INVESTMENT STAGES Capital raise and traction metrics

STAGE IDEATION PRE-SEED SEED SERIES A SERIES B SERIES C+ IPO

CAPITAL
<$250K $250K - $1M $1M - $3M $4M - $10M $10M - $25M $25+
RAISE

Friends & family, Growth VCs,

INVESTORS Self funded, loans VCs, Angels Institutional VCs Institutional VCs
Angels, VCs Private Equity

TRACTION Initial concept, Initial prototype, Strong usage from PMF, strong Expansion of Market leading
identification of beta customers in early customers, customer growth & product lines, tech/platform,
customers and target segments, POCs convert to management team. proven channels customer trust.
market MRR $0-25k customers. MRR ARR $2m+, 3x Y/Y to scale customer Predictable,
opportunity. $25k-100k growth. acquisition. profitable. ARR
ARR $6m+, 3x Y/Y $15m+, 2 Y/Y

MRR: Monthly Recurring Revenue ARR: Annual Run Rate PMF: Product Market Fit

CONFIDENTIAL
INVESTMENT STAGES Sample Canadian VC firms & typical stage

STAGE IDEATION PRE-SEED SEED SERIES A SERIES B SERIES C+ IPO

CAPITAL
<$250K $250K - $1M $1M - $3M $4M - $10M $10M - $25M $25+
RAISE

Friends & family, Growth VCs,

INVESTORS Self funded, loans VCs, Angels Institutional VCs Institutional VCs
Angels, VCs Private Equity

CONFIDENTIAL
CONTEXT How big are the companies that VCs fund?

COMPANY VALUATIONS
VC firms typically fund companies
FRIENDS & FAMILY: < $2,000,000 that have between $3m to
$200m in enterprise value.
ANGEL: < $10,000,000

VENTURE CAPITAL: $3,000,000 - $200,000,000

PUBLIC/PE: $50,000,000 - $10,000,000,000+

$ MILLIONS 0 50 100 150 200 250

Some companies consider going public as they

reach higher valuations, although most high-tech
firms are staying private longer because of the
At the low end, VC firms will co-invest with angel
abundance of private equity, and volatility of the
investors. At the high end, VC firms often work
public markets.
with PE firms.

CONFIDENTIAL
INVESTMENT Capitalization & dilution

PRE-MONEY
$3,000,000
VC firms typically seek to gain 15% - 30% in each round of
investment. In this example, investors have purchased 25%
VALUATION of the company’s shares.

INVESTMENT $1,000,000 VC firms will often syndicate deals with other firms and
investors, seeking to diversify the capitalization table.
POST-MONEY
VALUATION $4,000,000 VC firms have allocated reserves to invest in subsequent
rounds, as the company gains traction and reduces risk.

Pricing is technology investments is typically expressed in

terms of pre-money valuation, and never price-per-share.
Round Pre-money Round size Post-money Round Entrepreneur
valuation valuation dilution ownership

1 750,000.00 250,000.00 1,000,000.00 25% 75%

From the entrepreneur’s point of view, they can raise three
2 3,000,000.00 1,000,000.00 4,000,000.00 25% 56%
successive rounds at 25% dilution before investors own the
3 12,000,000.00 4,000,000.00 16,000,000.00 25% 42% majority of the company.

CONFIDENTIAL
INVESTMENT Unicorn timeline example: Twilio

SEED A B C D E IPO
$1M $3.7M $12M $17M $70M $130M $2.51B
RAISED RAISED RAISED RAISED RAISED RAISED
VALUATION
Approximately 7 years
from seed investment
to IPO

INITIAL INVESTMENT PERIOD FOLLOW-ON INVESTMENTS HARVESTING

0 1 2 3 4 5 6 7 8 9 10
Life of fund: 10 years

CONFIDENTIAL
INVESTMENT Unicorn timeline example: Twilio

TRIPLE, TRIPLE, DOUBLE, DOUBLE, DOUBLE

- Annualized revenue growth of 3x, 3x, 2x, 2x, 2x over 5 years (T2D3).

