Venture and Growth Capital

Equity Investments

Holding on to ‘what you’ve got’

Equity investments are a ‘trade-off’ game…

Do you really want an ‘investor?’

Question: “Would you rather have a small slice of a large pie, or have the entire ‘hostess fruit pie’ to yourself?”

Do you NEED the money? Do you WANT outsiders involved in your

business? WHO do you dare bring into your circle?

Angels

Definition: Individual. Not an organization. Significant source of startup financing. Find an angel with expertise as well as cash. Terrific source for smaller startup needs and

EARLY stage financing. (Usually smaller amounts)

They are usually experts in your industry…beware! Networking is your only hope of finding them…

Venture Capital

Venture Capital is a Process.

Firms look for opportunities to add to the chain of value creation.

Fairly recent phenomena (last 2-3 decades have seen the majority of VC activity)

Definitions

Venture Capital: An Organization that makes equity investments in startup companies, seeking a high return.

Private Funds Corporate Funds Lead Funds Niche Funds

VC Fund Structure

Investor(s): Provide money Process is called ‘raising a fund’

Venture Firm / Partners: Do the Work Screen opportunities Close deals Manage portfolio companies

Compensation and Investor Returns

Partners receive an annual management fee (usually around 2%).

Partners get (on average) 20% of capital gains of the fund.

Investors receive remainder of the capital gains. Distributions are made over very long time frames

(sometimes decades)….this is NOT a highly liquid investment vehicle!

Industry Overview

Total of $21.2 Billion invested in 2002 Compares to $41.3 Billion in 2001 2003 figure is nearly identical with 1998’s

amount Look here for detail on where the money

went (or see handout): http://www.pwcglobal.com/extweb/

ncpressrelease.nsf/DocID/1BE29A405A1233D485256CBC006B65B2

Recent Statistics

Participation by Industry

Medical Devices Technology http://www.devicelink.com/links/venture.html

High Tech: Softbank: http://www.sbcap.com/

Biotechnology: Directory:

http://www.bioworld.com/servlet/com.accumedia.web.Dispatcher?next=vcDirectory

Example firm: Fuqua: http://www.fuquaventures.com/focus.html

A look at typical VC firms

Kleiner Perkins (The Leader) http://www.kpcb.com/

Wasatch Ventures (Local) http://www.wasatchvc.com/

Charles River (East Coast) http://www.crv.com/

Sequoia Capital (Jobs at partner companies) http://www.sequoiacap.com/

Typical Venture ‘target’

Low risk, versus potential return Industry or strategy fit High potential Fit with Venture firm’s goals on stage,

amount, control, and growth rate Has a business plan that got an ‘A’ in B475

Stage Preferences of VCs

Some prefer very late stages (Mezzanine) such as Softbank, in order to lower risk.

Some companies seek earlier stage financing, accepting inherently higher risk, hoping for much higher returns.

Some will go all the way through the process with you…others will drop out…

Where do these people hide?

VC Finding tools… http://www.ventureexchangenetwork.com/index.htm http://www.garage.com/ http://www.vfinance.com/home.asp?ToolPage=venca.asp National organizations (see next slide) Magazines (Venture, Inc., Forbes, RedHerring, VCJournal) Broker / Dealers Consultants Investment Bankers COMPANIES in your industry may have a VC arm…

Intel Capital: http://www.intel.com/capital/

Key Organizations

NVCA www.nvca.org

Venture Economics www.ventureeconomics.com

Price Waterhouse Regional Venture Organizations VC Journal Red Herring

Typical Deal Flow

Contact / Intro Business Plan review / Meet management Due diligence Valuation / Negotiation stage (depends on lead) Closing Managing the investment Exit (it may be a decade before you hit this stage)…

Due Diligence

Background checks on management Verification of patents / agreements Complete disclosure of financials Review of ALL agreements (lease, customer,

etc.) Review of corporate structure / minutes Review of pending litigation

Benefits of Dealing with VC

Help with Strategy Very Experienced Partner Board participation Network of industry contacts Help recruiting key employees Access to markets, suppliers, customers, key

industry figures

Drawbacks to VC funding

It ain’t just your show anymore…

Depends on bargaining position / strength of your company

Increasing your odds…

Focus on a high growth opportunity with very high top-line potential

Leverage relationships to find the ‘right’ VC Make sure your business plan really works Seek VCs that ‘fit’ your company Revenues today greatly increase your chances

funding and your ultimate valuation Do your own due diligence Demand that the VC deliver Value beyond the cash

Final Note:

If you’re serious about VC: Do a whole bunch of reading to come up to

speed on the VC industry and current environment.

Consider working with a broker or consultant who has a proven track record of investment placement