Piotr Pietrzak: Investment Specialist at StartVenture, a StartUpHub Poland seed fund

1. INNOVATIONHUBFOR
CENTRAL& EASTEREUROPE

2. PRESENTATION GOAL
I address this presentation to all entrepreneurs, startup’ers and team leaders
who look for raising capital from venture capital funds:
VENTURE CAPITAL MOTIVATION
where the investment criteria are coming from
Legal and administrative criteria at project selection
Business investment criteria
typical for technology focused VC funds
Selection criteria overview
VC investment process

3. VENTURECAPITALMOTIVATIONAS
THESOURCE
FOR PROJECTSELECTIONCRITERIA

4. VC FUNDS MOTIVATION
VC fundsoffershigh internalrateof return(20-30%)totheir investors:
▪ A VC fund is expected to give itsinvestors atleast 6x invested capitalafter10 years
▪ Outof 10 VC investments, on average onlyup to2 are successful,3-4 give back the invested capitaltimes 2,
and allthe rest valued at zero.
▪ Itmeans, the most successful 2investments shouldgive a returnat 6x money on the entire portfolio
▪ Ifthe 2 successfulinvestments were20% ofthe fund’s portfolio,each investment should have a return of a
lease 30x money.
Summary:
▪ VC funds invest only in projects that have an exit potentialat10x-30x money within the investment horizon
(3-7 years)
▪ In consequence, the key project assessment criteria are i.a. targetmarket size and business scalability

5. VC FUNDS MOTIVATION -
WHAT A VC FUND IS LOOKING FOR?

6. VC FUNDS MOTIVATION– CASE STUDY YOUTUBE
For its 30% shares, SequoiaCapitalreceived USD495M
Taking into account fund’s initial investment atUSD11.5M,the return on capital invested was
more than 43 times
November
2005
April
2006
October
2006
SequoiaCapitalinvested
inYouTubeUSD3.5M
thesameVC fundinvestedina next
investmentroundanother USD8M
in YouTube (a totalof USD11.5M)
for 30%shares
GooglepurchasedYouTube
for USD1.65B

7. LEGAL AND ADMINISTRATIVE ASPECTS
SELECTION CRITERIA ON PROJECTS

8. LEGAL AND ADMINISTRATIVE CRITERIA
Such criteria come from legal framework (both the applicable national law and the contractual regulations
with capital providers) as well as from the characteristics of a market that a VC fund operates.
These criteria can begrouped into:
geography Industry
Business types
Project maturity
Growth stages
capital
Minimal and/or
maximal investment
ticket
time
Investment horizon

9. LEGAL AND ADMINISTRATIVE CRITERIA
Key investmentterms and conditions:
▪ Fund’s rolein portfoliocompany’s management and/or supervisory
▪ Minority versus majority stake investments
▪ Joint exit (100% shares sale)

10. BUSINESS
SELECTION CRITERIA ON PROJECTS

11. BUSINESSCRITERIA
TEAM
PRODUCT
MARKET
PROOF OF
CONCEPT

12. BUSINESS CRITERIA - TEAM
▪ current business experience of the team members (within the target market)
▪ Ability to execute business plans efficiently
▪ Human interactions within the team and with investors (what is the work atmosphere
and team’s performance?)
▪ Intellectual capital (know-how) and business contacts of the team members
▪ Team’s motivation (have they invested own money in the project? What are their
salary expectations?)
▪ Management skills
▪ Education

13. BUSINESS CRITERIA – PRODUCT
While analyzing project’s product/service, the VC funds are particularly interested in:
CUSTOMER’S
REALNEEDS
IP RIGHTSINNOVATION
SCALABILITY UNIQUENESS

14. BUSINESS CRITERIA – MARKET
While analyzing project’s product/service, the VC funds are particularly interested in:
MARKET SIZE
FIRST MOVER
ADVANTAGE
MARKET TREND
MARGET
CHANGE
FACTORS
MARKET
LEADERS

