Venture Capital When and how to raise VC finance April 17 2007 Ben Holmes Index Ventures
Who we are <ul><li>€ 1.3bn under management </li></ul><ul><li>Active investor in web / internet </li></ul><ul><li>Pan Euro...
Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC...
Venture Capital – How the VC makes money <ul><li>Raise fund every 2-4 years </li></ul><ul><ul><li>Pension funds, financial...
Venture Capital – Stages of Investment <ul><li>Investment Size  </li></ul>Seed Early Stage Series A, (B) Later Stage (B),C...
Venture Capital – What a good VC will add <ul><li>Advice and Strategy </li></ul><ul><li>Hiring </li></ul><ul><ul><li>Devel...
Venture Capital – Typical Deal Terms <ul><li>Target 20-35% ownership </li></ul><ul><li>Board Representation </li></ul><ul>...
Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC...
Good reasons to raise VC Large Potential Market Opportunity Unique Product  Or Concept Passionate Founding Team Pre-requis...
When NOT to raise VC <ul><li>Risk is not that you waste time unsuccessfully trying to raise finance … </li></ul><ul><li>… ...
Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC...
What does a VC look for?  <ul><li>Can evaluate each as </li></ul><ul><ul><li>Exceptional </li></ul></ul><ul><ul><li>Good /...
Identifying relevant VC partners <ul><li>Do  create a shortlist </li></ul><ul><li>Rifle is a better weapon than a shotgun ...
Getting on radar screens <ul><li>Out of the blue email is a longshot </li></ul><ul><li>Try to build  context </li></ul><ul...
Sharing relevant information <ul><li>100 page business plan not required </li></ul><ul><li>20 page ppt which clearly answe...
Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC...
Valuation should not be the decisive factor Value at exit Probability of getting there % share of business at exit Entrepr...
Key things to consider <ul><li>Relationship </li></ul><ul><ul><li>With key individual(s); and  </li></ul></ul><ul><ul><li>...
Thank you Ben Holmes Email : benh@indexventures.com Skype : ben_holmes
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  1. 1. Venture Capital When and how to raise VC finance April 17 2007 Ben Holmes Index Ventures
  2. 2. Who we are <ul><li>€ 1.3bn under management </li></ul><ul><li>Active investor in web / internet </li></ul><ul><li>Pan European Venture Fund </li></ul><ul><li>Based London & Geneva </li></ul>Index Ventures Selected Investments
  3. 3. Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC fundraising </li></ul><ul><li>How to choose the right VC partner? </li></ul>
  4. 4. Venture Capital – How the VC makes money <ul><li>Raise fund every 2-4 years </li></ul><ul><ul><li>Pension funds, financial institutions and specialist “fund of fund” investors </li></ul></ul><ul><li>Invest money over 3-5 years </li></ul><ul><ul><li>~ 1/2 of investments lose money </li></ul></ul><ul><ul><li>~ 1/3 of investments break even </li></ul></ul><ul><ul><li>~ 1/6 of investments make (lots) of money </li></ul></ul><ul><li>Very small management fee on funds managed </li></ul><ul><ul><li>~ 1-2.5% pa </li></ul></ul><ul><li>Carry </li></ul><ul><ul><li>~ 20-25%x (Total Return – Total Amount Invested) </li></ul></ul>
  5. 5. Venture Capital – Stages of Investment <ul><li>Investment Size </li></ul>Seed Early Stage Series A, (B) Later Stage (B),C,D… Pre-IPO / Buy-out Private Equity 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
  6. 6. Venture Capital – What a good VC will add <ul><li>Advice and Strategy </li></ul><ul><li>Hiring </li></ul><ul><ul><li>Developers </li></ul></ul><ul><ul><li>Country Managers </li></ul></ul><ul><ul><li>Sales </li></ul></ul><ul><ul><li>CEO / CFO / COO </li></ul></ul><ul><ul><li>Advisory Board </li></ul></ul><ul><li>Partnerships </li></ul><ul><li>Profile and PR </li></ul><ul><li>Internationalisation </li></ul><ul><li>Trusted service provider relationships </li></ul><ul><ul><li>Search / recruiting </li></ul></ul><ul><ul><li>Branding / PR </li></ul></ul><ul><ul><li>Finance, etc </li></ul></ul><ul><li>Exit optimisation </li></ul><ul><ul><li>Knowledge / contacts with relevant buyers </li></ul></ul><ul><ul><li>Experience with process </li></ul></ul>
  7. 7. Venture Capital – Typical Deal Terms <ul><li>Target 20-35% ownership </li></ul><ul><li>Board Representation </li></ul><ul><li>Liquidation Preference </li></ul><ul><li>Participation rights </li></ul><ul><li>Element of reverse vesting </li></ul><ul><li>Certain control and veto rights </li></ul><ul><li>Option Pool </li></ul><ul><li>Period of exclusivity to close legals </li></ul>but that’s so unfair… Photo Source: Philip Greenspun, MIT
  8. 8. Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC fundraising </li></ul><ul><li>How to choose the right VC partner? </li></ul>
  9. 9. Good reasons to raise VC Large Potential Market Opportunity Unique Product Or Concept Passionate Founding Team Pre-requisites Intense competition likely Need to move rapidly Implications… Hiring Infrastructure VC funding supports Rapid Product Development Internationalisation Partnerships Commercialisation
