only available for post revenue businesses. It can help to mitigate the effects of dilution from a VC round, but typically will not comprise more than 30% of the funding 4. How Do You Select VCs: How do you select the seas? Some of the key factors include the size of the round, the quantum of money being raised. Advisors will also look at the sector and specialization of the company and try to match it with investors who have experience in that market. It is true to say that advisors have their strong relationships with some BC's, and we'll show them all their deals, as well as trying to identify the specialists who best suit the company. Beware off approaching a V C who has invested in a competing company. They will take the meeting but be on a fishing trip for useful information rather than seeing it as an investment opportunity. Investors with funds also have an investment cycle off their owed, and you need to be confident that the investor you are meeting has the financial capacity within their fund for this round and potentially future rounds to at Siri's AM be geography plays a part, too. It is fair to say that unless your company is very specialized, you should seek to attract investors from the same country that your business operates in if you go abroad. One of the first questions you may be asked is, Why weren't your local investors support your company? 5. What Are VCs Looking For: what are veces looking for? Early stage deals still very much focus on the founder and entrepreneur. The investors are backing the vision and execution skills off the management team and particularly the leader off that team. Can they sell their investment to investors and come, they sell their company's products and services to customers? Siri's A deals are more complex here. The focus is on custom attraction and scalability. It is worth reflecting that the range of Siri's A Deals is broadening, with some still very early and occasionally pre revenue through to later, more mature post revenue deals. The investment case remains dependent on the opportunity on the business. Siri's be deals are more clear cut and focus primarily on revenue, traction and scale ability. Seed capital is very difficult, but not impossible to raise some veces. But it's fair to say that at this stage investors are hyper selective on looking for only the very highest quality opportunities. This is very much about backing an experienced team or a successful serial entrepreneur. Veces will also be positively inclined to invest in a founder that they have successfully supported before or in a sector or subsector, where they have seen successful returns in the past. Other sources of capital for pre revenue deals remain. Friends and family angel investors peer to peer lending platforms, and crowdfunding investors also like to see defensible intellectual property. I p preferably with some Peyton Protection. A risk with patent applications is that you have to set out much of your competitive information in the patent applications and need to be able to afford to defend them in court if necessary. For early stage businesses, staying under the radar and not applying for patents is often the right strategy to protect their I P. 6. How Much Money Should I Try To Raise: How much money should I trying to raise? This is a key question. Should I raise more than I need in this round at a lower evaluation to reduce the risk of running out of money or raise what I need and wait for the next funding round to raise more ? The best advice is more often to raise what your plan and your business needs. Focus then on running your business and delivering the milestones set out in your plan. Do bear in mind, however, that some investors have ideal investment amounts, which may mean that either you have to raise more than you need. Or perhaps they are the wrong investor for your business. Do not rule out the do nothing scenario. If you can get away with not raising capital from BC's, then consider this seriously. Once you accept VC investment, that dynamics of your business will never be the same. 7. How Long Does The Investment Process Take: How long does the investment process take? The first stage of pitching and negotiating term sheets can take two months. At this point, you are in the driving seat and are selecting between potential investors. Ideally, this is a time when you can negotiate the best terms based on the competitive tension on from which you can select your preferred investors. Once the term sheets are signed, the investors will normally ask for 12 weeks to complete the due diligence and documentation process. If you can restrict this time window, offer eight weeks but be prepared to accept 10 weeks. In total, the investment process can take six months less, perhaps if you already know the VECES. 8. When Is Debt Suitable For A Growing Business: When is debt suitable for a growing business? Debt can be used to bridge a gap between funding rounds, but this is not the best time to raise money. The best time to raise is when you are most liquid during or shortly after a funding round . This works best from Siri's A onwards. Large seed rounds can be considered, but they are the exception, not the rule. Debt can be used to extend your cash runway when you raise money. Debt providers align themselves very closely with the equity investors and will work with the same due diligence material, business plans and forecasts. One of the advantages of venture debt is you can extend the time between fundraising and give yourself more time to meet your critical business milestones. The providers of venture debt will look very closely at the quality of the company's equity investors, both existing and new, and whether the existing investors are investing in the new round following their money. By their nature, early stage companies have few assets and often no profits, so there is little spare cash flow to service debt. The presence of institutional investors who take a more structured approach to investing and who are more likely to support the company in future rounds is an important factor for venture debt providers. Broadly speaking, they will not feel the same confidence in high net worth investors. Venture debt providers are also very sensitive toe how existing investors have behaved or likely to behave if things do not go well on the company fails to meet some all of its milestones. Investors are always trying to anticipate downside risk. It is worth noting that venture debt normally seeks to be paid down or refinanced at the next funding round on this must be taken into consideration when thinking about whether to take on dead and if so, how much. 9. How Should A Founder Think About The Mix Of Debt And Equity: how should have found a think about the mix of debt and equity. This can vary from business to business. A good rule of thumb is 20 to 30% of the round. Venture debt providers will consider the extent of revenue traction to be a critical factor when evaluating a business debt providers will not want to over leverage the company ahead of the next round. But entrepreneurs should be aware that there are a range of different venture debt providers, and their structures and investment criteria will vary. Too much debt can damage the funding in the next round. If a significant proportion of the new funds are needed to pay down the old debt finance, it is often better to start off with a smaller debt facility and in the next round refinanced to a larger facility following a larger funding round. One way to manage this risk is to make the provisions of the