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The Juice
                      A monthly series of thought-sparking breakfasts

                     at Synergy Centre, Institute of Technology Tallaght

                              Tuesday Mornings, 8.30 – 10.00am
                                 Coffee & Croissants Served
                                   Tues 19th May, 8.30am

                                       Raising Finance

         Investor Perspective: Drew O’Sullivan, Investment Mgr, 4th Level Ventures
    Drew is a former Manager of the Genesis Enterprise Platform Programme in Cork and has
          worked in Nova UCD as Project Manager. Drew joined 4th Level Ventures in 2007
         Where he works with technology based businesses with high potential for growth on
       finance and fundraising, new product introduction and IP protection, business models,
                            team development and export market entry.

   *All breakfast briefings are free of charge but places should be reserved in advance.
                Contact Onray.brainard@ittdublin.ie or call 01-404 2083.




19 May 2009                                                                         Slide: 1
Investing in High Potential Start-Ups




              Drew O’Sullivan, 4th Level Ventures


19 May 2009                                         Slide: 2
4th Level Ventures


  •   Founded 2002
  •   Fund size is €18 million
  •   14 investments, 3 exits to date
  •   Focused on early stage technology companies
      commercialising Irish university research




19 May 2009                                         Slide: 3
4th Level Ventures



   • Invests up to €1.5 million over the life of a
     company at seed and early stage
   • Require a clear investment and exit strategy
     which suits size of fund
   • Co-invests with Enterprise Ireland (and other VCs)
   • Works closely with management teams




19 May 2009                                        Slide: 4
4th Level Ventures Investee Companies

                                                  LED Luminaires
                Lithium Ion Batteries




                                              Illicit Image Management
                   Medical Textiles
                                                        Software




                                              Digital Power Control for
              Chiral Catalyst Compounds
                                                  Computer Chips



                                              Photonics Test Equipment
               Laboratory Microfluidics




                                                 HDMI Cable Chips
               Video E-Rental and IPTV




                 LED and Solar Cell             Mobile phone games
               Equipment Manufacturer


                                              Technology Development
                  Meat Traceability



19 May 2009                                             Slide: 5
                                          5
What makes an investable
                High Potential Start-Up?


  It needs to have…

  1.     Market
  2.     „People, people, people‟
  3.     Novel Technology/Product
  4.     Business Model
  5.     Investment Strategy



19 May 2009                                Slide: 6
Market - Ideal


  • Big Hairy Opportunity
      – Target addressable market of > €1 billion


  • Customer Relationship
      – Validated need / priority / budget
      – Customer buying process understood


  • Timing
      – Waiting for the market is expensive – timing is
        everything



19 May 2009                                               Slide: 7
Market - Reality

  • Market small and not growing
      – Room for new entrant?
      – Worth the fight?

  • Customer “Relationship”
      – Over-reliance on soft positive feedback
      – Need not imminent
      – Champion is not key influencer

  • Timing
      – too early
      – too late




19 May 2009                                       Slide: 8
People - Ideal


  • CEO Industry knowledge
       – Real experience and network in industry
         knowledge and experience
       – Focused on success and can bring people with
         them

  • Team
       – Commercial, cohesive and flexible
         management



19 May 2009                                       Slide: 9
People - Reality

   • Wrong management team at outset
        – Can be impossible to fix as shares are allocated
        – Unfundable

   • Inexperienced Promoters
        – Learning on someone else‟s ticket
        – No real in-depth relevant industry knowledge
          and experience
        – No real commercial experience
        – Ability to discriminate and attract the best



19 May 2009                                         Slide: 10
Technology/Product - Ideal


   Technology/Product

   • Focus on a solution to a real world problem

   • Need a very significant competitive advantage

   • Defensible clean IP

   • Is the technology a product?



19 May 2009                                        Slide: 11
Technology/Product - Reality

   • Too many possibilities
        – Too many applications does not equal risk mitigation


   • Not enough of a significant competitive advantage
        – Start-ups have to be much much better to displace
          incumbent competitors (they have capital, time,
          credibility….)


