• Passion - Don't see work as a job otherwise you're doing the wrong thing.
  • "Find an occupation you love and you will never work a day in your life" - confusious
  • Optimism - Positive attitude is very important in business.
  • The most successful politician or business people in the world are the one that can speak effectively in front of groups of people and sell an idea, sell a concept to change the world.
  • Networking is key as relationships are more important than product knowledge
  • TAM (Total addressable market)
  • Venture capitalist don't invest less than TAM or at least $20B
  • Good entrepreneurs are great salespeople

Proprietorship

(+) cheap, quick setup, no politics, (-) personal liability, tough to sell
When : early stage, don't have product yet, if get sued can get your house.

General Partnership

(+) cheap, quick setup, 2+ members, (-) personal liability, tough to sel

Limited Partnership

(+) cheap, limited liability, 2 + members, (-) passive investor, tough to sell, partner with authority is limited

Corporation

(+) Access to capital, easy to sell, corporate governance, (-) board meeting, expensive to setup
has a board of directors and has the ability to protect shareholders and investors.

  • S corporation <100 individual investors, no corporate tax

LLC (limited liability company)

(+) cheaper than corp, limited liability, if lose $, helps my taxes (-) expensive vs gp, hard to raise money
usually costs 100 bucks or less per year to setup.

Intellectual Property

  • How to protect
    1. file patents / copyrights / TM
    2. NDAs
    3. Employee Contract
  • Patent - Product 'protected' once filed
  • Patent Pending - Usually going to be issued within a year
  • TM - name / brand / slogan registered @ state / patent
    if not used for 3 years u lose it
  • R - federal level trademark for all state
  • C - Copyright - its tough to patent software or media, the solution is C
  • trade secret - not filed for a reason ( it's a secret)
  • Unicorn are companies that have a billion dollar plus valuation
  • Relationship are more important than product knowledge
  • "be a contrarian and watch your career and your net worth take off"

Presentations

U need to be incredibly engaging and entertaining when you present.
Rules :

  1. The less is more
  2. keep it simple
  3. the medium is often more important then the message
  4. inspire, be passionate
  5. deliver an experience
  6. tell a story, 3 words or 3 items on each slide works well
  7. Create a passion statement
  8. show the product early or lose interest in first 30/60 second
  • Inform, educate, entertain
  • present with passion right from the heart
  • don't read scripts
  • One you understand where pain is, you can define solution.
  • try less than 10 min
  • have a break using video
  • repeat your message a lot
  • use you hands
  • make eye contact
  • dramatic pauses
  • be honest and sincere
  • 10000 hours practice rules

Very important sales technique

  • Most successful ceo do : They stop talking once they sense the sale is done.
  • Keep talking until you're convinced that they're not interested

How VC Makes money

  1. Charge 2% annual fee on the money you invest
  2. They make most of their money on what's called canary which is 20% in entire that they get
  • How do you harvest an investment? The company / startup, You'll either go public or sold to another company that's called harvesting.
  • Venture capital is everything between IPO and seed stage ABC rounds
  • VC capital raising and terms they typically look for 5 by 5 500% by 5 years

How to pitch to a VC

  • Prepare 3 pitches : 30 sec, 5 minutes, 30 minutes
  • Sell yourself : nothing is more important.
  • Discuss what is different about the product
  • Show the product
  • keep it simple, be passionate, be interesting
  • less is more

What VC should you target?

  • know their stage focus, sector focus, reputation, target return date
  • are they founder friendly
  • are they growth or value?
  • do you enjoy their company?
  • do you trust them?

How do VC firms make money?

  • 2% management fee
  • carried interest of 20%
  • 2 & 20
  • similar to a hedge fund
  • accredited investors
  • offering memorandum

How does investing in VC work?

  • Capital calls
  • 20% left over to avoid dilution

How do VC firms get deals?

  • networks
  • past investments
  • other vc introduce firms to vc
  • why am i so lucky to see this
  • University ( goog example )

Who do VC's back ?

