Itxaso del-Palacio
Partner at Microsoft Ventures
Teaching Fellow at UCL
@ItxasoLondon
UC Berkeley
Silicon Valley
London
Barcelona
Investors Legal
Investors
Pitching Meeting Due Final
Meeting Term
to (associate, Diligence Negotiation
(partners Sheet
Investors analyst) (4-12 milestones
)
weeks)
- Investor (Opportunity)
Due Diligence Lawyer Time
- Preliminary negotiations
Advantages Disadvantages
- Low pressure on valuation (no equity**) - Unable to fund growth phase
- Easy terms on ownership - Lack of funding commitment for future
- Control by founders - Loss of advice from investors
- Little time on finding investors
Source: Dorf &Byers, 2008
Public Funds/Grants
Advantages Disadvantages
- It doesn’t require re-payment** - Complex and long process
- No taxes or interests to be paid** - Huge effort on paperwork
- Finance seed stages (high risk) - Subjected to government audits
- No limit in the number of grants - Sometimes an accountant is needed
- Do not provide professional advice
Accelerators
- When? When support needed (rather than just cash)
- Provide intensive mentorship (3-6 months)
- How much? £50-100K for 8-10% equity (aprox.)
- They are different models with or without investment, space, equity,…
- Startup Bootcamp, Techstars, Y Combinator, 500 startups
- Industry focused: Collider, TrueStart, Barclays Accelerator
- Corporate Accelerators: Wayra, Deloitte
Advantages Disadvantages
- Experienced mentors - Do not always get financed
- Significant development in a short time - Most of them are ICT oriented
- Access to a huge network of
experienced entrepreneurs
- Smart money
Crowdfunding
Advantages Disadvantages
- Community Engagement - Small amount of money
- Social test of the idea - No feedback from investors
- No investor pressure (milestones) - Lack of expertise of investors
Venture Debt
- When? Need a “bridge” in between equity rounds
- How much? £1-5m
- Debt financing for equity-backed companies (provides short term liquidity)
- No valuation required (it is cheaper than equity)
- Interest rates: 10-15%
- Repaid (generally) on monthly payments over the life of the loan
- Dilution: (generally) <1% (warrants)
- Institutions providing Venture Debt: Silicon Valley Bank, Columbia Lake Partners,…
Advantages Disadvantages
- Minimize dilution - Can reduce companies’ flexibility if
- Allows increase of valuation utilized poorly (e.g. unfavorable terms)
- “Venture Debt makes venture more - Not good for big rounds of funding
efficient” - Not good if not combined/follows equity
- Quicker than equity financing (no - Not good when it is used as a last resort
valuation and no board seats to be (the weaker the company the worse the
negotiated) terms)
Angels and Super Angels
- Individuals investing their own money
- When? Early stages, looking for investors who know the industry
- How much? £50-£250K (they invest their own money)
- “Usually” experienced entrepreneurs
- More and more “super angels” (Former successful founders): Skype, Deepmind…
- Often get involved in the day-to-day management of the firm
- Might benefit from SEIS/EIS (Who qualifies?)
- Organized in networks (AngelLab, LBA, HBS Angels, Band of Angels,…)
Advantages Disadvantages
- Value adding - Little follow-on money
- Network of contacts in the industry - Few are “super angels”
- Prefer start-ups and early-stage firms - Want to have a vote in all decisions
- No high fees/ownership
- Invest in all industrial sectors (high-tech,
manufacturing, fashion, leisure,…)
Let’s talk about Venture Capital
What is Venture Capital?
How does it work?
How is it structured?
Venture Capital
Limited Partners
Deal origination
Investors
VCs
(General Partners) Screening
Investors
Evaluation
Post Investment
Activities
How do Venture Capitalist make money?
• Example:
$100m fund will have $99m from LPs & $1m from GPs
Will cover ±$15m management fees (over 10 years)
The return will be distributed:
1. 99/1 for the first $100m
2. and 20/80 for the remaining return
Recycling: If an early investment returns $20m, $15m
(same as management fee) will be re-invested
Venture Capital
- They invest others’ money (pension funds, university funds,…)
- Look for extraordinary returns
- Invest thinking of an exit (acquisition, IPO) – liquidity event
- Invest in exchange of ownership (shares, seats in the board)
- Exchange of CEO
- Want to see milestones
Advantages Disadvantages
- Value adding - reputation - High control with milestones
- Network of contacts in the industry - Staged investment
- Attract other investors - Ownership in exchange (negotiation)
- Follow-on investments - Voting rights
- Accelerate growth
- “Find the right CEO”
Understanding VC firms
$25M+
$5M+
$1M-$5M
$50k-$1M
@ItxasoLondon