Venture capital and building a big business Daniel Waterhouse [email_address] Facebook: www.facebook.com/profile.php?id=504242719 LinkedIn: www.linkedin.com/in/danielwaterhouse Dopplr: www.dopplr.com/traveller/DanWaterhouse LastFM: www.last.fm/user/DanLFM/ 3i: www.3i.com/people/danielwaterhouse.html 3 October 2007

Contents 3i A world-leader in venture capital and private equity Offices in 14 countries in US, Europe and Asia Truly globally connected investment teams € 10.7billion assets under management; €300million p.a. invested in the venture capital space Long history on investing in, building and creating value in internet/media space Over 550 trade sales and 70 IPOs in the past 5 years

A world-leader in venture capital and private equity

Offices in 14 countries in US, Europe and Asia

Truly globally connected investment teams

€ 10.7billion assets under management; €300million p.a. invested in the venture capital space

Long history on investing in, building and creating value in internet/media space

Over 550 trade sales and 70 IPOs in the past 5 years

3i – selected digital media portfolio Community, communications Media, entertainment, content eCommerce Advertising, Analytics Search, Classifieds, Lead Gen Applications Infrastructure

Agenda Fundraising climate, exit market Why raise money? How much? What does it mean? What VCs are looking for? Where are the attractive markets? Building a big business

Fundraising climate, exit market

Why raise money? How much? What does it mean?

What VCs are looking for? Where are the attractive markets?

Building a big business

Web2.0 Financing on the up…including in Europe Source: Dow Jones VentureOne and Ernst & Young

Large M&A in the online space - now

Large M&A in the online space – future? 

Large M&A in the online space – EU companies only

Agenda Fundraising climate, exit market Why raise money? How much? What does it mean? What VCs are looking for? Where are the attractive markets? Building a big business

Fundraising climate, exit market

Why raise money? How much? What does it mean?

What VCs are looking for? Where are the attractive markets?

Building a big business

Contents Why/why not raise money from a VC? Why? Big opportunity: need help to get there Cannot achieve goals without significant cash injection Speed of time to market critical Want to benefit from non-financial added value: Add to the team: experience, partner, governance Network: partnerships, advisors, corporates Team building Exit help Credibility? Why not? Good product/market but not venture scale Not financially motivated Lose opportunity for smaller exit

Why?

Big opportunity: need help to get there

Cannot achieve goals without significant cash injection

Speed of time to market critical

Want to benefit from non-financial added value:

Add to the team: experience, partner, governance

Network: partnerships, advisors, corporates

Team building

Exit help

Credibility?

Why not?

Good product/market but not venture scale

Not financially motivated

Lose opportunity for smaller exit

Contents What does it mean taking on an investor? What VC is looking for financially VC model is to target up ~10x return on early stage deals Raising €5m first round you may be happy to give 25% of the company Implies €20m post-money valuation 10x would need €200m exit May need B, C,… rounds and the expectation ratchets up There are not that many exists in the range So you have to feel really good about the potential and sticking with it to get to it Other aspects of raising money Best VC will be active partner and give you support and help The VC will want an exit at some point: recap, trade sale, IPO Regular board meetings with mgt team reporting to the board

What VC is looking for financially

VC model is to target up ~10x return on early stage deals

Raising €5m first round you may be happy to give 25% of the company

Implies €20m post-money valuation

10x would need €200m exit

May need B, C,… rounds and the expectation ratchets up

There are not that many exists in the range

So you have to feel really good about the potential and sticking with it to get to it

Other aspects of raising money

Best VC will be active partner and give you support and help

The VC will want an exit at some point: recap, trade sale, IPO

Regular board meetings with mgt team reporting to the board

Contents How much to raise? When to do it? How much to raise? Function of: How much you need to pass key milestones Contingency Valuation and implied dilution Implied exit aspirations There is a real trade-off between taking a lot up front and staging fundraising Look for a partner who has the ability to support you beyond the A-round Too much money impacts company culture When to do it? Don’t rush: more likely to get good valuation/succeeding in raising money when your product has met some milestones Comes back to time to market dynamic Bootstrapping can bring out the best of a team so don’t harm that

How much to raise?

Function of:

How much you need to pass key milestones

Contingency

Valuation and implied dilution

Implied exit aspirations

There is a real trade-off between taking a lot up front and staging fundraising

Look for a partner who has the ability to support you beyond the A-round

Too much money impacts company culture

When to do it?

Don’t rush: more likely to get good valuation/succeeding in raising money when your product has met some milestones

Comes back to time to market dynamic

Bootstrapping can bring out the best of a team so don’t harm that

Agenda Fundraising climate, exit market Why raise money? How much? What does it mean? What VCs are looking for? Where are the attractive markets? Building a big business

Fundraising climate, exit market

Why raise money? How much? What does it mean?

What VCs are looking for? Where are the attractive markets?

Building a big business

New technology or service that greatly improves existing product or creates new product to solve customer pain point Passionate, focussed founders, mgt and team; great biz savvy engineers First-mover advantage when scale will matter/does matter (communities, marketplaces) Rapidly growing customer base Difficult for customers to switch horses Watch metrics of business like hawks and react quickly to problems Will build or are building valuable, proprietary, hard to replicate database Encourage user feedback and listen to it; consumer participates in product development Product is: simple, easy to use, fast, social, useful, fun Have a solid biz model (leads, commissions, ads, transactions, premium) Competency in traffic acquisition (SEO, SEM, affiliate, partners, etc, etc) Technology is not out-dated/difficult to upgrade No risk of commoditisation Characteristics I like about great web companies

New technology or service that greatly improves existing product or creates new product to solve customer pain point

Passionate, focussed founders, mgt and team; great biz savvy engineers

First-mover advantage when scale will matter/does matter (communities, marketplaces)