RAISE BIGGER & BIGGER ROUNDS

- Round sizes increase at a similar rate to revenue growth.
- Growth is more important than profitability.
- Company is almost constantly raising.
- Company seeks profitability once they have significant market share.

FOR INVESTORS:
- Top performers in the portfolio will see increasing valuations every 12 – 18
months, and prospects for liquidity within 7 – 9 years.

CONFIDENTIAL
RETURNS MODEL Expected returns

“HUGE IF IT WORKS”
- Mostly binary outcomes:
company creates world changing
technology, or goes to zero.

DOUBLING DOWN
- After initial investment, funds
typically allocate follow-on
investments for 20-30% of their
On average, only 4% of VC
companies. investments return 10x or more.

PORTFOLIO SIZE
- Assuming 4% of the fund will
return 10x+, a minimum portfolio
of 25 companies is required.

CONFIDENTIAL
CONFIDENTIAL
RETURNS MODEL Panache Ventures
We believe a large, diversified portfolio of early-stage investments reduces risk and maximizes potential returns relative to
“traditional” VC funds.

Approximate Gross Exit % of Companies that Yield

Return Multiple Number of Companies Potential Returns
Value Per Company Return Multiple at Exit
20-50x+ $1B+ 1.5% 1 $73,125,000
10-20x $500M 2.5% 2 $26,785,714
5-10x $50M 5.9% 6 $47,410,714
1-5x $10M 25.3% 25 $40,191,360
0-1x $0 64.8% 63 $0
Total Returns $187,512,789
Fund Gross Multiple 3.75X

LARGE PORTFOLIO - SELECTIVE DIVERSIFICATION THEORY Representing an approximate compounded net

IRR of 24.4% over the 10-year life of the fund
§ Fund Size: $50M
§ Total Invested Capital: $42M (incl. $2M recycled capital)
§ Number of Portfolio Companies: 97
§ Initial investment generally between $150,000 and $300,000 per company
§ Follow-on of about $500,000 in 20% to 25% of our best companies (~24 second checks)

CONFIDENTIAL
RETURNS MODEL Fund allocation strategy

Initial investments vs. follow-ons

- Fund managers allocate the fund to initial and follow-on investments,

typically 50% to each.
- The 50% for initial investments is placed into companies with the
view that the best performing companies will get access to a larger
proportion of the follow-on allocation.
- In Panache Ventures’ allocation model, approximately 97 companies
split the initial investment allocation, while only 20 – 25% of those
companies will receive follow-on investments.
- Funds are usually restricted from building concentrated portfolios –
for instance, no more than a certain percentage of the fund invested
in one company.

CONFIDENTIAL
Type of Company/Entrepreneur

Blended Cheap fast growing Home run long shot

Funds business (RARE!) (VERY RARE!)

5 year growth rate

Angel Funding (and Higher
VC Funding
some VC)

Debt 50%

Small CAPEX Project

“normal growth” finance/ Lower
Non-profit business Other
Funds (MOST COMMON) sources
Mostly bank debt

>> $1-3M >>

Investment required to reach breakeven
3
Critical Financing Factors

 Firm’s economic potential/growth rate

 Maturity of the company (and performance to date)
 Nature of its assets
 Owners’ preferences for debt or equity
 Industry and technology
 Amount of capital required (and prior rounds/valuations)
 Upside potential and anticipated exit timing
 Founder goals (growth, control, liquidity, harvest)
 Investor’s/Lender’s
 Perceived risk
 Required rate of return
 Terms and covenants

13–5
5
Debt or Equity?

Debt Equity
Lower Risk Higher Risk
First Money Back Lives & Dies with Company
Relatively Inexpensive Very Expensive
First Lien on Assets (Typically) Unsecured
Negative Covenants BOD Governance

 Potential profitability
 Financial risk
 Voting / control

6
Sources of Funds

Personal Savings
Friends and Relatives
Other Individual Investors
Business Suppliers
Asset-Based Lenders
Commercial Banks
Equity Debt
Government-Sponsored Programs
Community-Based Financial Institutions
Large Corporations
Venture Capital Firms
Sale of Stock

13–7
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INVESTMENT Deal structure

VC firms typically invest in both convertible debt and equity rounds.

