Startup Accelerator 2014: Iterative Startups - Risk/value framework for the start-ups

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Published on March 11, 2014

Author: TiEDelhi

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Nishant Verman

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Creating Value and Managing Growth Nishant Verman March 2014

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved.1/7/14 Strictly Confidential About Canaan Partners 2

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. About Canaan MONEY EXPERIENCE BREADTH RESULTS $600M FUND IX 26+ YRS WORKING WITH ENTREPRENEURS 2 GLOBAL INSIGHTS 55 IPOS $3.5B UNDER MANAGEMENT 400 INVESTMENTS MULTI-SECTOR 95 M&As $3.1B EXIT PROCEEDS 12 YRS AVERAGE OF GPs WORKING TOGETHER EARLY STAGE FOCUS TOP QUARTILE PERFORMANCE 33% 67% Seed and Early Mid and Late 20% 80% 3

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Consumer Internet Payments & Financial Services Mobility Enterprise & Managed Services Canaan India Portfolio 4

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved.1/7/14 Strictly Confidential Creating Value & Managing Growth 5

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. TIME / REVENUE M A T U R I T Y Business Model Management Product Incubators Angels Venture Capital Bank loans Private equity IPO, Trade Sale Profitability Competition Financing Governance Expansion Liquidity Value Creation 6

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Case Study - iYogi Concept & Pilot - Pilot – demonstrate quality of service - Initial go-to-market plan - Core team Feasibility Stage - Unit economics - Initial traction - Continuing quality of service Scale Phase 1 - Internet based scale - Pilots around other channels - Team build out Growth Stage - Multi-channel scale - Additional services - Organizational Maturity Maturity Time Self/Angel Series A Series B Series C Series D (Apr 2007) (June 2008) (Dec 2009) (Dec 2010) Maturity Stage - Profitability - Focus Execution - Financial predictability - Risk management 7

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Business Model • Market Size • Validate assumptions in a controlled pilot • Comparables • Key macro trends & discontinuities Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 8

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Market: Case Study $ 400MN # of urban HH = 100MN Annual Spent= 200/- Market Size = 200*100 = 20 bn INR = $ 400MN $ 80 MN # of digi cams in India = 20MN Market Size = 20*200 = 4 bn INR = $80MN $ 60 MN Internet Penetration = 75% Market Size = 0.75*80 = $60MN ? Subscription Services Photo Storage Platform 100/- per HH per annum Mobiles with Cameras Easy Storage. How many of us print Photos today? » Competition » Degree of fragmentation, network effects » Compare growth rates, adoption rates from international markets » Additional revenue opportunities + Online Photo Printing Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 9

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Case Study Online Travel Industry Online Ticketing Internet Penetration Payment Options LCC Zero Commission Regime Watch for discontinuities which can impact the business Online Ticketing - Air Assisted Ecommerce 2004 2005 2006 2007 2008 2012 Mobile Commerce E-ticketing Hotels, Packages Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 10

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Management • Skills fit  Domain  Functional • Passion • Execution capability • Scalability Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 11

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Product • Instantly broadcast live video over wireless channels • Product Risk  Can team successfully build the technology • Competitive Risk  Other technologies and approaches may still be in labs • Adoption Risk  Use cases enticing industry to adopt it Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 12

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Profitability • Early Stage Series A in April 07  Remote desktop support company  Company had pilot with 1000 customer  Experienced founders  Large market at an appropriate price point • Focused on contribution margin before growth  Life time value – key driver • Series B in May 08  Build scale  Develop other marketing channels • Series C in Jan 10  Build scale  Marketing Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 13

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Competition • Online travel industry (2008), eCommerce (today) • Many well capitalized players with good teams • Increased marketing spends • Profitability risk • Evolving barriers to entry • Increased options for acquirer 2008: 2012: Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 14

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Financing • Out of Home industry – Network of digital screens • Financing requirements  Critical mass on screens required, often financed by the startup - Leading players will have 10,000+ screens in 4-5 years - ~ $1000-2000 per screen  Operating losses to cover rental costs till revenues catch up - ~ $2500 per screen per year • Minimum $30MN - $40MN to build the business What kind of syndicate should one setup to finance this? Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 15

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Financing • eCommerce in India • Financing requirements  Customer acquisition costs - ~$10 for horizontal players, ~$20 for verticals - Significant well-funded players bidding up keywords - Also need to invest in brand building  Working capital requirements - Need 45-60 days of working capital (depending on vertical) - For a $50M top-line business, translates to $6-8M in working capital • Minimum $30MN - $40MN to build the business What kind of syndicate should one setup to finance this? Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 16

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Governance • Growing Business – Series A in August 2006  Validated business model  Category leader in classified space • Series B in Jan 2008  Growth financing to breakeven  Ultimate exit – IPO or strategic acquisition • Internal audits • Control and management systems • Board formation and formal processes • Risk management Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 17

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Scale and Expansion 0 100 200 300 400 500 600 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Revenues(inCr) Jobs InfoEdge 2464 Headcount IPO, 951 headcount Business Model Management Product Profitability Competition Financing Governance Expansion Liquidity 18

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved. Realizing Value • Every stage has different risks to manage • Investors should keep Exit options in mind  IPO - Focus on Scale and Profitability  Strategic M&A - Align with potential buyers early on 19

1/7/14 Strictly ConfidentialCopyright © Canaan Partners 2013, All rights reserved.

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