  10. 10. When NOT to raise VC <ul><li>Risk is not that you waste time unsuccessfully trying to raise finance … </li></ul><ul><li>… real danger is that you do succeed in raising VC funds </li></ul><ul><ul><li>Lose opportunity for small exit which could be personally lucrative </li></ul></ul><ul><ul><li>Lose opportunity to run lifestyle business </li></ul></ul><ul><ul><li>Get bound in to 3+ yrs work you may not enjoy </li></ul></ul>Application is a feature not a product Market size is too small Motivation is not financial
  11. 11. Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC fundraising </li></ul><ul><li>How to choose the right VC partner? </li></ul>
  12. 12. What does a VC look for? <ul><li>Can evaluate each as </li></ul><ul><ul><li>Exceptional </li></ul></ul><ul><ul><li>Good / credible </li></ul></ul><ul><ul><li>Mediocre / incomplete </li></ul></ul><ul><li>Misconception that being good / credible across the board is what VCs look for </li></ul><ul><ul><li>Can always add credible attributes to the mix later </li></ul></ul><ul><li>We focus on finding opportunities which rate as exceptional in one attribute </li></ul>Technology $$$ Traction Team
  13. 13. Identifying relevant VC partners <ul><li>Do create a shortlist </li></ul><ul><li>Rifle is a better weapon than a shotgun </li></ul>Has funds to invest Match of Size/Stage/ Geography Relevant Portfolio No directly competitive investments Excellent track record Shortlist Good free sources on VC funding http://www.thealarmclock.com/euro/ http://www.vecosys.com
  14. 14. Getting on radar screens <ul><li>Out of the blue email is a longshot </li></ul><ul><li>Try to build context </li></ul><ul><ul><li>Analyse portfolio companies – are there any links there </li></ul></ul><ul><ul><li>Analyse contact network and advisors </li></ul></ul><ul><ul><li>Analyse press coverage </li></ul></ul><ul><ul><li>Participate in blog conversations </li></ul></ul><ul><ul><li>Attend events and conferences </li></ul></ul><ul><ul><li>Relevant PR around product also helps </li></ul></ul><ul><li>VCs spend their time looking for businesses with momentum </li></ul>
  15. 15. Sharing relevant information <ul><li>100 page business plan not required </li></ul><ul><li>20 page ppt which clearly answers main questions is best bet </li></ul><ul><ul><li>Product </li></ul></ul><ul><ul><li>Market </li></ul></ul><ul><ul><li>Business Model </li></ul></ul><ul><ul><li>Team </li></ul></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>Product Roadmap </li></ul></ul><ul><ul><li>Technology Overview </li></ul></ul><ul><ul><li>Business Development </li></ul></ul><ul><ul><li>Financial Status </li></ul></ul>Pre - first meeting Pre - termsheet Post - termsheet <ul><li>Dialogue rather than documentation – expect lots of meetings </li></ul><ul><li>Calls with current / prospective customers or partners </li></ul><ul><li>Meeting broader team </li></ul><ul><li>Brainstorming around strategy </li></ul><ul><li>Identifying key hires post closing </li></ul><ul><li>Formal presentation to VC partnership </li></ul><ul><li>Some additional reference calls with partners / customers </li></ul><ul><li>Personal reference calls </li></ul><ul><li>Legal / accounting audit (if relevant) </li></ul><ul><li>Drafting legal documentation </li></ul>2-4 weeks 1-2 Months
  16. 16. Agenda <ul><li>Overview of Venture Capital </li></ul><ul><li>When to raise VC finance? </li></ul><ul><li>Strategies for VC fundraising </li></ul><ul><li>How to choose the right VC partner? </li></ul>
  17. 17. Valuation should not be the decisive factor Value at exit Probability of getting there % share of business at exit Entrepreneur’s Equation <ul><li>Revenues / Profitability </li></ul><ul><li>Growth rate </li></ul><ul><li>Team quality </li></ul><ul><li>Strategic fit with buyer community </li></ul><ul><li>Well managed exit process </li></ul><ul><li>Fewest strategic errors made </li></ul><ul><li>Hiring (quality & speed) </li></ul><ul><li>Partnerships </li></ul><ul><li>Product development </li></ul><ul><li>Valuation at initial round </li></ul><ul><li>Valuation and dilution at subsequent rounds </li></ul><ul><li>Option grants </li></ul>
  18. 18. Key things to consider <ul><li>Relationship </li></ul><ul><ul><li>With key individual(s); and </li></ul></ul><ul><ul><li>broader team </li></ul></ul><ul><li>References </li></ul><ul><ul><li>Speak to other founders </li></ul></ul><ul><li>Portfolio </li></ul><ul><ul><li>Relevant experience </li></ul></ul><ul><ul><li>Non competitive </li></ul></ul><ul><ul><li>Community you want to be part of </li></ul></ul><ul><li>Valuation and associated deal terms </li></ul>Right partner at a fair price vs. Any partner at best price
  19. 19. Thank you Ben Holmes Email : benh@indexventures.com Skype : ben_holmes
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