The venture capital perspective


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The venture capital perspective

  1. 1. The Venture Capital Perspective Know your audience!
  2. 2. The venture capital perspective <ul><li>A VC is accountable to its Limited Partners—the institutions and people who have invested money in the VC’s funds </li></ul><ul><li>A VCs only responsibility is to make money for its “Limiteds” </li></ul><ul><li>Each fund has a specific mandate that the VC must follow in making its investments </li></ul><ul><li>Willing to take risks to realize high return but looking for every way possible to mitigate that risk </li></ul><ul><li>VCs are looking for companies that have the potential to become “home runs” </li></ul><ul><li>We see 2 to 3 business opportunities per week </li></ul><ul><ul><li>Our goal is to fund 2 to 3 businesses per year </li></ul></ul>
  3. 3. What we do day to day… <ul><li>Invest in companies that will make money for our Limiteds </li></ul><ul><ul><li>Generate deal flow </li></ul></ul><ul><ul><ul><li>Speak at events </li></ul></ul></ul><ul><ul><ul><li>Network </li></ul></ul></ul><ul><ul><ul><li>Develop relationships with service providers </li></ul></ul></ul><ul><ul><li>Evaluate opportunities </li></ul></ul><ul><ul><ul><li>Email/phone </li></ul></ul></ul><ul><ul><ul><li>Read business plans </li></ul></ul></ul><ul><ul><ul><li>Meet with entrepreneurs </li></ul></ul></ul><ul><ul><li>Due diligence </li></ul></ul><ul><ul><ul><li>Need to understand the opportunity, the business, the team </li></ul></ul></ul><ul><ul><ul><li>Can take 6 months </li></ul></ul></ul><ul><ul><li>Present, negotiate and close deals </li></ul></ul><ul><ul><ul><li>Term sheets </li></ul></ul></ul><ul><ul><ul><li>Lawyers and legal fees </li></ul></ul></ul>
  4. 4. What we do day to day… <ul><li>Work with portfolio companies </li></ul><ul><ul><li>Involvement depends on stage of company and management experience </li></ul></ul><ul><ul><li>Focused on: </li></ul></ul><ul><ul><ul><li>Generating revenue – getting customers and sales </li></ul></ul></ul><ul><ul><ul><li>Making sure the company doesn’t run out of money </li></ul></ul></ul><ul><ul><ul><ul><li>Budgeting – burn rate </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Fund raising </li></ul></ul></ul></ul><ul><ul><ul><li>Successful exit – this is what we are measured on and what we care about! </li></ul></ul></ul><ul><li>Fund raising </li></ul><ul><ul><li>Every four years or so </li></ul></ul><ul><ul><li>Must justify mandate </li></ul></ul><ul><ul><li>Must show track record </li></ul></ul><ul><ul><li>Takes about 1 ½ years to raise a fund – with a good track record! </li></ul></ul>
  5. 5. Getting venture capital
  6. 6. Is venture capital appropriate? <ul><li>Not every technology company needs venture capital… </li></ul><ul><li>Need to ask: </li></ul><ul><ul><li>What problem does this technology solve </li></ul></ul><ul><ul><li>Can I create a product out of this technology? </li></ul></ul><ul><ul><li>Will anyone be willing to buy this product? </li></ul></ul><ul><ul><li>Is the product idea compelling enough for people to change their behaviour? </li></ul></ul><ul><li>Make sure the problem you are solving is something that people care about– something that causes pain </li></ul><ul><li>Rule of thumb </li></ul><ul><ul><li>10x better, 10x cheaper, 10x more reliable </li></ul></ul><ul><ul><li>Improve by an order of magnitude in more than one performance indicator or metric </li></ul></ul><ul><li>A word about “agents” </li></ul>
  7. 7. Is venture capital appropriate? <ul><li>Unique solutions to very big problems </li></ul><ul><ul><li>Simple enough for VC to understand yet unique enough that VC thinks it is something special </li></ul></ul><ul><ul><li>“Secret sauce” vs. “Marketing plays” </li></ul></ul><ul><ul><li>Disruptive technology </li></ul></ul><ul><ul><ul><li>Disrupt an existing market </li></ul></ul></ul><ul><ul><ul><li>Create a new market space altogether </li></ul></ul></ul><ul><ul><li>Solves “pain”: “Pain killer” vs. “Vitamin” </li></ul></ul>