15. BUSINESS CRITERIA – PROOF OF CONCEPT
The VC fundslook for product/concept validation (proof of concept) i.a. basedon:
▪ Settingrealistic actionplan that increases the company’s probability to execute on the business plan
▪ Metrics for potential interest in such product/service
▪ Letters ofintent frompotential customers
▪ Partnership agreements withpotential / existing business partners (sale channels)
▪ Technology specifications
▪ Industry experts’ opinions
▪ WorkingMVP / prototype

16. INVESTMENT PROCES
ELEMENTS

17. INVESTMENT PROCESS
Project sourcing&
screening
Legal & financial due
diligence
negotiationsInvestment committee
Initial analysis &
selection
Business due diligence
Signing& execution of
investment agreement
1 2 3
4 5 6 7

18. INVESTMENT PROCES
PROJECT SOURCING & SCREENING
• Analysts verify if a project is valid under fund’s investment
policy and criteria
• Fund’s team (analysts and partners) screens deal flow (all
projects submitted to the fund within a time period) and selects
projects for further businessanalysis
• Decision making is based mostly on information provided by the
applicant (project)

19. INVESTMENT PROCES
INITIAL ANALYSIS AND SELECTION
Based on information provided by applicants and initial analysis, the
fund’s analyst prepares a teaser:
Business
description /
business
model
Market
potential
Project team
Expected
investment
size and use of
funds
The fund’s partners qualify projects to the next stage in investment
process (business due diligence) based on the teaser

20. • An analyst jointly with fund’s partner prepare and negotiate Term Sheet with the project’s team. Term
Sheetdescribeskey investmentterms andconditionsandis notbiding.Itincludes:
▪ General terms of investments (lists parties, investment size, valuation etc.)
▪ Non-disclosure clauses
▪ Exclusivity provisions
• The analyst prepares a report on outcomes of Business and Intellectual capital due diligence, based on the
project’s information, talks with founders, market reports, talks with competition, experts’ opinions,
referentials.
• The fund’s team prepares a financial model that presents project’s financial plans in detail, including the
use of capitalfrom investors,CAPEX,revenue and costsforecasts for 4-7 years, initial andexitvaluations
INVESTMENT PROCES
BUSINESS DUE DILIGENCE

21. • Based on information in:
▪ Term Sheet,
▪ Business and Intellectual due diligence reports,
▪ Financial model
Investment Committee (fund’s partners and external experts) takes an investment
decision and accepts termsof an investmentagreement
• Fund’s legal adviser prepares (under partner’s auspices) first draft of an investment
agreement
• The investment agreement is conditional – conditions precedent are: positive outcome
of financial, taxand legal due diligence (DD carried outbyindependent parties)
INVESTMENT PROCES
INVESTMENT COMMITTEE

22. • Negotiations are run by the fund’s appropriate partner. This includes i.a.:
▪ Negotiating the investment agreement and agreeing on its all provisions
▪ Negotiating exit paths
▪ Call or Put options for parties
▪ Corporate Governance (rules of control and fund’s supervision)
• A legal due diligence starts at this point as well (carried out by independent legal advisors)
• Financial and tax due diligence are carried out by jointly selected auditors
INVESTMENT PROCES
INVESTMENT AGREEMENT NEGOTIATIONS

23. • Upon positiveoutcomeof negotiations,foundersand investorssign the investmentagreement
• The investment agreement is subject to positive results of legal, financial and tax due diligence
(unless DD are finished before signing) and/or fulfillment of other requirements as indicated within
the due diligence
• Upon meeting all conditions precedent set in the investment agreement, the fund purchases a given
numberof sharesand paysgiven capital in
• Subsequently,the fund monitorsits portfoliocompany:
▪ Strategicmanagementsessions(managing board + investor)
▪ Supervisory/ advisory boards
▪ Regularbusinessand financial reporting
INVESTMENT PROCES
SIGNING AND EXECUTION OF INVESTMENT AGREEMENT

24. INVESTMENT
Venturecapitalfund founders

25. THANK YOU FOR ATTENTION
PIOTR PIETRZAK
BOARD MEMBER
PIOTR.PIETRZAK@STARTUPHUB.PL