  • Strong management team
  • huge tam
  • strong syndicate
  • disruptive business model

Common stock

  • the lowest of the low
  • the last claim on the company
  • usually can be sold
  • if firm buys then

Preferred shares

  • senior claim to common shares
  • liquidation preference
  • get divivdens before common
  • vc firms get preferred
  • employees get common

Convertible preferred

  • at IPO preferred shares convert to common shares
  • when you buy stocks in US markets they are common shares
  • sometimes convert = 2

Down round?

  • if you price the series a too high
  • price of new shares (b) is lower
  • everyone is angry at the anti dilution clause

Convertible debt

  • this is a debt instrument & hence has senior debt claims over preferred shareholder
  • if the firm can't pay the debt then the convertible debt take your stuff.

Warrants

  • a startup can incentivice investors when they invest by giving them warrants ( an option to get new shares later for free )

Options

  • call options, the right to buy shares at a specific price in the future
  • "The biggest risk is not taking any risk... in a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risk" Mark Z.
  • You can really accomplish anything in life if you're confident
  • confidence leads to perceived competence
  • don't memorize accounting or finance, understand it

Balance sheet

  • assets - stuff you own
  • liabilities - debt that you owe
  • equety - people who own your stuff
  • assets - current assets and longterm assets
  • liabilities - current liabilities and longterm liability
  • current assets = cash or bonds
  • long term assets = factory
  • current liabilities = credit cards, payroll
  • long term liabilities = banks

Income Statements

  • A total stuff we sold
  • B Amount it took us to sell
  • net income = A - B

Cashflow

You always want to payback your debt as late as you can as long as you don't incur penalties or pay interest expence

  • Financial ratio why?
  1. so equity investors can decide to invest or they can assess investment performance.
  2. So lenders can decide to lend or they can decide to lend or the can assess loan performance
  3. So business owners can track performance.
  • Ratio are less important untuk round B
  • Liquidity ratio - measure our ability to pay short term debt, if you can yurn something into cash that's called liquidity.
  • Current ratio - current asset divided liabilities, if > 1 then bank think's you can pay your bills
  • quick ratio is like current ratio except it ignores inventory if needed
  • quick ratio - ( current assets - inventory) / current liability

leverage ratio

  • debt to total assets = debt / assets
  • interest coverage = ebitda / interest
  • ROA = net income / assets
  • ROE = net income / equity
  • You always want to praise in public and criticize in private
  • You'll never get promoted unless you ask to be promoted you'll never get a raise unless you ask get a raise

Management cashflow

  • all forecast are based on % of sales.
  • cash conversion period ratio measure how long it takes for assets and liabilities to turn into cash
  • inventory to sale conversion period - avg inventories / COGS /365
  • Sale to cash conversion period - avg receivables / sales / 365

Financial Capital and ethics

  • Accounting is more focused on accrued revs and expenses
  • Finance is more focused on cash revs and expenses, cost capital, cost of equity.
  • Risk free rate = real rate of interest + inflation premium.
  • Senior debt - debt is secured via access to asset upon default
  • measure risk and return - standard deviation / expected return
  • expected public equity returns risk free rate ( includes inflation) + the validity of the company vs market (b)x expect stock to cut perform goverments bonds.

Security Laws

  1. prospective investors must receive all relevant info before investing (s1)
  2. if you have been defrauded, you should receive compensation ( class action lawsuits )
  3. Insider info - for publicity traded is illegal and result prison. ( no excuse )
  • most important thing to assess for a potential invest in startup ?
  • Management team, is the TAM big enough ?

How to value Private companies

  • Sustainable growth - (ending equity - beginning equity) / beginning equity
  • Sustainable growth = net income / beginning equity * retention rate

Due diligence and data sources

  • In business, confidence != competence. don't let others influence your opinion in finance.
  • Question the financial data & form your own opinion, don't let other form opinion for you

Foundation Toolbox

  • Qualitative and quantitative
  • Tech model income statement drivers
  • subscribers or license revenues
  • bookings
  • operating and gross margin trends

Tech model balance sheet

  • Usually low debt if any
  • cash rich
  • analyze deferred revenue

Tech model cash flow

  • Usually tracks net income
  • important for subs companies
  • some companies are seasonable

What about valuation?

  • value investors sucks at tech
  • smartmoney model 5+ years out
  • use revenue, cps and cf

What about non tech valuation?