  8. 8. Is venture capital appropriate? <ul><li>Large market size </li></ul><ul><ul><li>Understand the “real” market – segmentation </li></ul></ul><ul><li>Potential customers identified and engaged </li></ul><ul><ul><li>How are you going to make money – revenue model </li></ul></ul><ul><li>Management team </li></ul><ul><ul><li>Domain expertise </li></ul></ul><ul><ul><li>Stage adjusted </li></ul></ul><ul><ul><li>Willing to “share the wealth” </li></ul></ul><ul><li>Intellectual property “IP” </li></ul><ul><ul><li>Clean… </li></ul></ul><ul><ul><li>Protected… </li></ul></ul><ul><li>Exit strategy </li></ul><ul><ul><li>How will the VCs realize a return for their Limiteds? </li></ul></ul>
  9. 9. Entrepreneurs are not all the same <ul><li>2 types of entrepreneurial opportunities </li></ul><ul><ul><li>Lifestyle entrepreneurs </li></ul></ul><ul><ul><ul><li>The founder wants to be the majority owner </li></ul></ul></ul><ul><ul><ul><li>The founder wants to be the boss </li></ul></ul></ul><ul><ul><ul><li>Growth funded through profits and bank debt </li></ul></ul></ul><ul><ul><ul><li>Examples: </li></ul></ul></ul><ul><ul><ul><ul><li>Consulting firms, retail, distribution, sales agencies, service firms </li></ul></ul></ul></ul><ul><ul><ul><li>Can be highly profitable </li></ul></ul></ul><ul><ul><li>VC backed entrepreneurs </li></ul></ul><ul><ul><ul><li>Founder is okay with a smaller piece of a bigger pie (2% to 5% at liquidity) </li></ul></ul></ul><ul><ul><ul><li>Founder does not need to be the CEO but needs to see the business succeed </li></ul></ul></ul><ul><ul><ul><li>Growth is funded through 3 rd party capital </li></ul></ul></ul><ul><ul><ul><li>Founder makes money on liquidation of his ownership </li></ul></ul></ul><ul><ul><ul><li>Examples: </li></ul></ul></ul><ul><ul><ul><ul><li>Some technology companies, some manufacturing companies </li></ul></ul></ul></ul>
  10. 10. So how do you know? <ul><li>Look for a lifestyle business if: </li></ul><ul><ul><li>Your aspirations are to start a business without prior experience </li></ul></ul><ul><ul><li>You want to be running the company in 15 years </li></ul></ul><ul><ul><li>You want to learn by doing </li></ul></ul><ul><li>Consider VC backed business if: </li></ul><ul><ul><li>You understand that you probably won’t be the boss </li></ul></ul><ul><ul><li>You know what you don’t know </li></ul></ul><ul><ul><li>You want to focus on your strengths and rely on other good people to do the rest </li></ul></ul>
  11. 11. The venture capital process <ul><li>The initial pitch—Phone call/email </li></ul><ul><ul><li>References—almost always get more attention if you are referred by someone reputable </li></ul></ul><ul><ul><li>Describe: </li></ul></ul><ul><ul><ul><li>Technology </li></ul></ul></ul><ul><ul><ul><li>Market </li></ul></ul></ul><ul><ul><ul><li>Team </li></ul></ul></ul><ul><li>Preliminary evaluation of business plan (if you have one) </li></ul><ul><li>Introductory meeting </li></ul><ul><ul><li>Items required: </li></ul></ul><ul><ul><ul><li>Justification for defensibility of technology </li></ul></ul></ul><ul><ul><ul><li>Justification for market opportunity </li></ul></ul></ul><ul><ul><ul><li>Financials/projected financials—Income Statement, Cash Flow, Balance Sheet </li></ul></ul></ul><ul><ul><ul><li>Sales pipeline </li></ul></ul></ul><ul><ul><ul><li>Team </li></ul></ul></ul>
  12. 12. Questions a company will be asked <ul><li>When are you going to be generating revenue? </li></ul><ul><li>Who is your first customer and what have they done to prove they will buy your technology? </li></ul><ul><li>What does your sales pipeline look like? </li></ul><ul><ul><li>Be specific and realistic </li></ul></ul><ul><li>Who owns the technology? </li></ul><ul><li>How much do you intend to pay yourself? </li></ul>
