Global Themes

“How much should I expect, end of the day?”

I promised earlier this month to highlight some of the most common questions that entrepreneurs have about venture capital financings and related topics…and I hope some of you managed to read Max’s thoughts on “how much equity should you give up?” which I used to begin my series.

A few days ago, I came across Krishna Mony’s excellent blog and found this post on his site: “How much to hold back?” 

Its a neat and well-written expplanation of the basic maths behind how much equity could founders expect to have at the end of the day? Over to Krishna:

“Most of the startup entrepreneurs have this persistent question on valuation. Let me now direct them to read this before they have my hair for splits. From now on, I would look forward to something more intelligent from them so that it tests my skills at a significantly higher level calling for some sophisticated financial modelling.

“So how much should I expect to own at the end of the day? ” is that question.
It all depends on how capital efficient you are. If you need to raise $5M followed by $15M followed by $20M, there is not much pie left at the end of the day.

Let’s see what that looks like:
Seed/early : $ 5M at a $5M pre-money leaves you with 50%
Expansion : $ 15M at a $15M pre-money leaves you with 25%
Later stage : $ 20M at a $40M pre-money leaves you with about 16%
Back out 8-10% for equity to other managers, warrants, founders, etc and you have 6-8% left over.

Unfortunately, too many entrepreneurs don’t think this through completely and are extremely resentful or disappointed at the end. Furthermore, if things don’t go as planned the money could come in at much lower valuations or you might need to raise more rounds.

In a capital efficient play, you end up with a much greater share. For example:

Seed/early : $1M at a $3M pre-$ leaves you with 75%.
Expansion : $3M at a $12M pre-$ leaves you with 62%.
Later stage : $3M at a $27M pre-$ leaves you with 56%

Back out 8-10% and you have over 45% still in your possession. You’ll notice that I even used lower pre-$’s in this second example and it still came out significantly ahead (nearly 7x).

December 23rd, 2006 Posted by Shantanu | Entrepreneurship, FAQs for Entrepreneurs, Venture Capital | no comments

China, India and the “3D Advantage”

Thomas L Friedman writing in yesterday’s IHT (“Tough Choices” or “Learning to Keep Learning” Pg 7, 13th/14th Dec ’06) about the many changes that China will need to make to get into the “rank of innovation-oriented countries by 2020” had a very interesting comment to make:

“…I still believe it is very hard to produce a culture of innovation in a country that censors Google – which for me is a proxy for curtailing people’s ability to imagine and try anything they want,”

As Friedman goes on to say, “You can command K-12 education. But you can’t command innovation. Rigor and competence, without freedom, will only take China so far…”

And this is where India may have an edge with its vibrant democracy, a culture of “questioning” and its tradition of free thinking…all of which gets turbo-charged when coupled with our enormous diversity…

In the long-running discussion of India vs. China, India’s “3D Advantage” (Democracy, Demographics and Diversity) may well prove to be decisive.

December 17th, 2006 Posted by Shantanu | China, Entrepreneurship, India | 15 comments

Bleeding-edge Tech + Grassroots Applications = High-impact Innovation

I was very fortunate to be part of the UKTI Delegation at the “Mind to Market” conference that concluded in New Delhi yesterday (6th Dec).

India is “hot” these days and so is innovation and entrepreneurship. But this was not always so. As good friend, Shai Vyakarnam mentioned in his talk, an event like this would have been unthinkable even as recently as five years ago.

Innovation may have been stifled during the license-permit raj but entrepreneurship never died in India.

Keep Reading…

December 7th, 2006 Posted by Shantanu | Delegations, Emerging Markets, Entrepreneurship, Europe and Asia, India | 2 comments

On Immigration, Innovation and Entrepreneurship…

Red Herring reported on a recent study (available on the NVCA website) which shows how immigration has been one of the major driving forces behind tech innovation in the US. (Hat Tip: Shefaly) 

The study revealed that over the past 15 years, 25 percent of U.S. public companies that were VC-backed were started by immigrants. Together these companies account for an impressive market cap exceeding $500 billion.

Note that legal immigrants account only for 8.7% of the population.Some of these companies include Google, Yahoo, eBay, Sun Microsystems, Intel and Solectron