Venture CapitalWhen and how to raise VC finance

14 Nov 2011

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Agenda

• Overview of Venture Capital

• When to raise VC finance?

• Strategies for VC fundraising

Venture Capital – How the VC makes money

• Raise fund every 2-4 years• Pension funds, financial institutions and specialist

“fund of fund” investors

• Invest money over 3-5 years~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money

• Very small management fee on funds managed~ 1-2.5% pa

• Carry~ 20-25%x (Total Return – Total Amount Invested)

Venture Capital – Stages of Investment

SeedEarly StageSeries A, (B)

Later Stage(B),C,D…

Pre-IPO / Buy-out

PrivateEquity

Investment Size

Potential Sources of Funds

0 - €1m

Grant-funding

University seed funds

Friends and family

Angel Investors

(Venture Capital)

€2m-€20m

Venture Capital

(Wealthy) Angel investors

€5m-€20m

Venture Capital

€30m+

Specialist Late stage tech investment funds

Hedge Funds

Venture Capital – What a good VC will add

• Advice and Strategy

• Hiring• Developers• Country Managers• Sales• CEO / CFO / COO• Advisory Board

• Partnerships

• Profile and PR

• Internationalisation

• Trusted service provider relationships

• Search / recruiting• Branding / PR• Finance, etc

• Exit optimisation• Knowledge / contacts

with relevant buyers• Experience with

process

Venture Capital – Typical Deal Terms

• Target 20-35% ownership

• Board Representation

• Liquidation Preference

• Participation rights

• Element of reverse vesting

• Certain control and veto rights

• Option Pool

• Period of exclusivity to close legals

but that’s so

unfair…

Photo Source: Philip Greenspun, MIT

Agenda

• Overview of Venture Capital

• When to raise VC finance?

• Strategies for VC fundraising

Good reasons to raise VC

Large PotentialMarket Opportunity

Unique Product Or Concept

PassionateFounding Team

Pre-requisites

Intensecompetition

likely

Need to moverapidly

Implications…

Hiring

Infrastructure

VC funding supports

Rapid Product Development

Internationalisation

Partnerships

Commercialisation

When NOT to raise VC

Applicationis a feature

not a product

Market size istoo small

Motivation isnot financial

• Risk is not that you waste time unsuccessfully trying to raise finance …

• … real danger is that you do succeed in raising VC funds

• Lose opportunity for small exit which could be personally lucrative

• Lose opportunity to run lifestyle business• Get bound in to 3+ yrs work you may not enjoy

Agenda

• Overview of Venture Capital

• When to raise VC finance?

• Strategies for VC fundraising

What does a VC look for?

Technology Traction

• Can evaluate each as• Exceptional• Good / credible• Mediocre / incomplete

• Misconception that being good / credible across the board is what VCs look for

• Can always add credible attributes to the mix later

• We focus on finding opportunities which rate as exceptional in one attribute

Team

Identifying relevant VC partners

Has funds to invest

Match of Size/Stage/Geography

RelevantPortfolio

No directlycompetitiveinvestments

Excellenttrack record

Shortlist

• Do create a shortlist

• Rifle is a better weapon than a shotgun

Good free sources on VC fundinghttp://www.thealarmclock.com/euro/http://www.vecosys.com

Getting on radar screens

• Out of the blue email is a longshot

• Try to build context• Analyse portfolio companies – are there any links

there• Analyse contact network and advisors• Analyse press coverage• Participate in blog conversations• Attend events and conferences• Relevant PR around product also helps

• VCs spend their time looking for businesses with momentum

Sharing relevant information

• 100 page business plan not required

• 20 page ppt which clearly answers main questions is best bet

• Product• Market• Business Model• Team• Competition• Product Roadmap• Technology Overview• Business Development• Financial Status

Pre - first meeting Pre - termsheet Post - termsheet

• Dialogue rather than documentation – expect lots of meetings

• Calls with current / prospective customers or partners

• Meeting broader team

• Brainstorming around strategy

• Identifying key hires post closing

• Formal presentation to VC partnership

• Some additional reference calls with partners / customers

• Personal reference calls

• Legal / accounting audit (if relevant)

• Drafting legal documentation

2-4 weeks 1-2 Months

Key things to consider

1. RelationshipWith key individual(s); and broader team

2. ReferencesSpeak to other founders

3. PortfolioRelevant experienceNon competitiveCommunity you want to be part of

4. Valuation and associated deal terms

Right partner at a fair price

vs.

Any partner at best price

Valuation should not be the decisive factor

Value at exit

Probability of getting there

% share of business at exit

Entrepreneur’s Equation • Revenues / Profitability

• Growth rate

• Team quality

• Strategic fit with buyer community

• Well managed exit process

• Fewest strategic errors made

• Hiring (quality & speed)

• Partnerships

• Product development

• Valuation at initial round

• Valuation and dilution at subsequent rounds

• Option grants