roceo venLures Sdn 8hd 2014.

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Investor 101
Lveryth|ng you wanted to know about
|nvestors but d|dn't know who to ask
8y Dr V. S|vapa|an
Co-Iounder & Ch|ef Investor
rohceo Ventures
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Agenda
1. Who are Angels & vCs and whaL's ln lL for Lhem?
2. lnvesLor reLurns: l88 vs. Muluples
3. uo vCs really wanL Lo Lake over your company?
4. Should you Lake Lhelr money?
3. uumb money vs. SmarL money vs. no money
6. reparlng & posluonlng for fundlng.
7. SLoryLelllng - how you should plLch your buslness Lo Angels & vCs.
8. Pow do you value your company? Some valuauon meLhodologles.
9. lnvesLmenL mechanlsms: 8CS, romlssory noLes, eLc
10. AgreemenLs & 1erm SheeL baslcs.
11. lnvesLors' preferred exlL mechanlsms.
12. Cradle's Cl130 & Cl300 granL baslcs
13. lnvesLee sharlng.
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8ackground Lo Lhe sesslon
Why have Lhls sesslon?
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1. Who are Angels & vCs and whaL's ln lL for
Lhem?
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Who are Angels?
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Who are vCs?
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VC Structure
1. LlmlLed arLners (provlde caplLal) & Ceneral arLners
(manage fund)
2. lund slze & mandaLes (verucals, geography, sLage)
3. lund ume llmlLs: 7 - 10 years
4. lnvesLmenL ume frame (3+2+2) or (4+3+3) (lnvesL, manage,
dlvesL)
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2. lnvesLor reLurns: l88 vs. Muluples
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VC Investor keturns
1. ManagemenL fees (2.3 - 3.3 p.a. x lund umeframe)
2. Purdle raLe: A specled raLe of reLurn for Lhe L before Lhe C sLarLs
recelvlng hls share of proLs, usually based on Lhe rlsk facLor - hlgher
rlsk, hlgher hurdle raLe.
3. Carrled lnLeresL: 1he Cs share of proLs usually a percenLage
(sLandard raLe 20)
4. Ls: CaplLal musL be reLurned rsL, Lhen hurdle raLe lf any & Lhen only
proLs shared (say 80:20)
3. lf lund doesn'L make money Cs don'L make money
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VC kate of keturn
1. Success raLe ouL of 10: uead (4), Llvlng uead (4), Success (1)
8lC wlnner (1)
2. Alm for reLurn muluples of 3 - 3x & 8lC wlnner 10 - 20x
3. Average raLe of reLurn: lnLernal 8aLe of 8eLurn (l88 20-23)
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VC kate of keturn
1. 8ased on l88 of 20 (red llne) & 40 (black llne)
2. Shows muluple expecLed over no. of years
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Success raLe of vCs
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3. uo vCs really wanL Lo Lake over your
company?
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1he venLure CaplLal SecreL:
3 CuL of 4 SLarL-ups lall
uo vCs make lousy managers?
73 percenL of venLure-backed companles never reLurn cash
Lo lnvesLors (l.e. Lhey fall),
wlLh 30 Lo 40 percenL of Lhose llquldaung asseLs where
lnvesLors lose all of Lhelr money.
- Parvard 8uslness School senlor lecLurer Shlkhar Chosh ln 1he Wall SLreeL
!ournal based on research lnLo 2,000 vC backed rms
So why wou|d they want to take over your bus|ness?
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8uL you wlll lose some conLrol over Lhe company
vC Shareholder agreemenLs wlll normally lnclude some resLrlcuons. So you
cannoL do Lhe followlng wlLhouL Lhelr permlsslon:
lssue more shares
lncrease Lhe slze of Lhe 8oard of ulrecLors
1ake on debL
Amendlng Memorandum & Arucles of Assoclauon
aylng dlvldends
8edeemlng shares
Llquldaung Co or selllng ma[or asseLs
M&A & lC
aymenLs above a cerLaln amounL (negouable)
Cnce they g|ve you the money they |ose contro| over |t so they need to
make sure the|r |nterest |s protected. ou take the|r money, you have
to ||ve by the|r ru|es.
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4. Should you Lake Lhelr money?
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ou shou|d take the money on|y |f:
1. ?ou really need lL
2. ?ou know whaL you wlll use lL for
3. ?ou can use lL Lo grow & scale Lhe buslness - fasLer Lhan
organlcally
4. lL wlll help you Lo bulld a successful buslness
3. ?ou can glve Lhem & yourself a good reLurn on lnvesLmenL
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3. uumb money vs. SmarL money vs. no money
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Dumb money vs. Smart money vs. No money
1. uumb money - [usL money, llule else - vCs provlde nanclal clarlLy,
corporaLe governance, exlL experuse
2. SmarL money - money, relevanL experuse & knowledge, neLworks,
sLraLeglc savvy, operauonal skllls, recrulLmenL, long Lerm growLh plans,
exlL plan
3. no money - you're on your own maLe, so grow organlcally, prove Lhe
model & make money
Shou|d you take "dumb money"?
