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Venture Capital Funding Process and Documentation
Mark Cameron White, White & Lee LLP
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Panel of Domestic Venture Capital Firms
Scott Sandell, New Enterprise Associates
Thad Whalen, Aspen Ventures
Dan Beldy, Hummer Winblad
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Panel of Angel Investors
Jack Carsten, Band of Angels
Wendy York-Fess, Lynch Enterprises
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Panel of International Venture Capital Investors
JennyTheleen, ChinaVest, Inc. (Asia)
Adriaan Ligtenberg, A3Ventures, Inc. (Europe)
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Insider Perspective On Venture Capital and Valuation
Ted James, T. E. James Inc.
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Stories from the Battlefield
J. Peter Herz, 3ware, Inc.
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— Mark White, White & Lee LLP
Mark White (a) provided his perspective on the current financing environment in the Silicon Valley: the types of companies he sees getting funding and from what sources, (b) presented the capital structure of an early stage company immediately prior to the intial seed financing, and identified other "founder issues" that should be addressed prior to presenting the Company to investors, (c) reviewed valuation parameters for early stage companies, staging financings to maximize value, and the tradeoffs of maximizing valuation, control, and investor resources, (d) provided a general comparison of VC, angel and strategic investors, and how (or if) they co-exist in the same company, (e) gave a general overview of the venture capital financing process and timing, (f) reviewed the legal documentation used in venture-backed financings, the critical issues seen from the perspective of the Company and investors, and (g) presented a comparison of documentation used with angel and non-VC investors.
This panel consisted of established, first-tier venture capital firms that actively fund early stage technology startups in the Silicon Valley. The three panelists had 15 minutes each to talk about their firm (with 15 minutes of questions at the end of the presentation), to identify recent investments their firm has made that exemplify what they look for in technology startups, current financing trends or developments they see in the Valley, and how their firm is reacting, or positioned, relative to these trends. Also, each panelist distinguished his own firm, briefly addressing the number of seed financings they expect to complete in 1999, the average size 1st-round investment, and how a young company can get an introduction to the firm and be noticed.
NOTE: Since there are no papers available, we've provided links to their web pages.
Speaker One: Scott Sandell, New Enterprise Associates.
Mr. Sandell addressed (a) how VC's, in general, determine the valuation of early-stage companies, (b) how valuation changes over time, (c) the most critical milestones in determining valuation, and (d) how firms weigh and tradeoff valuation against the other resources they believe they bring to young companies.
Speaker Two: Thad Whalen, Aspen Ventures.
Mr. Whalen focused his remarks on (a) the size market potential VC's like to see in portfolio companies, (b) how entrepreneurs should support the existence and size of the market, (c) whether reference customers, strategic partners (or investors) are preferred at an early stage (or are these milestones more important for 2nd round financings?) and (d) why VC's prefer business-to-business product and service companies over consumer/retail companies, and whether this bias is now changing with the success of internet e-commerce, portal and destination sites.
Speaker Three: Dan Beldy, Hummer Winblad.
Given Hummer Winblad's strict focus on business-to-business software companies, Mr. Beldy discussed: (a) recent trends in new software startups and the current technologies that are getting the most attention, (b) the business models for software application products, tool companies and internet companies that have the most credibility with investors, and (c) examples of technologies that Hummer Winblad has recently seen that are "ahead of the curve" and won't get funded until markets further develop.
This panel focused on angel investing as an alternative to financing from established venture capital firms. Mr. Carsten and Ms. York-Fess each had 15 minutes (followed by 15 minutes of questions) to give their own perspective on the following: (a) how sophisticated angels in the Silicon Valley differ from VCâs, and where angels might be more appropriate for a company than a venture capital firm, (b) trends in angel investing in the Valley, and why angels are becoming more visible and more aggressive in getting deals, (c) what resources angels bring to young companies that VC firms do not or cannot, and (d) how angels counter the "deep pockets" issue for providing companies with ongoing access to capital for growth.
Speaker One: Jack Carsten, The Band of Angels.
(sorry no paper available.)
