The venture capital perspective
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The venture capital perspective






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The venture capital perspective The venture capital perspective Presentation Transcript

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