Everything you need to know about Venture Capital 20 February 2007 Ben Holmes Index Ventures

Who we are € 1.3bn under management Active investor in web / internet Pan European Venture Fund Based London & Geneva Index Ventures Selected Investments

€ 1.3bn under management

Active investor in web / internet

Pan European Venture Fund

Based London & Geneva

Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner?

Overview of Venture Capital

When to raise VC finance?

Strategies for VC fundraising

How to choose the right VC partner?

Venture Capital – Size of market US - 2006 $25.7bn 1446 transactions $10.5m average investment Europe - 2006 € 4.1bn 867 transactions € 14m average investment 55% of transactions within broad IT sector However rapid increase in Web application investments UK 2005 - £24m invested UK 2006 - £79m invested Sources: Dow Jones VentureOne, Paul Fisher at FirstCapital

US - 2006

$25.7bn

1446 transactions

$10.5m average investment

Europe - 2006

€ 4.1bn

867 transactions

€ 14m average investment

55% of transactions within broad IT sector

However rapid increase in Web application investments

UK 2005 - £24m invested

UK 2006 - £79m invested

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)

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 Investment Size 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

Investment Size

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

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

VC Case Study Company Creation Index acting as Interim Mgmt Team Recruitment Mattias Miksche as CEO Relocated to Stockholm Board Hiring Fred Davis Additional Finance Sequoia Capital Celebrity Partnerships Fashion Industry Partnerships

Company Creation

Index acting as Interim Mgmt

Team Recruitment

Mattias Miksche as CEO

Relocated to Stockholm

Board Hiring

Fred Davis

Additional Finance

Sequoia Capital

Celebrity Partnerships

Fashion Industry Partnerships

VC Case Study Company establishes HQ in London Few hundred meters from Index Day to day contact with founders Team Recruitment Mike Volpi, Cisco as Chairman Saul Klein, Head of Marketing Etc. Exit strategy Index plays key role in navigating multiple buyer discussions Successful exit to eBay €2.5bn+

Company establishes HQ in London

Few hundred meters from Index

Day to day contact with founders

Team Recruitment

Mike Volpi, Cisco as Chairman

Saul Klein, Head of Marketing

Etc.

Exit strategy

Index plays key role in navigating multiple buyer discussions

Successful exit to eBay €2.5bn+

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

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

Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner?

Overview of Venture Capital

When to raise VC finance?

Strategies for VC fundraising

How to choose the right VC partner?

Good reasons to raise VC Large Potential Market Opportunity Unique Product Or Concept Excellent Development Capability Pre-requisites Intense competition likely Need to move rapidly Implications… Hiring Infrastructure VC funding supports Rapid Product Development Internationalisation Partnerships Commercialisation

When NOT to raise VC 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 Application is a feature not a product Market size is too small Motivation is not 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 How to choose the right VC partner?

Overview of Venture Capital

When to raise VC finance?

Strategies for VC fundraising

How to choose the right VC partner?

The top tips… Have a great product Focus predominantly on the business not fundraising Evidence of executional ability is more exciting to VC than a 100 page business plan

Have a great product

Focus predominantly on the business not fundraising

Evidence of executional ability is more exciting to VC than a 100 page business plan

Identifying relevant VC partners Do create a shortlist Rifle is a better weapon than a shotgun 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

Do create a shortlist

Rifle is a better weapon than a shotgun

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

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

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

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

Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner?

Overview of Venture Capital

When to raise VC finance?

Strategies for VC fundraising

How to choose the right VC partner?

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

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

Key things to consider Relationship With key individual(s); and broader team References Speak to other founders Portfolio Relevant experience Non competitive Community you want to be part of Valuation and associated deal terms Right partner at a fair price vs. Any partner at best price

Relationship

With key individual(s); and

broader team

References

Speak to other founders

Portfolio

Relevant experience

Non competitive

Community you want to be part of

Valuation and associated deal terms

Thank you Ben Holmes Email : benh@indexventures.com Skype : ben_holmes Stardoll : binky2128