Daniel Waterhouse FOWA Oct07


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Daniel Waterhouse of 3i (http://www.3i.com/) discusses investment options for start-ups, what VCs are looking for and how that impacts on your business.

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  • Daniel Waterhouse FOWA Oct07

    1. 1. 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
    2. 2. Contents 3i <ul><li>A world-leader in venture capital and private equity </li></ul><ul><li>Offices in 14 countries in US, Europe and Asia </li></ul><ul><li>Truly globally connected investment teams </li></ul><ul><li>€ 10.7billion assets under management; €300million p.a. invested in the venture capital space </li></ul><ul><li>Long history on investing in, building and creating value in internet/media space </li></ul><ul><li>Over 550 trade sales and 70 IPOs in the past 5 years </li></ul>
    3. 3. 3i – selected digital media portfolio Community, communications Media, entertainment, content eCommerce Advertising, Analytics Search, Classifieds, Lead Gen Applications Infrastructure
    4. 4. Agenda <ul><li>Fundraising climate, exit market </li></ul><ul><li>Why raise money? How much? What does it mean? </li></ul><ul><li>What VCs are looking for? Where are the attractive markets? </li></ul><ul><li>Building a big business </li></ul>
    5. 5. Web2.0 Financing on the up…including in Europe Source: Dow Jones VentureOne and Ernst & Young
    6. 6. Large M&A in the online space - now
    7. 7. Large M&A in the online space – future? 
    8. 8. Large M&A in the online space – EU companies only
    9. 9. Agenda <ul><li>Fundraising climate, exit market </li></ul><ul><li>Why raise money? How much? What does it mean? </li></ul><ul><li>What VCs are looking for? Where are the attractive markets? </li></ul><ul><li>Building a big business </li></ul>
    10. 10. Contents Why/why not raise money from a VC? <ul><li>Why? </li></ul><ul><li>Big opportunity: need help to get there </li></ul><ul><li>Cannot achieve goals without significant cash injection </li></ul><ul><li>Speed of time to market critical </li></ul><ul><li>Want to benefit from non-financial added value: </li></ul><ul><ul><li>Add to the team: experience, partner, governance </li></ul></ul><ul><ul><li>Network: partnerships, advisors, corporates </li></ul></ul><ul><ul><li>Team building </li></ul></ul><ul><ul><li>Exit help </li></ul></ul><ul><ul><li>Credibility? </li></ul></ul><ul><li>Why not? </li></ul><ul><li>Good product/market but not venture scale </li></ul><ul><li>Not financially motivated </li></ul><ul><li>Lose opportunity for smaller exit </li></ul>
    11. 11. Contents What does it mean taking on an investor? <ul><li>What VC is looking for financially </li></ul><ul><li>VC model is to target up ~10x return on early stage deals </li></ul><ul><li>Raising €5m first round you may be happy to give 25% of the company </li></ul><ul><ul><li>Implies €20m post-money valuation </li></ul></ul><ul><ul><li>10x would need €200m exit </li></ul></ul><ul><ul><li>May need B, C,… rounds and the expectation ratchets up </li></ul></ul><ul><ul><li>There are not that many exists in the range </li></ul></ul><ul><ul><li>So you have to feel really good about the potential and sticking with it to get to it </li></ul></ul><ul><li>Other aspects of raising money </li></ul><ul><li>Best VC will be active partner and give you support and help </li></ul><ul><li>The VC will want an exit at some point: recap, trade sale, IPO </li></ul><ul><li>Regular board meetings with mgt team reporting to the board </li></ul>
    12. 12. Contents How much to raise? When to do it? <ul><li>How much to raise? </li></ul><ul><li>Function of: </li></ul><ul><ul><li>How much you need to pass key milestones </li></ul></ul><ul><ul><li>Contingency </li></ul></ul><ul><ul><li>Valuation and implied dilution </li></ul></ul><ul><ul><li>Implied exit aspirations </li></ul></ul><ul><li>There is a real trade-off between taking a lot up front and staging fundraising </li></ul><ul><li>Look for a partner who has the ability to support you beyond the A-round </li></ul><ul><li>Too much money impacts company culture </li></ul><ul><li>When to do it? </li></ul><ul><li>Don’t rush: more likely to get good valuation/succeeding in raising money when your product has met some milestones </li></ul><ul><li>Comes back to time to market dynamic </li></ul><ul><li>Bootstrapping can bring out the best of a team so don’t harm that </li></ul>
    13. 13. Agenda <ul><li>Fundraising climate, exit market </li></ul><ul><li>Why raise money? How much? What does it mean? </li></ul><ul><li>What VCs are looking for? Where are the attractive markets? </li></ul><ul><li>Building a big business </li></ul>
    14. 14. <ul><li>New technology or service that greatly improves existing product or creates new product to solve customer pain point </li></ul><ul><li>Passionate, focussed founders, mgt and team; great biz savvy engineers </li></ul><ul><li>First-mover advantage when scale will matter/does matter (communities, marketplaces) </li></ul><ul><li>Rapidly growing customer base </li></ul><ul><li>Difficult for customers to switch horses </li></ul><ul><li>Watch metrics of business like hawks and react quickly to problems </li></ul><ul><li>Will build or are building valuable, proprietary, hard to replicate database </li></ul><ul><li>Encourage user feedback and listen to it; consumer participates in product development </li></ul><ul><li>Product is: simple, easy to use, fast, social, useful, fun </li></ul><ul><li>Have a solid biz model (leads, commissions, ads, transactions, premium) </li></ul><ul><li>Competency in traffic acquisition (SEO, SEM, affiliate, partners, etc, etc) </li></ul><ul><li>Technology is not out-dated/difficult to upgrade </li></ul><ul><li>No risk of commoditisation </li></ul>Characteristics I like about great web companies
