- 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
(+) 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.
(+) cheap, quick setup, 2+ members, (-) personal liability, tough to sel
(+) cheap, limited liability, 2 + members, (-) passive investor, tough to sell, partner with authority is limited
(+) 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.
- How to protect
1. file patents / copyrights / TM
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"
U need to be incredibly engaging and entertaining when you present.
- The less is more
- keep it simple
- the medium is often more important then the message
- inspire, be passionate
- deliver an experience
- tell a story, 3 words or 3 items on each slide works well
- Create a passion statement
- 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
- Charge 2% annual fee on the money you invest
- 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
VC legal paperwork
- accredited investors
- offering memorandum
How does investing in VC work?
- Capital calls
- 20% left over to avoid dilution
How do VC firms get deals?
- 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
- the lowest of the low
- the last claim on the company
- usually can be sold
- if firm buys then
- senior claim to common shares
- liquidation preference
- get divivdens before common
- vc firms get preferred
- employees get common
- at IPO preferred shares convert to common shares
- when you buy stocks in US markets they are common shares
- sometimes convert = 2
- if you price the series a too high
- price of new shares (b) is lower
- everyone is angry at the anti dilution clause
- 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.
- a startup can incentivice investors when they invest by giving them warrants ( an option to get new shares later for free )
- 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
- 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
- A total stuff we sold
- B Amount it took us to sell
- net income = A - B
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?
- so equity investors can decide to invest or they can assess investment performance.
- So lenders can decide to lend or they can decide to lend or the can assess loan performance
- 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
- 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
- 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.
- prospective investors must receive all relevant info before investing (s1)
- if you have been defrauded, you should receive compensation ( class action lawsuits )
- 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
- Qualitative and quantitative
- Tech model income statement drivers
- subscribers or license revenues
- 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.
- Consultant usually use framework and suggest solutions.
- Why? Because their client cannot solve complex problem.
Type of consulting firm
- Management / strategy
- hr / staffing
Positive working in consulting
- intellectual stimulating
- opportunity to travel
- excellent compensation
- brutal hours
- some client hates u
- long path to partner
BCG Matrix framework
lomarket share — | – high 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
- 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
- leverage buyout (LBO)
- financed using debt
- must have great cashflow to loads.
- Employee stock ownership plan
- employee buy the company using leverage
- owned by all employee and management
- 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.