Rapidly growing customer base

Difficult for customers to switch horses

Watch metrics of business like hawks and react quickly to problems

Will build or are building valuable, proprietary, hard to replicate database

Encourage user feedback and listen to it; consumer participates in product development

Product is: simple, easy to use, fast, social, useful, fun

Have a solid biz model (leads, commissions, ads, transactions, premium)

Competency in traffic acquisition (SEO, SEM, affiliate, partners, etc, etc)

Technology is not out-dated/difficult to upgrade

No risk of commoditisation

Contents We think about markets a lot Bit of a joke, but where are the $1b+ markets and which can be disrupted? I look at the UK internet market and see: £1.3b+ paid search market £450m display ad market, £150m email mktg, £400m online classifieds £500m+ lead gen/price comparison market £24bn+ spend online retails spend; £8bn online personal travel Billions spend on phone calls £700m+ on online gambling Hosting, ISP, premium services, etc etc markets But..everyone gets excited about advertising (including me) but: It works best in a very targetted way when the consumer wants to receive it (eg Google) Google has 90%+ of the paid search market Yahoo!, MSN have another 50%+ display market Maybe there is £150-200m to go around for the thousands of other players This is fine to pay the bills but it’s hard to get to scale

Bit of a joke, but where are the $1b+ markets and which can be disrupted?

I look at the UK internet market and see:

£1.3b+ paid search market

£450m display ad market, £150m email mktg,

£400m online classifieds

£500m+ lead gen/price comparison market

£24bn+ spend online retails spend; £8bn online personal travel

Billions spend on phone calls

£700m+ on online gambling

Hosting, ISP, premium services, etc etc markets

But..everyone gets excited about advertising (including me) but:

It works best in a very targetted way when the consumer wants to receive it (eg Google)

Google has 90%+ of the paid search market

Yahoo!, MSN have another 50%+ display market

Maybe there is £150-200m to go around for the thousands of other players

This is fine to pay the bills but it’s hard to get to scale

Specific areas of interest One step away from the transaction: Retailers, service providers, universities, health care providers, local tradesmen, etc all comfortable with routing out leads online Best qualified leads can be monetised quickly, get premium prices Lead gen, vertical search, etc Databases, databases, databases Scale of supplier relationships; scale of unique, hard to replicate, useful data to leverage; scale of users Network effect Monopoly/duopoly possible after tipping point Eg. Seloger, Blue Lithium, Fotolog Fragmentation Content, advertising, audience Scale plays interesting: Demand Media, Blue Lithium Plumbing Discovery

One step away from the transaction:

Retailers, service providers, universities, health care providers, local tradesmen, etc all comfortable with routing out leads online

Best qualified leads can be monetised quickly, get premium prices

Lead gen, vertical search, etc

Databases, databases, databases

Scale of supplier relationships; scale of unique, hard to replicate, useful data to leverage; scale of users

Network effect

Monopoly/duopoly possible after tipping point

Eg. Seloger, Blue Lithium, Fotolog

Fragmentation

Content, advertising, audience

Scale plays interesting: Demand Media, Blue Lithium

Plumbing

Discovery

Agenda Fundraising climate, exit market Why raise money? How much? What does it mean? What VCs are looking for? Where are the attractive markets? Building a big business

Fundraising climate, exit market

Why raise money? How much? What does it mean?

What VCs are looking for? Where are the attractive markets?

Building a big business

Beyond the A round Going from early adopter traction to the mainstream is hard! Scaling challenges include: Managing the proliferation of online distribution channels Finding a biz model that scales Developing partnerships Building depth of supplier relationships Scaling infrastructure Growing org in effective way Launching intl offices Buying other companies Adapting when things don’t work Most businesses have some hiccups Knowing when to exit Next 12-24 months are going to be very interesting for the ’06 and ’07 startups

Going from early adopter traction to the mainstream is hard!

Scaling challenges include:

Managing the proliferation of online distribution channels

Finding a biz model that scales

Developing partnerships

Building depth of supplier relationships

Scaling infrastructure

Growing org in effective way

Launching intl offices

Buying other companies

Adapting when things don’t work

Most businesses have some hiccups

Knowing when to exit

Next 12-24 months are going to be very interesting for the ’06 and ’07 startups

3i case studies Blue Lithium 3i and Walden invested $11.5m in 2005 Backed a successful entrepreneur Capital to scale the biz 3i found the European lead to bring to market 3i made first intro to Yahoo Yahoo announced acquisition for $300m in August 2007 Fotolog 3i originally invested in 2005 Site grew faster than infrastructure could cope with Invested $4m more in Oct 2006 to support this 3i helped bring in additional mgt Now at: 11m members (+100% y-on-y), top 20 in Alexa

Blue Lithium

3i and Walden invested $11.5m in 2005

Backed a successful entrepreneur

Capital to scale the biz

3i found the European lead to bring to market

3i made first intro to Yahoo

Yahoo announced acquisition for $300m in August 2007

Fotolog

3i originally invested in 2005

Site grew faster than infrastructure could cope with

Invested $4m more in Oct 2006 to support this

3i helped bring in additional mgt

Now at: 11m members (+100% y-on-y), top 20 in Alexa

3i case studies Habbo Hotel Scaled to 19 country offices, 29 localized sites 3i helped find media partners for new country launch 3i recruited non-exec directors Demand Media 3i backing former Myspace Chairman’s new play DM has raised $320million for an ambitious play in the content and domains space 3i actively helping with European expansion

Habbo Hotel

Scaled to 19 country offices, 29 localized sites

3i helped find media partners for new country launch

3i recruited non-exec directors

Demand Media

3i backing former Myspace Chairman’s new play

DM has raised $320million for an ambitious play in the content and domains space

3i actively helping with European expansion