Cass Business School Lecture Nov 2009


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Slides for Nic Brisbourne's CASS Business School talk on Venture Capital 27 November 2009

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  • Notes Takes a long time Pitch to literally hundreds of potential investors Nearly all of whom say no Sound familiar? It should to anyone who has raised VC – parallels are legion Hope to persuade 10-20 to invest in your fund Then have to get them all to close at the same time ‘ Limited’ joke But it is challenging – must invest across multiple asset classes and multiple types of VC fund – again a bit like a VC must invest across multiple tech sectors
  • By taking investment at these different sizes you lock yourself into a big exit Lose the opportunity for a small potentially lucrative one Lose the opportunity for a lifestyle biz
  • Does the common practice of requiring warm introductions promote inbreeding and reduce meritocracy? – David Semeria
  • Market Need a big, attractive and fast growing market to support a big exit Need to be honest about which part of a market is truly addressable Cliche – but 1% of a huge market as per Gartner is a terrible idea Top down and bottom up assessment Check against forecasts Product Product market fit Quality of idea Barriers to entry Most VCs want to see something working The more working the better Revenues Traffic Beta customers Prototype Team Look for relevant experience Sector Entrepreneur Look for characteristics Energy level Belief Fact based decision making But to a very great extent gut feel (Blink, my mistakes)
  • Cass Business School Lecture Nov 2009