  13. 13. Term sheets and due diligence <ul><li>Due diligence </li></ul><ul><ul><li>Very time consuming and can take a long time </li></ul></ul><ul><li>Timing of term sheet—before or after due diligence </li></ul><ul><li>Make sure you understand all of the terms </li></ul><ul><li>Valuation </li></ul><ul><ul><li>“ Pre-money” and “post-money” </li></ul></ul><ul><ul><li>Bigger is not always better </li></ul></ul><ul><ul><li>You need to understand the structure to be able to negotiate </li></ul></ul>
  14. 14. VC secrets <ul><li>Canada is very small </li></ul><ul><ul><li>You get one shot – with one VC (think of it from this perspective) </li></ul></ul><ul><ul><li>VCs do not like to be second </li></ul></ul><ul><ul><li>Collusion exists </li></ul></ul><ul><li>Listen… get us involved and attached to your company </li></ul><ul><ul><li>Before you need $ </li></ul></ul><ul><ul><li>Before you spend years </li></ul></ul><ul><li>There is always money for good deals </li></ul>
  15. 15. Subsequent financing (VC) <ul><li>A VC thinks about this before investing </li></ul><ul><ul><li>How much time will it take to reach the next milestone? </li></ul></ul><ul><ul><ul><li>Product complete </li></ul></ul></ul><ul><ul><ul><li>First customer – revenues! </li></ul></ul></ul><ul><ul><ul><li>First US customer </li></ul></ul></ul><ul><ul><li>How much will it cost to reach the next milestone? </li></ul></ul><ul><ul><li>Do we have enough money to get the company there? </li></ul></ul><ul><ul><li>If not, should we syndicate now? </li></ul></ul><ul><ul><li>Who will be interested in this investment in the future? </li></ul></ul><ul><ul><li>What value will we be able to get for the company next round? </li></ul></ul><ul><ul><li>How many rounds will we have to go through to have a fully-funded business </li></ul></ul><ul><ul><li>Potential exit scenarios (the ultimate financing round) </li></ul></ul>
  16. 16. Subsequent financing (company) <ul><li>Managing shareholders is critical </li></ul><ul><ul><li>No surprises </li></ul></ul><ul><ul><li>Stay off their “radar” </li></ul></ul><ul><ul><li>Honesty is ALWAYS the best policy </li></ul></ul><ul><ul><li>Always follow up on their leads </li></ul></ul><ul><ul><li>Tap into their contacts </li></ul></ul><ul><li>Under promise and over perform </li></ul><ul><li>Need existing VCs to participate </li></ul><ul><ul><li>Select people with deep pockets early </li></ul></ul><ul><li>Customer support </li></ul><ul><li>Maturing the company </li></ul><ul><ul><li>Is it getting ready to IPO </li></ul></ul>
  17. 17. Questions to ask VCs <ul><li>Are you actively investing? </li></ul><ul><li>At what stage do you typically invest? (the answer here is often misleading…) </li></ul><ul><li>How much will you typically invest and how much of the company will you typically take? </li></ul><ul><li>How long does it typically take you to conduct due diligence? What can we expect? </li></ul><ul><li>How active are you post-investment? </li></ul><ul><li>What can you bring to the table? </li></ul><ul><li>What experience do you have in this industry? </li></ul>
  18. 18. Some examples
  19. 19. PixStream Example - History <ul><li>Founded in 1996 by three entrepreneurs </li></ul><ul><ul><li>During 1997 secured a contract and hired 4 engineers </li></ul></ul><ul><li>Dec 1997 start receiving venture capital funding </li></ul><ul><li>Sept 1998 secure first telco customer </li></ul><ul><li>July 1999 spun out non-core division </li></ul><ul><li>August 2000 announce sale to Cisco </li></ul><ul><ul><li>$550MM </li></ul></ul><ul><ul><li>Fifth highest price paid for a private Canadian technology company </li></ul></ul><ul><li>April 2001 Cisco announces closure </li></ul>
  20. 20. Revenue and headcount <ul><li>Revenue </li></ul><ul><ul><li>1998 - $0.4MM </li></ul></ul><ul><ul><li>1999 - $7.3MM </li></ul></ul><ul><li>Headcount </li></ul><ul><ul><li>1996 - 4 </li></ul></ul><ul><ul><li>1997 - 7 </li></ul></ul><ul><ul><li>1998 - 35 </li></ul></ul><ul><ul><li>1999 - 91 </li></ul></ul><ul><ul><li>2000 - 200 </li></ul></ul>