As a founder of the Band of Angels, Mr. Carsten focused his remarks on the investment process and philosophy followed by the Band, including (a) how the Band works, how the Band finds its deals, and how the investor list is typically put together within the Band, (b) what the Band members look for in a company, whether the Band will support a company that has been turned down by more mainstream venture capital firms, and how the Band or its individual investors support the company post closing, (c) if and how the Band works with the venture capital community (Do the two groups compete or cooperate in supporting companies?) and (d) how does the Band value companies as compared to venture capital investors.
Speaker Two: Wendy York-Fess, Lynch Enterprises.
Ms. York-Fess addressed how Dan Lynch makes his investments as an individual, not associated with an organized group of angel investors. Specifically, (a) how he finds the companies he invests in, what his involvement typically is in these companies, and whether he normally invests by himself or with others in seed financings, (b) what an individual investor like him can contribute to a young company, and what resources and relationships he and other individual investors like him can bring to the company, (c) the number of investments he typically makes in one year, and is what he looks for in a company any different from what other investors seek in a company, and (d) how can entrepreneurs identify investors like him, and get introductions?
This panel addressed how investors based outside of the U.S. make early stage technology investments. Mr. Ligtenberg and Ms. Theleen each had 15 minutes to make their remarks, followed by 15 minutes of questions.
NOTE: Since there are no papers available, we've provided links to their web pages.
Speaker One: Jenny Theleen, ChinaVest.
Ms. Theleen briefly spoke about (a) ChinaVest's history and investment philosophy, (b) the U.S.-based companies it has invested in that do business in China, (c) the most critical technology needs of China, and whether U.S. companies developing this kind of technology should approach ChinaVest, and (d) what ChinaVest can do to help its portfolio companies access Chinese and other Asian markets.
Speaker Two: Adriaan Ligtenberg, A3 Ventures.
Although A3 Ventures really functions as a smaller U.S.-based venture capital firm, Mr. Ligtenberg addressed: (a) the more prominent European funds/groups that are investing in Silicon Valley companies and how young companies can access European investment funds in general, (b) what European investors look for in the companies they invest in, and what they should bring to the company, (c) any special rights, concerns or practices of European investors that will affect the company post close, and (d) Do European investors bring additional liquidity options to the company, such as partnering or acquisition possibilites with European companies, or IPOs on some of the European exchanges?
— Ted James, T.E. James Inc.
Mr. James gave an analytical underpinning to valuation. Specifically, he addressed (a) how the "Net Present Value" technique works, whether it is appropriate for valuing young companies, and why venture capital firms do not seem to use it, (b) the key milestones for setting value and how valuation changes over time, (c) how should management negotiate value, the dynamics and key issues, (d) aside from Net Present Value, what other valuation techniques or baselines are useful, (e) does valuation change with different categories of investors (VC's, angels, strategic investors and investment banking firms)? Should it? and (e) the valuation of more mature companies, and how this might be different from the valuation of younger companies.
— Peter Herz, 3ware, Inc.
3ware closed its first VC round of investment in the middle of 1998, and it is currently preparing for a second larger round of venture-backed investment. With this background, Mr. Herz addressed (a) how to position a company for an early round investment, and what seems to be most critical to investors, (b) how 3ware got introductions to VC firms, which firms were most receptive to working with seed companies, and how did 3ware prioritize the firms that it wanted to work with, (c) why 3ware decided to accept a lower valuation to work with a 1st tier venture capital firm, and how much in valuation it gave up for this, (d) tradeoffs with investors on Board seats, founder stock vesting and acceleration, the size of the employee stock pool, and staffing the management team, (e) how the financing has structured the company with monthly Board meetings, reports, monthly functional objectives, etc., (f) what resources and relationships have the investors, in fact, brought to the company, (g) balancing the grant of new employee stock option grants against investor (and founder) dilution, and (h) preparing for the 2nd round of financing, including the role current investors are taking in the process, investor conflicts between maximizing value and minimizing dilution, and how current investors are affecting the selection of new venture capital firms to approach in the 2nd round.