   • Too many loose ends on IP

   • Technology licence v product


19 May 2009                                                Slide: 12
Business Model - Ideal


  • Importance of pricing, gross margins
    & route to market
       – Premium pricing
       – Scaling potential (source of funding)
       – Exit potential


  • Proven business model suitable for
    the industry

19 May 2009                                      Slide: 13
Business Model - Reality

  • Under-pricing & low gross margin
       –   Value to customer not fully understood
       –   Costing direct cost of sales
       –   Scaling and exit potential damaged
       –   Gross margin – “can be improved later as
           model evolves”

  • Direct sales where price is too low to
    support direct sales effort

  • Lead time to sales underestimated


19 May 2009                                           Slide: 14
Raising Finance - to build what?


  • What do you want to build?
       – Risk / Reward expectation of promoter
       – Revenues, profitability, technical
         leadership
       – Potential size of company and size of
         opportunity
       – What will company balance sheet and
         share structure look like in 4 year‟s
         time?

19 May 2009                                      Slide: 15
Raising Finance - VC expectations

  • If raising funds from venture capital - to
    VC or not to VC?
       – Understand venture capitalists
              • Wants to invest!
              • Fund manager – measured by returns
              • Funds capacity, Funds focus (tech, stage, geo)
              • What are value enhancing events/milestones for
                business (investment rounds)
              • Adding value - recruitment, market access, business
                systems, other money




19 May 2009                                                   Slide: 16
Raising Finance - Valuation

  • Valuation of early stage tech companies is
    a function of:
       – Potential size of “success” - BHO
       – Risk associated with company development
              • where is it at now
              • incremental funds to achieve value milestones
       – Probability of success
       – Total capital needed to succeed
       – Availability of capital – competition for deals
         and possible later investors
       – “Confidence” of investor of value add

19 May 2009                                                     Slide: 17
Raising Finance - Reality

  • Family friends and…. Revenues
       – most common route to finance business
       – few go vc route

  • Inexperienced teams forget they are
    selling an investment opportunity
       – not listening to the buying signals

  • Undercapitalised technology companies
    growing too slowly
       – fix it or……leave it?
19 May 2009                                      Slide: 18
Drew O‟Sullivan
              drew.osullivan@4lv.ie
                 Tel: 01 6333604