  21. 21. Financing rounds - pre money values <ul><li>Venture Capital </li></ul><ul><ul><li>Dec 1997 - $6MM (raised $3MM) </li></ul></ul><ul><ul><li>March 1999 - $22MM (raised $7MM) </li></ul></ul><ul><ul><li>Nov 1999 - $65MM (raised $12MM) </li></ul></ul><ul><li>Special warrants </li></ul><ul><ul><li>Feb 2000 - $200MM (raised $35MM) </li></ul></ul><ul><li>Sale </li></ul><ul><ul><li>Aug 2000 - $550MM </li></ul></ul>
  22. 22. Raising money at PixStream <ul><li>Under promise and over perform </li></ul><ul><ul><li>No surprises </li></ul></ul><ul><ul><li>Communicate goals </li></ul></ul><ul><ul><ul><li>At PixStream everyone knew external commitments </li></ul></ul></ul><ul><li>Share the wealth </li></ul><ul><ul><li>Options for everyone </li></ul></ul><ul><ul><li>Opportunity to purchase shares </li></ul></ul><ul><li>Every decision was done to be ready to be public </li></ul><ul><ul><li>Selection of VC’s </li></ul></ul><ul><ul><li>Corporate governance </li></ul></ul><ul><ul><li>Expectation setting </li></ul></ul>
  23. 23. XYZ Inc. <ul><li>Fall 2000 </li></ul><ul><ul><li>Had term sheet at US$20+ valuation </li></ul></ul><ul><ul><li>Company wanted an elaborate cross border share structure for tax purposes </li></ul></ul><ul><ul><li>Investors wanted simple share structure </li></ul></ul><ul><ul><li>Negotiations over share structure took so long that </li></ul></ul><ul><ul><ul><li>Other companies entered the space </li></ul></ul></ul><ul><ul><ul><li>Strategic partners aligned with competitors </li></ul></ul></ul><ul><ul><ul><li>Investors walked </li></ul></ul></ul><ul><ul><li>12 months ago were trying to raise money at sub US$5MM </li></ul></ul><ul><ul><ul><li>Unsuccessful and the company closed </li></ul></ul></ul>
  24. 24. VideoLocus Inc. – Case Study <ul><li>Founded June 2001 </li></ul><ul><li>Four members of the advanced engineering group at PixStream </li></ul><ul><li>Tech Capital invested $600,000 of seed capital </li></ul><ul><li>Very strong technically needed help with commercialization process </li></ul><ul><li>To address this they: </li></ul><ul><ul><li>Took investment from an industry angel alongside TCP </li></ul></ul><ul><ul><li>Secured an ACTIVE advisory board </li></ul></ul><ul><ul><li>Hired two senior employees who were made quasi-founders </li></ul></ul><ul><ul><ul><li>VP engineering with product development and employee supervision experience </li></ul></ul></ul><ul><ul><ul><li>VP sales and marketing with industry experience </li></ul></ul></ul><ul><ul><li>Focused on establishing themselves as world leaders </li></ul></ul><ul><ul><li>Active with standard setting committees </li></ul></ul><ul><ul><li>Became known to industry players </li></ul></ul><ul><ul><li>Hit development milestones </li></ul></ul><ul><ul><li>Strategic financing round lead to acquisition </li></ul></ul><ul><ul><li>Based on relationships and track record </li></ul></ul>
  25. 25. Some thoughts on markets and customers
  26. 26. You need to figure out… <ul><li>Who is the customer? </li></ul><ul><ul><li>Do they have a problem/pain that needs to be fixed? Do they care? (vitamin vs. pain killer) </li></ul></ul><ul><li>Is the market big enough to support a business? </li></ul><ul><ul><li>How much will customers pay? How much of this will you get to keep? (Channel partners) </li></ul></ul><ul><ul><li>How many customers are there? </li></ul></ul><ul><ul><li>How many of these customers will buy your offering? </li></ul></ul><ul><ul><li>Will this generate enough $ to cover your costs and make a profit? </li></ul></ul><ul><li>Is the market too early? </li></ul><ul><ul><li>Newly emerging markets take time to develop </li></ul></ul><ul><ul><li>When will the customer be willing to buy? </li></ul></ul><ul><ul><li>How will you finance the company until then? </li></ul></ul><ul><ul><li>Are there enough customers in the market TODAY to finance your company until the market matures? </li></ul></ul>