  • Dcf - smart money model 5 year
  • use revenue, cps and cf

"Small customers are just as much work as large customer"

Shor term valuation drivers

  • consumer tech = subs
  • enterprise tech = revenue
  • semi tech = earnings
  • hotel = rev par
  • industrial = earning and volume
  • telco = arpu
  • retail = earning and SSS
  • biotech = FDA Approved

When we hire Goldman sach, Investment banker "underwrite" the IPO( legal documents, excel valuation etc)

  • Equity capital market (ECM) write for 20 page "Sales memo" for goldman sales people.
  • ECM teaches salespeople on the trading floor, how to market the deal to investors.
  • Sales people call their client ( Fidelity citadel and other mutual fund/ hedge fund)
  • Once all order are submitted ECM decide how many shares client gts
  • Traders the distribute the shares to their mutual fund and hedge fund clients.

Management Consulting

  • Consultant usually use framework and suggest solutions.
  • Why? Because their client cannot solve complex problem.

Type of consulting firm

  1. Management / strategy
  2. financial
  3. it
  4. hr / staffing

Positive working in consulting

  • intellectual stimulating
  • opportunity to travel
  • excellent compensation
  • negatives
  • brutal hours
  • some client hates u
  • long path to partner

BCG Matrix framework

high growth
lomarket share — | – high market
                        low market

##

Why you might not get debt financing

  • Don't have 2+ years financials
  • if you have few tangible assets
  • if you have low revenue
  • 1-2 employee are to valiable

Credit cards

  • 50% of startups use credit card
  • don't get romanced by teaser rates
  • if you're credit rating suck, you can't raise debt again.

Foreign investor funding sources

  • Us Gov. lets you buy lawful permanent resident status if you invest 1 million in startup and create or preserve 10+ jobs.
  • Minimum drops to 500k if it is in a rural or high unemployment region
  • Even easier for foreign if invest in turn around

Additional gov. loans

  • For native americans
  • for hawaians, women, veterans

Harvesting an investment

  • assets can be transferred to investors
  • company can be sold and cash is distributed to investors
  • company goes public and shares distributed 6 months post IPO

Planning exit strategy

  • Need to explain liquidity targets to investors when you are raising capital
  • otherwise trauma occurs as investors have their own personal liquidity needs
  • easy way to value them is using relative multiples

Buyouts

  • leverage buyout (LBO)
  • financed using debt
  • must have great cashflow to loads.

ESOP

  • Employee stock ownership plan
  • employee buy the company using leverage
  • owned by all employee and management

Troubled ventured

  • It is important not to be emotional about dying companies and realize when it is walking dead then liquidate it or sell it and move on.
  • reason venture fail, cash is king and run out of cash
  • Financial distress - when cash on hand is insufficient to pay for current liabilities
  • load default - miss one payment and its over.
  • acceleration provision - when a firm defaults on just one payment then all future payments are due immediately
  • cross default provision one late payments on one loan causes all loans to go into default
  • Foreclosure - the legal process where lenders collect and takestuff from you
  • insolvent - negative book equity
  • operation restructuring increase revenue or cut expenses.
  • asset restructuring - selling assets or improving ratios like debt divide equity
  • " Don't expect to realize your dreams in life unless you help others achieve their first"
  • Term sheet is non binding 10 page doc. that lists basic terms and you have to agree to it and your investors do as well
  • Free source - wilson sonsini term sheet maker

Invest in yourself

  • Don't be cheap
  • sleep 7/8 hour
  • exercise everyday

  • A company is only as good as its customer service
  • 3 reason to be longterm greedy
  • think long term like a founder unjustified critism is a disguised compliment
  • wealth = health + happiness + gratitude
  • turn around don't owrk in tech
  • success = apple's simplicity + intel's paranoia
  • Superb marketing beats great product
  • less is more in business
  • timing is crucial in business
  • frustration is a good thing in business. it leads to breakthrough
  • When a company founder resign, investors should head for the exit too.
  • You need yoda in order to succeed in business and life
  • Debt holder have the highest claim on a acompany ( meaning they get paid forst or they get their money back first).
  • Pro rata rights, often vc firms often invest in future round so that they don't want to get diluted
  • Mark cuban : only morons start a business on a loan.