There are two basic flavours of convertible debt: SAFE Investors and entrepreneurs often use the standard SAFE
(Simple Agreement for Future Equity – developed by and KISS templates and customize terms.
YCombinator) and KISS (Keep It Simple Stupid – developed
by 500 Startups). Both are meant to deliver capital quickly VCs usually favour convertible debt in the early stages of a
with entrepreneur-friendly terms. technology venture, and opt for equity rounds in series A
financings and later. Typical terms include:
Typical terms: - Liquidation preferences.
- Valuation cap: a pre-determined maximum valuation at - ROFR and drag –along rights.
which the capital will convert. - Preference shares issuance and conversion rights.
- Discount: the discounted valuation at which capital will
convert if the maximum valuation is not reached. (typically
20%).
- Minimum qualified financing: the minimum amount of
For more information on deal
capital that must be raised at the next equity round for structure, see Venture Deals by
the debt to convert. (typically $1m). Brad Feld & Jason Mendelson.
- MFN (Most Favoured Nation) clause.
- Information rights.

CONFIDENTIAL
INVESTMENT Deal lingo

”They’re raising 1 on SAFE note, 4 cap, 20% discount”

- $1m of new capital, at a $4m valuation cap, on a SAFE convertible note.

- VCs typically assume valuation = valuation cap. Thus, the minimum
equity at conversion will be at least 20%. ($5m post-money valuation).
- More equity will be assigned conversion if the company fails to close a
qualified financing above the $4m valuation cap.

CONFIDENTIAL
Equity
Family and friends
 Flexible, but can be hurt

Angels
 May coach more, especially at the beginning
 Often interested in ‘early’ exits
 2.5x in 2 years is same as 10x in 5 years (58% IRR)

VCs
 Support CEOs with active hiring, strategy, biz modeling
 Connections
 Exit experience
 Home runs

10
 Goal is to increase value
• It’s the area of the pie slice
not the %
• All parties agree… focus
founders on building value
employees

founders
employees
angels

founders
employees
angels
VCs

Equity requires an exit

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Pre-Money Valuation (No Option)

33%

67%

Investors

Founders

23
Pre-Money Valuation (With ESOP)

20%

33%

Investors
47%
Founders
Option

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Investors’ Main Concerns
Economics and Governance

 Valuation accuracy (present and projected)

 Risk level
 Projected ROI
 Liquidity (downside protection)
 Later round participation (upside protection)
 Influence and control over management and strategy

18
CAUTION!
Pre-Money Valuation is only one economic term.

“You can name the

valuation, if I can name all
the other terms.”
- Angel / VC Investor

25
Anti-Dilution Protection
Addresses investors’ valuation concerns

 Protection in “down round”

 When new money invested later at pre-money valuation
 That is lower than previous round’s post-money valuation
 Preferred stock converts to common at set ratio
 Often 1-for-1
 If triggered, it changes the conversion ratio
 Preferred stock getting more common stock upon conversion

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Liquidation Preference

 Applies when a liquidation event occurs

 Usually M&A – trade sale, strategic sale

 When distributing proceeds

 Preferred stock has right to get money back first
 Often at 1x investment amount, but sometimes higher
 Sometimes accruing dividends are included
 Before common stock gets anything
 “Preference overhang” is the total amount of proceeds due to
preferred stock, and can make common virtually worthless

 Three varieties
 Non-participating; participating (with cap); participating (no cap)
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Other Key Terms for Company

 Voting rights
 Board seats
 Right of first refusal
 Pre-emptive rights
 Registration rights
 Information rights
 Protective provisions protect Preferred (minority) holders
 Ability to veto certain actions
 Selling company or raising capital are common
 Drag and Tag along rights
 Reverse vesting
 Non-disclosures and IP development agreements
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