  27. 27. You need to figure out… <ul><li>Is the market too competitive? </li></ul><ul><ul><li>Will you be the first to market? (lots of educating) </li></ul></ul><ul><ul><li>Is your product different enough to make people change their behaviour? (10x the performance, 1/10 th the cost) </li></ul></ul><ul><ul><li>Look at direct and indirect competition </li></ul></ul><ul><ul><li>Map the competitive landscape based on key criteria (that customers care about) </li></ul></ul>Inexpensive Expensive High Quality Low Quality Competitor A Competitor C You Competitor B
  28. 28. You need to figure out… <ul><li>What challenges will you face in getting this product to market? </li></ul><ul><ul><li>Customer perception challenges </li></ul></ul><ul><ul><li>Sales channel challenges </li></ul></ul><ul><ul><li>Distribution challenges </li></ul></ul><ul><ul><li>Regulatory challenges </li></ul></ul><ul><ul><li>Etc. </li></ul></ul><ul><li>Make sure you know what you’re up against! </li></ul>
  29. 29. What if a market doesn’t exist yet <ul><li>Brand new markets are rare – can usually find a way to estimate approximate size </li></ul><ul><li>Should be close enough to the market that you can research it – if not, too far out (unless you are independently wealthy or have big amounts of govt. financing) </li></ul><ul><li>Identify gaps in the market </li></ul><ul><ul><li>What needs to happen in the market for this product to be successfully commercialized? </li></ul></ul><ul><ul><li>Customers need the whole solution, not just a piece </li></ul></ul><ul><li>Conduct potential customer/partner calls </li></ul><ul><ul><li>What do people think of the idea? </li></ul></ul>
  30. 30. Tips for getting a first customer <ul><li>Know and build relationships with your prospective customers </li></ul><ul><ul><li>Easier to sell if you know what they want and they trust you </li></ul></ul><ul><li>Potential customer calls </li></ul><ul><ul><li>Pick up the phone – Don’t sell… Ask questions… </li></ul></ul><ul><ul><li>Identify why this product is important to them (and if it isn’t, pick something else) – what is the value? </li></ul></ul><ul><ul><li>Do they have $ to spend on this type of product? Who does? </li></ul></ul><ul><ul><li>Who makes the decisions? Map it out… Org chart / messages and timing </li></ul></ul><ul><li>Partner to get a first customer </li></ul><ul><ul><li>Develop the product with their input </li></ul></ul><ul><ul><li>Commitment – home phone number, do what it takes </li></ul></ul><ul><ul><li>Be careful not to customize the product too much… </li></ul></ul>
  31. 31. Tips for getting a first customer <ul><li>Use your business associates/friends/relatives </li></ul><ul><ul><li>References </li></ul></ul><ul><ul><li>Who can they introduce you to? – LinkedIn ( ) </li></ul></ul><ul><li>Don’t assume “no” </li></ul><ul><ul><li>Assume everyone loves you until they tell you they don’t </li></ul></ul><ul><ul><li>Persistence will pay off… </li></ul></ul><ul><li>If you have developed a solution to a very big, very painful, difficult problem, and you let people know about it, they will buy it – if the price is right (don’t forget to ask this question) </li></ul>
  32. 32. Tech Capital
  33. 33. Tech Capital II <ul><li>Overview </li></ul><ul><ul><li>Second fund for Tech Capital Partners </li></ul></ul><ul><ul><li>Fund size $60 million – closed July 2005 </li></ul></ul><ul><ul><li>Two investments to date </li></ul></ul><ul><li>Fund Mandate </li></ul><ul><ul><li>Typical seed round investment: $1.5 to $2 million </li></ul></ul><ul><ul><li>Waterloo and surrounding area </li></ul></ul><ul><ul><li>Start-up and early-stage technology companies </li></ul></ul>
  34. 34. Tech Capital Portfolio Companies
  35. 35. Tech Capital Partners Inc. [email_address] [email_address] 519-883-8255
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