    1. 3. Understanding venture capital Nic Brisbourne Cass Business School Lecture November 27th 2009
    2. 4. Agenda <ul><li>Introduction </li></ul><ul><li>The four aspects of venture capital </li></ul><ul><ul><li>Raising money to make investments </li></ul></ul><ul><ul><li>Making investments </li></ul></ul><ul><ul><li>Exiting investments (aka portfolio management) </li></ul></ul><ul><ul><li>Managing ourselves </li></ul></ul>
    3. 5. Nic Brisbourne <ul><li>10 years in venture </li></ul><ul><ul><li>4 years corporate venturing with Reuters </li></ul></ul><ul><ul><li>6 years with DFJ Esprit </li></ul></ul><ul><li>Career VC </li></ul><ul><li>2008 Deal of the Year for exit </li></ul><ul><li>Focused on the internet </li></ul><ul><li>Blogger at </li></ul>
    4. 6. <ul><li>DFJ Esprit is a leading venture capital investor focused on five target segments: technology, media, telecoms, medtech, cleantech and healthcare. </li></ul><ul><li>Esprit aims to provide superior returns for investors in its funds by investing in, and helping entrepreneurs grow world class companies. </li></ul><ul><li>Esprit Capital Partners is the product of the 2006 merger between Cazenove Private Equity and Prelude Ventures. </li></ul><ul><li>Prelude Ventures has been successfully making early stage investments in the UK and European technology, life-science and healthcare businesses for 21 years. </li></ul><ul><li>Cazenove Private Equity has been active as a cross stage investor in the European technology market since 2000, making more than 20 investments in this time. </li></ul><ul><li>Recently announced: </li></ul><ul><ul><li>A new primary fund </li></ul></ul><ul><ul><li>The acquisition of 3i’s European IT venture portfolio </li></ul></ul>DFJ Esprit
    5. 7. Structure of the venture industry Fees + Carry
    6. 8. Home runs – the maths demands them <ul><li>Target IRR of 30-35% and a four year average holding period implies a 3x multiple on the whole fund </li></ul><ul><ul><li>Sample fund of 10 companies, average investment of £1 per company </li></ul></ul><ul><ul><ul><li>Two 10x returns = £20 </li></ul></ul></ul><ul><ul><ul><li>Three 3x returns = £9 </li></ul></ul></ul><ul><ul><ul><li>Two money back = £2 </li></ul></ul></ul><ul><ul><ul><li>Three write offs = £0 </li></ul></ul></ul><ul><ul><ul><li>Total = £31, or 3.1x multiple on whole fund </li></ul></ul></ul>
    7. 9. Different funds specialise in investing differing amounts Seed Early Stage Series A, (B) Later Stage (B),C,D… Pre-IPO / Buy-out Private Equity Investment Size 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
    8. 10. The process of making investments changes with the heat in the market
    9. 11. How VCs find companies <ul><li>Decide what sectors to look in </li></ul><ul><ul><li>Thematic investing </li></ul></ul><ul><ul><li>Ad hoc/reactionary investing </li></ul></ul><ul><li>The process of finding companies </li></ul><ul><ul><li>Network, network, network </li></ul></ul><ul><ul><li>Advisors </li></ul></ul><ul><ul><li>Research </li></ul></ul><ul><ul><li>Cold approaches </li></ul></ul>
    10. 12. Deciding to make an investment <ul><li>Fit with fund strategy </li></ul><ul><li>Multiple meetings assessing exit potential – needs to be big! </li></ul><ul><ul><li>Market </li></ul></ul><ul><ul><li>Product </li></ul></ul><ul><ul><li>Team </li></ul></ul><ul><ul><li>Why this business will win </li></ul></ul><ul><li>Company needs to have momentum </li></ul>
    11. 13. Investment execution <ul><li>Termsheet </li></ul><ul><li>Formal due diligence </li></ul><ul><li>Legal documents </li></ul><ul><ul><li>Articles </li></ul></ul><ul><ul><li>Shareholders agreement </li></ul></ul><ul><ul><li>Reps and warranties </li></ul></ul><ul><li>Takes time – need to keep performing throughout </li></ul><ul><li>Two end-to-end examples </li></ul><ul><ul><li>Buyat – 500 days </li></ul></ul><ul><ul><li>Tribold – 90 days </li></ul></ul>
    12. 14. Typical deal terms <ul><li>Target 20-35% ownership </li></ul><ul><li>Board Representation </li></ul><ul><li>Liquidation Preference </li></ul><ul><li>Participation rights </li></ul><ul><li>Certain control and veto rights </li></ul><ul><li>Option Pool </li></ul><ul><li>Period of exclusivity to close legals </li></ul>but that’s so unfair…
    13. 15. Helping companies to help themselves <ul><li>A good board focuses on (per Patrick Dunne): </li></ul><ul><ul><li>Right strategy </li></ul></ul><ul><ul><li>Right resources </li></ul></ul><ul><ul><li>Staying out of jail </li></ul></ul><ul><li>A good VC investor director (generally) focuses on </li></ul><ul><ul><li>The high level </li></ul></ul><ul><ul><li>Areas where they will make a difference </li></ul></ul><ul><ul><li>A small number of issues (ideally one) </li></ul></ul>
    14. 16. What a good VC will add <ul><li>Advice and Strategy </li></ul><ul><li>Hiring </li></ul><ul><ul><li>Developers </li></ul></ul><ul><ul><li>Country Managers </li></ul></ul><ul><ul><li>Sales </li></ul></ul><ul><ul><li>CEO / CFO / COO </li></ul></ul><ul><ul><li>Advisory Board </li></ul></ul><ul><li>Partnerships </li></ul><ul><li>Profile and PR </li></ul><ul><li>Internationalisation </li></ul><ul><li>Trusted service provider relationships </li></ul><ul><ul><li>Search / recruiting </li></ul></ul><ul><ul><li>Branding / PR </li></ul></ul><ul><ul><li>Finance, etc </li></ul></ul><ul><li>Exit optimisation </li></ul><ul><ul><li>Knowledge / contacts with relevant buyers </li></ul></ul><ul><ul><li>Experience with process </li></ul></ul>
    15. 17. Making the fund a success <ul><li>Focus resource where it will make a difference </li></ul><ul><ul><li>This is tough </li></ul></ul><ul><li>Keeping sufficient reserve capital </li></ul><ul><li>Maintain decision quality </li></ul><ul><ul><li>Stop partners from going native </li></ul></ul><ul><li>Ensure a steady flow of exits </li></ul><ul><ul><li> example </li></ul></ul>
    16. 18. Internal process for a VC fund <ul><li>Typically centres around a weekly partners meeting </li></ul><ul><ul><li>Ours has three sections, as above </li></ul></ul><ul><li>Key is good information and good decision making </li></ul><ul><li>Challenge is making it work in a partnership where everyone operates autonomously </li></ul>
    17. 19. Recruitment into a VC fund <ul><li>In private equity you have to be financially trained and to have an understanding of management, but you also have to have a strategic brain while being sensitive to tactical and people issues.  </li></ul>“ “ And a passion for your sector!!!
    18. 20. Conclusion <ul><li>To do this job is a privilege </li></ul>
    19. 21. Thank you & Questions Nic Brisbourne, Partner DFJ Esprit TheEquityKicker