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Prerequisites for international growth investments


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Presentation held by Fergal Mullen from Highland Capital Partners, at the Nordic Seed Capital Summit 2011 in Stockholm, 16 May 2011.

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Prerequisites for international growth investments

  1. 1. Prerequisites For International Growth Investments NORDIC SEED CAPITAL SUMMIT MAY 2011
  3. 3. BACKGROUND  Formed in 1988  $3 billion under management & 8 funds »  Backed 230 companies; over 100 IPOs and M&A  Venture growth & early stage focused investment strategy »  tech | internet | life sciences  Global presence »  Offices in Boston, Silicon Valley, Geneva, London & Shanghai  Europe Focus & Strategy »  Venture Growth »  Internet & Digitial Media and Information & Communications Tech CONFIDENTIAL 3
  4. 4. GLOBAL INVESTMENT AMBITIONIn Any Geography &Regardless of Sector… …We look for extraordinary entrepreneurs… with a burning desire to succeed… who can inspire others and build their companies from the garage to the Fortune 500… reinventing themselves and their companies along the way… CONFIDENTIAL 4
  6. 6. 6
  7. 7. Nasdaq: BFRE $567,000,000 Nasdaq: ASKJ Nasdaq: AVID $67,200,000 Nasdaq: CKFRAcquired by Cisco Systems $42,000,000 $56,000,000 Performance-based online $86,4000,000 Broadband VPN solutions Online Search Video editing systems marketing Electronic bill pay systems $5,400,000,000 $1,100,000,000Nasdaq: CONR $78,000,000 Nasdaq: LULU Acquired by Terra Acquired by AOL $355,000,000 Acquired by J&J for $1.4B $32,760,000 Networks Advanced mapping Acquired by Tellabs Drug eluting stents Specialty apparel retailer Global internet network solution Optical access solutions $411,100,000 Nasdaq: STAR $278,000,000 NYSE: QIHU Acquired by Apple $126,000,000 Acquired by Apple Chinese-based Internet Mobile advertising Acquired by Staples Acquired by Cisco $2.9B Low power chips company platform Specialty retailer Infrastructure Products Nasdaq: SYBS $49,600,000 $295,000,000 Nasdaq: VPRT Acquired by HP Acquired by AOL Relational database Acquired by Lucent $120,200,000 Database engine Online advertising management software Switching equipment Internet-based printing technology CONFIDENTIAL 7
  8. 8. LEVERAGING A GLOBAL PLATFORM Highland Capital Partners Reputation & Brand Portfolio Companies Network & Knowledge Back Office & IT CONFIDENTIAL 8
  9. 9. EUROPE STRATEGY  Venture growth focus »  Growth capital »  Proven business models »  Attractive returns profile  Focus on Internet & Technology »  Disruptive e-commerce »  Internet advertising technologies & platforms »  Mobile “everything” business models & technologies »  Big data, virtualization, cloud computing  Geographic focus »  Proactive in: UK, Germany, Nordics, Israel, France, Spain »  Reactive in: Eastern Europe and Russia CONFIDENTIAL 9
  10. 10. HIGHLAND EUROPE PORTFOLIO » Online eyewear retailer » United Kingdom » Online photo sharing, storing and printing » France » Semiconductor wireless » United Kingdom infrastructure » Online private sales club » Spain » Online shoe retailer » France » Social games developer » Germany CONFIDENTIAL 10
  12. 12. GROWTH STAGE FILTER   Team   Market »  “A” Players »  Size, Growth, Proximity »  Capital efficient »  Competition »  Speed and Agility »  Ripe for disruption »  PSD »  How big can you be?   Deal   Product or Service »  Financial model »  Unique / Differentiated »  Price & Ownership »  Value Prop & Defensible »  Structure »  Customers Buying Compelling Growth Story CONFIDENTIAL 12
  13. 13. TEAM  Hire A Players and remember A players hire A players, B players hire Cs  Balance culture fit and need for diversity of new backgrounds  Hire resourceful problem solvers  Trust your gut, you have spent 30+ years developing it  Search beyond local geography CONFIDENTIAL 13