debt available only in tranches measured against successful delivery off agreed milestones. These might include market traction metrics or the number of customer contracts. For example, 10. What Documentation Do You Need: What documentation do you need for the first stage of the investment process? A financial model pitch deck and one page summary will suffice. These will still take time to prepare on. The management team must be able to talk to these in detail on defend the assumptions made in them. The pitch deck should comprise between eight and 20 slides and take no more than 20 minutes to deliver. Once the rays gets beyond the heads of terms stage, more complete documentation will be needed for the Jude Allegiance phase on this should be presented in a data room. This information should include historical and forecast financial information, a detailed cap table on organization chart, existing equity documentation, shareholders agreements if they exist, the memorandum and articles of the company. Employment agreements, customer agreements and contracts in other words, a full range of the financial and legal documentation off the company. It is a good idea to put the data room together ahead of time, as this can be a time consuming process. Bear in mind that Jew diligence is about finding errors and mistakes, so careful preparation is important to ensure that there are no skeletons or banana skins around in your business that might derail the investment process. Entrepreneurs should note that investors normally seek to recover their deal costs and particularly due diligence costs from the money raised in the deal. And if the funding does not go through, this can often leave the business with a large, unwelcome bill. 11. How Should A Founder Sell To An Investor: How should have founder cell to an investor. The pitch presentation is the sales pitch by the founders to the VECES. This document needs to focus clearly on the issues which are off the most importance to the investors. These include the product and its US peas, the market market size and why the product can compete. The customer's existing in future, where custom attraction will come from the defense ability off the intellectual property, the composition and track record of the management team, a summary of the financials P NL balance sheet and cash flow, existing shareholders, investors and advisors and finally, the amount off the Rays and its proposed uses. 12. What Is The Deal Process From Signed Term Sheet To Cash In The Bank: What is the deal process from signed term sheet to cash in the bank, The term sheet sets out the principle terms of the investment by the investors into the company. Once this is signed, the initiative passes from the company to the investors who will have to conduct due diligence on, then negotiate and complete or the legal documentation. This swing is often referred to as the pendulum of power. The exclusivity period is normally 8 to 12 weeks, with the veces preferring a longer period on. Management should be arguing for the shorter end of the spectrum. It is important that all enquiries are followed up and answered promptly. Do diligence will work through the business from top to bottom, and that is where a well prepared data room is essential to a smooth running and successful process. This may include revising and updating employment agreements. Sight of all the company's legal documentation, including customer agreements, Onda property and environmental review. The Jew Diligence checklist is normally a multi page document organized under these and other headings. Make sure that any red flag issues are identified early and addressed as soon as possible. The documentation phase will primarily focus on the investment agreement between the company and the new investors. However, as part of the documentation process, the investors may require new articles of association. New employment agreements on may require the I P ownership to be transferred to ensure that its ownership is aligned with the company. The Jew diligence process can be a difficult process with a Siris of meetings where the investors lawyers grill the founders and their lawyers looking for skeletons in the cupboard. In this regard, the Jew diligence process is an inherently negative process. The role of advisers and lawyers in this process is important to ensure that the founders understand what is market practice on. When the investors taken unreasonable position on an issue, the founders will need to know when to push back on when not to do so. It is always better when the process is collaborative and not competitive. It is also important toe have complete transparency on fees. In the event of an unsuccessful due diligence process, the VECES, who always try to recover their deal fees from the money raised, will present the company with an unwelcome bill. The biggest pitfall in due diligence is understanding how long the process will take as the whole process can take up to six months, the investors will have an opportunity to track the performance of the company against the business plan presented before the term sheet was signed. It's important not to miss any key milestones during this period. 13. Course Summary and Wrap Up: summary letters trying to summarize some of the key points from the seminar. What does this tell us about the market for V C investment in 2000 and 19 the state of the market in 2000 and 19? There is no shortage of money, but there is, it seems, a shortage of high quality deals. What can we say about valuations in 2000 and 19? As a result, valuations are high, but the number of deals is lower. How do you select veces You need to match the veces to your business, which includes sector specialisation, funding, round stage, geographical proximity and quantum of investment, amongst others. What a. B C is looking for. It seems that there are still a wide range of investors from corporate institutional funds , VCT, funds, micro veces and angels, and everyone is looking for the best quality deals in businesses. With riel traction, it is more difficult. It has never been easy to raise pre revenue investment as investors increasingly prefer to invest larger amounts and at higher valuations in companies with revenue and custom attraction. How much money should I try to raise? Broadly speaking, raise what you need. Don't raise more money than the company requires to achieve its next set of milestones, with some contingency on runway to take you through the next funding cycle. How long does the investment process take? Six months is a good working assumption. When is debt suitable for a growing business venture debt comm player part in Siris A and B rounds Seldom before this, it can be used for in reducing the dilution of the equity in the round. But founders should be careful not to over leverage their businesses as this might negatively impact subsequent rounds. How should have found a think about the mix of debt and equity? 20 to 30% seems to be an acceptable benchmark. What documentation do you need to start the process? You need a financial model, a pitch document and a one page summary. Once the heads of terms assigned, you will need a full data room, how should a founder cell to an investor? This is the purpose off the pitch document, which should be a 10 to 20 slide document and should take no longer than 20 minutes to deliver. What is the deal process from signed term sheet to cash in the bank, the two main processes to be completed after signing the term sheet, our due diligence and documentation, which can take 10 to 12 weeks.