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6. reparlng & posluonlng for fundlng.
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What shou|d you do to prepare for |nvestors
1. 8ulld a 1LAM LhaL can envlslon & execuLe Lhe buslness plan
2. rove Lhe need for your producL wlLh paylng cusLomers
3. CreaLe a Scalable & 8epeaLable buslness model
4. Serve a PuCL markeL (don'L be a [aguh kampung)
3. SorL ouL your corporaLe & nanclal sLrucLure, ensure
proper governance ls ln place
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What shou|d you do to prepare for |nvestors
1. Make Lhem WAn1 Lo lnvesL ln you.
2. know whaL you need (how much money) & how you wlll
spend lL
3. rove LhaL you can scale (show Lhem how you have already
done so, make sure your assumpuons are correcL & valld)
4. Pave a solld long Lerm vlslon wlLh a achlevable exlL plan for
Lhe lnvesLor
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7. SLoryLelllng - how you should plLch your
buslness Lo Angels & vCs.
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What's your 8IG story
1. Lvery lnvesLor wanLs Lo see an exclung sLory: hlgh
growLh, huge markeL, greaL LalenL/Leam,
lnnovauve, scalable buslness, repeaLable revenue
model, blg exlL, everyone maklng money.
2. lLch me your sLory
3. ulscusslon
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What's the|r 8IG story?
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8. Pow do you value your company? Some
valuauon meLhodologles.
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Methodo|og|es
I|nanc|a| Mu|np|es (usually benchmarked agalnsL slmllar deals)
1. Cash llow (posluve or negauve)
2. 8evenue muluples
3. roL Muluples & L (rlce Larnlngs) 8auo
4. Can also be creauve & do muluples based on revenues or proLs on
forecasL numbers over 12 Lo 24 monLhs.
3. lnvesLors need numbers of some klnd Lo benchmark especlally when Lhe
deal ls for a commerclallsed enuLy.
6. lor pure Lechnology acqulsluon wlLh zero revenue deal wlll be based on
Lhe lnnovauveness of Lhe producL & markeL poLenual alone.
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Some recenL valuauon rauos
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Market Metr|cs
1. Slze of MarkeL (1oLal MarkeL)
2. 1oLal Addressable MarkeL (1AM)
3. Scalable & 8epeaLable model Lo capLure 1AM
4. Larger 1AM, proven S&8 model = hlgher valuauon
(CrabLaxl)
3. CrowLh meLrlcs (revenue, Lramc, user/cusLomer daLabase)
8lslng Lrend valldaLes success of buslness & markeung
6. 8enchmarklng - comparable deals, reglonally, globally,
relaLed secLors.
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Van|ty Metr|cs
1. CusLomers/users esp. 82C
WhaLsapp 300 mll users = uS$ 19 bll (lacebook)
vlber 300 m users = $900m (8akuLen)
uropbox 373m users, ralsed $330m [ $10 bll valuauon
2. Lyeballs, snaps, plns
SnapchaL - 300 mll plcs, vldeos a day = $3 bll valuauon
lnLeresL - 1.3m Lravel relaLed plns a day = $3.6 bll
valuauon
8evenue? negllglble.
3. Mllllons of users? >10m users = $30 per user
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Van|ty Metr|cs
1. uo Lhey make sense?
2. 8ubbles?
3. MarkeL valuauon.
4. Wllllng seller, wllllng buyer.
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Show me the money
1. ulumaLely lL's abouL maklng money.
2. no money? CoL vanlLy?
3. Money ls sull Lhe real deal
4. LxecuLe, execuLe, execuLe
3. Scale, scale, scale
6. 8epllcaLe, repllcaLe, repllcaLe
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9. lnvesLmenL mechanlsms: 8CS, Converuble or
romlssory noLes, eLc
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reference Shares
1. ref shares ls one of Lwo Lypes of shares normally lssued by companles,
Lhe oLher belng Crdlnary Shares
2. ref Shares normally rank ahead of Crd shares ln reLurn on caplLal lf Co
goes bankrupL or ls llquldaLed (hence Lhe name reference")
3. ref shares can also lnclude (buL ls noL necessary) xed annual
dlvldends whlch musL be pald before Crd shareholders (oen called a
dlvldend raLe or coupon raLe).
4. Someumes Lhere ls also a Llquldauon reference" whlch means lf Lhe
Co ls sold Lhey geL Lhelr lnvesLmenL back rsL before any of Lhe oLher
shareholders are pald. L.g. lf Lhey lnvesLed 8M1m & Co sold for 8M3m
Lhen Lhey geL back Lhelr 8M1m rsL & Lhen only Lhe resL of Lhe sale
value ls dlvlded among all Lhe shareholders lncludlng Lhem.
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kedeemab|e, Convernb|e, reference Shares
1. 8edeemable - Lhe Co or romoLer can redeem Lhe shares from Lhe
shareholder aL a fuLure xed prlce (redempuon prlce) l.e. Co can buy
back Lhe shares aL Lhe redempuon prlce.