  14. 14. MARKET  We don’t buy the “there’s a gap in the market” line, we want to know if there is a market in the gap!  Growth investors generally spend a lot of time validating market »  Size, Growth & Proximity (is company too early to market?) »  Competition »  Ripe for disruption »  How big can you be?  And they will do this by talking with a lot of your customers and their own contacts  Investor has to believe in market potential and that you will be among the leaders CONFIDENTIAL 14
  15. 15. PRODUCT  Unique & Differentiated? »  IP is good but does not guarantee success »  Execution, execution, execution  Defensible? »  IP or Execution play »  First mover »  Economies of scale »  Capital intensity  Value Proposition »  Must be easy to understand »  Better stand up to scrutiny  Never perfect…have to be commited to constant evolution »  Don’t be afraid to test and get feedback CONFIDENTIAL 15
  16. 16. FINANCIAL PLAN & DEAL  1, 3, 5 perspective is very important »  1 Year budget, 3 Year Plan, 5 Year perspective »  Key metrics and model drivers must be realistic relative to current performance »  50% Rule (combination of EBITDA & Growth NOT less than 50%)  In Internet relatied businesses, customer analytics are crucial »  INTERNET: LTV perspective, Cohort Analysis, Contributon, etc) »  ICT: Bookings, Sales, Growth, Pipeline, Customer Concentration, etc.  Deal »  Price & structure are very important to growth investors, look for win/win »  Valuation: Profit/Revenue dilemma »  Public market comps and precedent transaction multiples guide disucssions  Banker or no Banker? »  Totally depends, a good banker can be very helpful, a bad one disasterous CONFIDENTIAL 16
  17. 17. DOs1.  Know what you are talking about2.  Develop a solid pitch deck3.  Do you pass the elevator test?4.  Do you pass the airplane test?5.  Target the right audience6.  Know exactly what you are asking for and why?7.  Have a vision of where you are going?8.  Show apetite for making money in the day-to-day business9.  Articulate your apetite for making money on exit10. Demonstrate your focus on building a world class business CONFIDENTIAL 17
  18. 18. DO NOT1.  Target growth investors with pre-revenue business2.  Hit the road to fund raise until you are ready3.  Pretend business model is de-risked when it is not4.  Claim that founding team can take the company all the way5.  Show a plan with steeper revenue curves than MS or Google6.  Pitch a financial plan with big discontinuities7.  Postpone answers to questions as you pitch8.  Ask for substantially more or less capital than you really need9.  Pretend you know which one or two companies will buy you10. BS: no surprises in the due diligence process, tell investor what to expect CONFIDENTIAL 18
  19. 19. THE DEAL….A TYPICAL DEAL SCENARIO Deal A Deal B  Raise: €10M   Raise: €10M  Valuation: €30M Pre-Money   Valuation: €22M Pre-Money  Liq Pref: 1X, Participating   Liq Pref: 1X  You sold 25%?   You sold 31.25%?  €100M Exit   €100M Exit  VC return: €32.5M   VC return: €31.25M or 31.25%  You sold 32.5%   So what’s the “effective” Pre-Money  So what’s the “effective” Pre-Money »  €10M / .3125 = €32.00M post »  €10M / .3250 = €30.76M post  Effective Pre-Money: €20.76M   Effective Pre-Money: €22.00M  €50M Exit, “effective” pre is €15M   €50M Exit, “effective” pre is €22M CONFIDENTIAL 19
  20. 20. Agenda   Who We Are   What growth investors look for   What you should look for in a growth investor CONFIDENTIAL 20
  21. 21. WHAT SHOULD YOU LOOK FOR?1.  Trust2.  Remember airplane test? …can you hang with these people?3.  Remember elevator test? … they really get it?4.  Enthusiastic supporter5.  Knowledgeable6.  Balance of operating and investing experience7.  Relevant network8.  Relevant board experience9.  A cool hand in good times & bad times…reference this10. Ability to shape or help with exit at right time CONFIDENTIAL 21