    15. 15. Contents We think about markets a lot <ul><li>Bit of a joke, but where are the $1b+ markets and which can be disrupted? </li></ul><ul><li>I look at the UK internet market and see: </li></ul><ul><ul><li>£1.3b+ paid search market </li></ul></ul><ul><ul><li>£450m display ad market, £150m email mktg, </li></ul></ul><ul><ul><li>£400m online classifieds </li></ul></ul><ul><ul><li>£500m+ lead gen/price comparison market </li></ul></ul><ul><ul><li>£24bn+ spend online retails spend; £8bn online personal travel </li></ul></ul><ul><ul><li>Billions spend on phone calls </li></ul></ul><ul><ul><li>£700m+ on online gambling </li></ul></ul><ul><ul><li>Hosting, ISP, premium services, etc etc markets </li></ul></ul><ul><li>But..everyone gets excited about advertising (including me) but: </li></ul><ul><ul><li>It works best in a very targetted way when the consumer wants to receive it (eg Google) </li></ul></ul><ul><ul><li>Google has 90%+ of the paid search market </li></ul></ul><ul><ul><li>Yahoo!, MSN have another 50%+ display market </li></ul></ul><ul><ul><li>Maybe there is £150-200m to go around for the thousands of other players </li></ul></ul><ul><ul><li>This is fine to pay the bills but it’s hard to get to scale </li></ul></ul>
    16. 16. Specific areas of interest <ul><li>One step away from the transaction: </li></ul><ul><ul><li>Retailers, service providers, universities, health care providers, local tradesmen, etc all comfortable with routing out leads online </li></ul></ul><ul><ul><li>Best qualified leads can be monetised quickly, get premium prices </li></ul></ul><ul><ul><li>Lead gen, vertical search, etc </li></ul></ul><ul><li>Databases, databases, databases </li></ul><ul><ul><li>Scale of supplier relationships; scale of unique, hard to replicate, useful data to leverage; scale of users </li></ul></ul><ul><ul><li>Network effect </li></ul></ul><ul><ul><li>Monopoly/duopoly possible after tipping point </li></ul></ul><ul><ul><li>Eg. Seloger, Blue Lithium, Fotolog </li></ul></ul><ul><li>Fragmentation </li></ul><ul><ul><li>Content, advertising, audience </li></ul></ul><ul><ul><li>Scale plays interesting: Demand Media, Blue Lithium </li></ul></ul><ul><li>Plumbing </li></ul><ul><li>Discovery </li></ul>
    17. 17. Agenda <ul><li>Fundraising climate, exit market </li></ul><ul><li>Why raise money? How much? What does it mean? </li></ul><ul><li>What VCs are looking for? Where are the attractive markets? </li></ul><ul><li>Building a big business </li></ul>
    18. 18. Beyond the A round <ul><li>Going from early adopter traction to the mainstream is hard! </li></ul><ul><li>Scaling challenges include: </li></ul><ul><ul><li>Managing the proliferation of online distribution channels </li></ul></ul><ul><ul><li>Finding a biz model that scales </li></ul></ul><ul><ul><li>Developing partnerships </li></ul></ul><ul><ul><li>Building depth of supplier relationships </li></ul></ul><ul><ul><li>Scaling infrastructure </li></ul></ul><ul><ul><li>Growing org in effective way </li></ul></ul><ul><ul><li>Launching intl offices </li></ul></ul><ul><ul><li>Buying other companies </li></ul></ul><ul><ul><li>Adapting when things don’t work </li></ul></ul><ul><li>Most businesses have some hiccups </li></ul><ul><li>Knowing when to exit </li></ul><ul><li>Next 12-24 months are going to be very interesting for the ’06 and ’07 startups </li></ul>
    19. 19. 3i case studies <ul><li>Blue Lithium </li></ul><ul><ul><li>3i and Walden invested $11.5m in 2005 </li></ul></ul><ul><ul><li>Backed a successful entrepreneur </li></ul></ul><ul><ul><li>Capital to scale the biz </li></ul></ul><ul><ul><li>3i found the European lead to bring to market </li></ul></ul><ul><ul><li>3i made first intro to Yahoo </li></ul></ul><ul><ul><li>Yahoo announced acquisition for $300m in August 2007 </li></ul></ul><ul><li>Fotolog </li></ul><ul><ul><li>3i originally invested in 2005 </li></ul></ul><ul><ul><li>Site grew faster than infrastructure could cope with </li></ul></ul><ul><ul><li>Invested $4m more in Oct 2006 to support this </li></ul></ul><ul><ul><li>3i helped bring in additional mgt </li></ul></ul><ul><ul><li>Now at: 11m members (+100% y-on-y), top 20 in Alexa </li></ul></ul>
    20. 20. 3i case studies <ul><li>Habbo Hotel </li></ul><ul><ul><li>Scaled to 19 country offices, 29 localized sites </li></ul></ul><ul><ul><li>3i helped find media partners for new country launch </li></ul></ul><ul><ul><li>3i recruited non-exec directors </li></ul></ul><ul><li>Demand Media </li></ul><ul><ul><li>3i backing former Myspace Chairman’s new play </li></ul></ul><ul><ul><li>DM has raised $320million for an ambitious play in the content and domains space </li></ul></ul><ul><ul><li>3i actively helping with European expansion </li></ul></ul>