2. Converuble - Lhe shares can be converLed Lo ordlnary shares aL some
polnL ln Lhe fuLure, normally on Lhe occurrence of a speclal evenL l.e.
lC or M&A
3. 1he converslon rauo ls xed when shares are lssued & lndlcaLes how
many ordlnary shares lL wlll be converLed Lo.
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Convernb|e Notes
1. An agreemenL Lo lnvesL currenLly buL Lo only do a valuauon
ln Lhe fuLure based on fuLure lnvesLmenLs
2. Cood for very early sLage companles when a valuauon ls
hard Lo do or unfalr on lounders
3. Cers provlders of Lhe Cn a dlscounL on fuLure valuauons
because Lhey Look a blgger rlsk when lnvesung early
4. 8arely used ln M'sla buL gemng more popular ln S'pore
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10. 1erm SheeL, AgreemenLs & uue ulllgence
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1erm Sheet
1. An lnlual agreemenL on Lhe deal.
2. SeLs Lhe sLage for a due dlllgence Lo be conducLed
3. 8evlew 1emplaLe
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Due D|||gence
1. CorporaLe - revlew of Lhe corporaLe sLrucLure & Co Sec
documenLs. All sLaLuLory requlremenLs musL be up Lo daLe.
2. llnanclal - revlew of pasL, currenL & pro[ecLed nanclals
lncludlng assumpuons
3. Legal - on Lhe company & ulrecLors/Shareholders. Lnsure
no legal sulLs, hldden unpald debLs, bankrupLcles, eLc.
4. 8uslness - valldaung Lhe buslness & all clalms made by Lhe
lounders
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Shareho|ders Agreement
1. upon compleuon of due dlllgence & accepLed by Lhe
lnvesLor, all shareholders musL slgn Lhe shareholders
agreemenL
2. SeLs ouL Lhe duues & responslblllues of shareholders &
operauons of Lhe buslness as well as share sale rules
3. 8evlew LemplaLe
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Subscr|pnon Agreement
1. 8lnds all parues Lo Lhe agreed upon shareholdlng sLrucLure
2. ueLermlnes Lhe mechanlsm used (8CS eLc)
3. SeLs ouL number of Lranches, how money ls dlsbursed, how
many 8CS wlll be lssued eLc.
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11. lnvesLors' preferred exlL mechanlsms.
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Lx|t Mechan|sms (for |nvestors)
1. 1rade sale or M&A (1
sL
cholce as lLs easler)
2. lC (2
nd
cholce unless Lhe publlc markeLs are hungry for Lhe
deal Lhen lLs 1
sL
cholce)
3. 8edempuon by Lhe company
4. 8edempuon/acqulsluon by Lhe lounders/romoLers
3. Llquldauon (everyone loses)
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12. Cradle's Cl130 & Cl300 granL baslcs
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CI Cata|yst (kM1S0,000)
1. CranLs for lnnovauve ldeas
2. urpose - Lo bulld proLoLypes buL musL have a poLenual
markeL for lL
3. kl - compleuon of proLoLypes & ready for
commerclallsauon
4. 1lmeframe - 9 - 12 monLhs
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CI S00 (kMS00,000)
1. CranLs for commerclallsauon of lnnovauve ldeas. Cenerally do noL fund
buslnesses Loo slmllar Lo Lhose already funded or copycaL ldeas
2. urpose - Lo help you successfully commerclallse your ldea
3. MusL show evldence of markeL accepLance/valldauon
4. 1lmeframe - 12 monLhs
3. kls - markeL drlven: Always lncludes revenue kl & oLhers based on
Lhe buslness. lounders can propose oLher kls, sub[ecL Lo agreemenL
by Cradle.
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CI Grants
1. lL ls a condluonal granL based on 3 mllesLones
2. ay rsL & Lhen clalm back. Make regular clalms (every 2 monLhs ls
recommended). uon'L lump everyLhlng lnLo 1 or 2 ma[or clalms. Clalms
wlll be audlLed & verled by Cradle Lo prevenL fraud or mlsrepresenLauon.
3. Some moblllsauon funds ls allowed sub[ecL Lo agreemenL wlLh Cradle
4. ?ou musL have cash ows secured.
3. lf mllesLones are noL meL, granL can be frozen & you may be asked Lo pay
back beLween 30- 100 of Lhe granL dlsbursed sub[ecL Lo agreemenL wlLh
Cradle.
6. lf revenues exceed 8M2.3 mll or lnvesLmenLs above 8M2.3 mll secured,
you wlll be requesLed Lo pay back up Lo 30 of granL dlsbursed
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CI Grants - ayback requ|rement
1. Cl300: lf revenues exceed 8M2.3 mll wlLh 8M300k ln proLs C8
lnvesLmenLs above 8M2.3 mll secured, you wlll be requesLed Lo pay back
up Lo 30 of granL dlsbursed.
2. 1lmellne ls 2 years from end of granL perlod
3. Cl130: 8evenue & proL numbers for payback belng revlewed.
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1hank you and C&A
ConLacL ur. v. Slvapalan
slva[proceo.com