Daniel Waterhouse FOWA Oct07

Slide 1: Venture capital and building a big business Daniel Waterhouse daniel.waterhouse@3i.com 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 1

Slide 2: 3i Contents in venture capital and private equity  A world-leader  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 2

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

Slide 4: 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 4

Slide 5: Web2.0 Financing on the up…including in Europe Web2.0 VC Financing $400.00 $350.00 $300.00 $250.00 US Europe $200.00 Israel China $150.00 $100.00 $50.00 $0.00 H1 01 H2 01 H1 02 H2 02 H1 03 H2 03 H1 04 H2 04 H1 05 H2 05 H1 06 H2 06 H1 07 Source: Dow Jones VentureOne and Ernst & Young 5

Slide 6: D ig ita lM 0 10000 12000 14000 2000 4000 6000 8000 ar ke tin g Pr Tr od av uc el tiv ity /E nt er pr is e Pr ic e co m pa ris C on om m un ic at io Se ns a rc h & D C ir e on ct t or y en t, Fi na nc e, En t. IS P/ Po rta ls eC om m Large M&A in the online space - now er ce G Internet M&A >$100M 2003-2007 am es Vi de o C la ss ifi ed s C om m un ity D at in g 6

Slide 7: D ig ita lM 0 10000 12000 14000 2000 4000 6000 8000 ar ke tin g Pr Tr od av uc el tiv ity /E nt er pr is e Pr ic e co m pa ris C on om m un ic at io Se ns a rc h & D C ir e on ct t or y en t, Fi na nc e, En t. IS P/ Po rta ls eC om m er ce G Internet M&A >$100M 2003-2007 am es Large M&A in the online space – future?  Vi de o C la ss ifi ed s C om m un ity D at in g 7

Slide 8: Di g ita lM 0 2000 4000 6000 8000 10000 12000 14000 ar ke tin g Pr Tr od av uc el tiv ity /E nt er pr is e Pr ic e co m pa ris on Co m m un ic at io Se ns ar ch & D ire Co ct nt or en y t, Fi na nc e, En t. IS P/ Po rta ls eC om m er ce G am es Vi de o Internet M&A >$100M 2003-2007: EU companies Cl as si fie ds Co m m Large M&A in the online space – EU companies only un ity Da tin g 8

Slide 9: 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 9

Slide 10: Why/why not raise money from a VC? Contents 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 10

Slide 11: What does it mean taking on an investor? Contents 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 11

Slide 12: How much to raise? When to do it? Contents 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 12

Slide 13: 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 13

Slide 14: Characteristics I like about great web companies 1. New technology or service that greatly improves existing product or creates new product to solve customer pain point 2. Passionate, focussed founders, mgt and team; great biz savvy engineers 3. First-mover advantage when scale will matter/does matter (communities, marketplaces) 4. Rapidly growing customer base 5. Difficult for customers to switch horses 6. Watch metrics of business like hawks and react quickly to problems 7. Will build or are building valuable, proprietary, hard to replicate database 8. Encourage user feedback and listen to it; consumer participates in product development 9. Product is: simple, easy to use, fast, social, useful, fun 10. Have a solid biz model (leads, commissions, ads, transactions, premium) 11. Competency in traffic acquisition (SEO, SEM, affiliate, partners, etc, etc) 12. Technology is not out-dated/difficult to upgrade 13. No risk of commoditisation 14

Slide 15: We think about markets a lot Contents but where are the $1b+ markets and which can be disrupted?  Bit of a joke,  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 15

Slide 16: 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 16

Slide 17: 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 17

Slide 18: 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 18

Slide 19: 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 19

Slide 20: 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 20

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