19 May 2009                           Slide: 19

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Investor

  • 1. The Juice A monthly series of thought-sparking breakfasts at Synergy Centre, Institute of Technology Tallaght Tuesday Mornings, 8.30 – 10.00am Coffee & Croissants Served Tues 19th May, 8.30am Raising Finance Investor Perspective: Drew O’Sullivan, Investment Mgr, 4th Level Ventures Drew is a former Manager of the Genesis Enterprise Platform Programme in Cork and has worked in Nova UCD as Project Manager. Drew joined 4th Level Ventures in 2007 Where he works with technology based businesses with high potential for growth on finance and fundraising, new product introduction and IP protection, business models, team development and export market entry. *All breakfast briefings are free of charge but places should be reserved in advance. Contact Onray.brainard@ittdublin.ie or call 01-404 2083. 19 May 2009 Slide: 1
  • 2. Investing in High Potential Start-Ups Drew O’Sullivan, 4th Level Ventures 19 May 2009 Slide: 2
  • 3. 4th Level Ventures • Founded 2002 • Fund size is €18 million • 14 investments, 3 exits to date • Focused on early stage technology companies commercialising Irish university research 19 May 2009 Slide: 3
  • 4. 4th Level Ventures • Invests up to €1.5 million over the life of a company at seed and early stage • Require a clear investment and exit strategy which suits size of fund • Co-invests with Enterprise Ireland (and other VCs) • Works closely with management teams 19 May 2009 Slide: 4
  • 5. 4th Level Ventures Investee Companies LED Luminaires Lithium Ion Batteries Illicit Image Management Medical Textiles Software Digital Power Control for Chiral Catalyst Compounds Computer Chips Photonics Test Equipment Laboratory Microfluidics HDMI Cable Chips Video E-Rental and IPTV LED and Solar Cell Mobile phone games Equipment Manufacturer Technology Development Meat Traceability 19 May 2009 Slide: 5 5
  • 6. What makes an investable High Potential Start-Up? It needs to have… 1. Market 2. „People, people, people‟ 3. Novel Technology/Product 4. Business Model 5. Investment Strategy 19 May 2009 Slide: 6
  • 7. Market - Ideal • Big Hairy Opportunity – Target addressable market of > €1 billion • Customer Relationship – Validated need / priority / budget – Customer buying process understood • Timing – Waiting for the market is expensive – timing is everything 19 May 2009 Slide: 7
  • 8. Market - Reality • Market small and not growing – Room for new entrant? – Worth the fight? • Customer “Relationship” – Over-reliance on soft positive feedback – Need not imminent – Champion is not key influencer • Timing – too early – too late 19 May 2009 Slide: 8
  • 9. People - Ideal • CEO Industry knowledge – Real experience and network in industry knowledge and experience – Focused on success and can bring people with them • Team – Commercial, cohesive and flexible management 19 May 2009 Slide: 9
  • 10. People - Reality • Wrong management team at outset – Can be impossible to fix as shares are allocated – Unfundable • Inexperienced Promoters – Learning on someone else‟s ticket – No real in-depth relevant industry knowledge and experience – No real commercial experience – Ability to discriminate and attract the best 19 May 2009 Slide: 10
  • 11. Technology/Product - Ideal Technology/Product • Focus on a solution to a real world problem • Need a very significant competitive advantage • Defensible clean IP • Is the technology a product? 19 May 2009 Slide: 11
  • 12. Technology/Product - Reality • Too many possibilities – Too many applications does not equal risk mitigation • Not enough of a significant competitive advantage – Start-ups have to be much much better to displace incumbent competitors (they have capital, time, credibility….) • Too many loose ends on IP • Technology licence v product 19 May 2009 Slide: 12
  • 13. Business Model - Ideal • Importance of pricing, gross margins & route to market – Premium pricing – Scaling potential (source of funding) – Exit potential • Proven business model suitable for the industry 19 May 2009 Slide: 13
  • 14. Business Model - Reality • Under-pricing & low gross margin – Value to customer not fully understood – Costing direct cost of sales – Scaling and exit potential damaged – Gross margin – “can be improved later as model evolves” • Direct sales where price is too low to support direct sales effort • Lead time to sales underestimated 19 May 2009 Slide: 14
  • 15. Raising Finance - to build what? • What do you want to build? – Risk / Reward expectation of promoter – Revenues, profitability, technical leadership – Potential size of company and size of opportunity – What will company balance sheet and share structure look like in 4 year‟s time? 19 May 2009 Slide: 15
  • 16. Raising Finance - VC expectations • If raising funds from venture capital - to VC or not to VC? – Understand venture capitalists • Wants to invest! • Fund manager – measured by returns • Funds capacity, Funds focus (tech, stage, geo) • What are value enhancing events/milestones for business (investment rounds) • Adding value - recruitment, market access, business systems, other money 19 May 2009 Slide: 16
  • 17. Raising Finance - Valuation • Valuation of early stage tech companies is a function of: – Potential size of “success” - BHO – Risk associated with company development • where is it at now • incremental funds to achieve value milestones – Probability of success – Total capital needed to succeed – Availability of capital – competition for deals and possible later investors – “Confidence” of investor of value add 19 May 2009 Slide: 17
  • 18. Raising Finance - Reality • Family friends and…. Revenues – most common route to finance business – few go vc route • Inexperienced teams forget they are selling an investment opportunity – not listening to the buying signals • Undercapitalised technology companies growing too slowly – fix it or……leave it? 19 May 2009 Slide: 18
  • 19. Drew O‟Sullivan drew.osullivan@4lv.ie Tel: 01 6333604 19 May 2009 Slide: 19