Insight into the mind of a Venture Capitalist


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Must-read for anyone who is looking for VC funding now or is planning to do in the future!

This no-punches-pulled crash course on VC funding was delivered by two VCs, Patrick Polak of Newion Investments Management and Marc Lambrechts (Capricorn Venture Partners) at the Benelux Venture Forum.

Inside you'll find explanation of why VCs do the things they do, as well as excellent tips on the content and structure of your business plan and execution plan, forming your team and overall wooing the next VC you come across.

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Insight into the mind of a Venture Capitalist

  1. 1. Insight - the mind of a VC Marc Lambrechts - Capricorn Venture Partners Patrick Polak – Newion Investments Management BVF Leuven – 2011-05-16
  2. 2. Or…How many clichés can you present in 20 minutes…
  3. 3. Your speakers today• Dr ir Marc Lambrechts • Ir Patrick H. Polak (1965) – research in microsystems and PhD on – TU Delft, Aerospace Engineering (1984- biosensors at KU Leuven 1992) – industrial R&D experience at Terumo – Founder, COO IT company (1991-1996) Europe – RTD programme management experience – VC Investment manager (1997-2000) at IWT – VC: Managing Partner Newion Investments – + 10 years experience as senior investment (2001-….) manager in early stage venture capital – 18 Relevant Board seats since 1997 – technology fusion as special area of • Newion Investments Management interest – Founded in 2000 – board member Boondoggle, fluXXion, Neosens, Leuven.Inc – Independent and partners-owned• Capricorn Venture Partners – Benelux Focus; located in Heerenveen and – founded in 1993 Eindhoven, The Netherlands – independent and partners-owned – Investing from Newion Investments II and – pan-European activity, located in Leuven, Private Plus Fund Belgium – hands-on, early stage & technology focus – investing out of Capricorn Cleantech Fund and Capricorn Health-tech Fund2011-05-16 Insight the mind of a VC 3
  4. 4. Portfolio examples4 Insight the mind of a VC 2011-05-16
  5. 5. Portfolio examples
  6. 6. Differences between Private Equity and Venture CapitalPrivate Equity invests in private Venture Capital invests in fast companies growing and ambitious companiesThe invested amounts will go to the old shareholders and, in The invested amounts will be invested in the company to general, bank loans are involved accelerate growth. for the acquisition finance. The investors concentrate on Loans will be repaid by the cash rapid market penetration and flow of the company. increase of market share, andThe investors concentrate primarily acceleration of product on maximizing of cash flow, and development. strategy
  7. 7. Who is the client of a VC?• Is it the Company where the VC wants to invest in?• Is it the “Exit partner” where the VC wants to sell it’s shares to? – Strategic, Financial, Stock Market?• The client of a VC are its Shareholders: Banks, Institutional Investors, Pension Funds, Informal Investors. – For Investors, VC’s are just a part of their investment mix: a asset class with a high risk – high reward. • They invest in: Private Equity for LBO’s, stock markets, Hedge Funds, VC’s…
  8. 8. The Venture Capital model € IP knowledge €€€€ experience + €€€€proof of concept business plan €€€€ + market €€€€ customers .. entrepreneurs and team (TTO) investors8 Insight the mind of a VC 2011-05-16
  9. 9. Tech VC’s prefer to invest in…• Entrepreneurs and a team• Technology as sustainable competitive advantage – strong and clean intellectual property/capital – proof of concepts exists and mode of action is understood• A business model we understand and like• Growing and huge markets• ‘Need to have’ proposals with ‘identified customer pain’• Focus combined with mutant potential• Well funded and capital efficient companies• Exit perspective @ 5 to 10 x multiple 9 Insight the mind of a VC 2011-05-16
  10. 10. Probability of Success• Technical Success 60 %• Commercial Success 50 %• Economic Success 40 % Overall Probability 12 %10 Insight the mind of a VC 2011-05-16
  11. 11. ….can a VC make a living?• Track record Fund level: extreme good Returns: Net IRR > 20%! – after all costs, failures, etc…• That is why VC’s look for IRR’s of >40%/company!• No track record, no next fund! Source: Evca-Thompson study july 2009 Top Quarter Net IRR Venture Funds 10 year 5,5% Venture Funds 10 year Net IRR -1,4% Newion Investments Net IRR 2001-2010 22% Newion Investments DPI 2001-2010 2,5
  12. 12. Organization of a VC Limited Partner 1 Limited Partner 2 Limited Partner 3 Limited Partner n Fund Management Advisory Board Investment Committee/Board Newion Investments Newion Investments Management Managing partners Investment Directors Investment managersCompany 1 Company 2 Company 3 Company n Analysts
  13. 13. Lifecycle of a VC... • In general, VC’s are “closed-end Funds” – Meaning that they have to close their fund after a certain time. – 5 years investing, 5 years ‘managing’ • This influences the way you and the VC work together! – Early stage company in the last year FUND I of investing for a VC??..... How long can the VC support your growth andNew companies Support companies needs? FUND II New companies Support companies FUND III New companies Support companies
  14. 14. Process within a VCIntroduction Research stage and Exit Value creation stage stage negotiations stageElevator Pitch, Business plan, execution Building team and company M&AExec summary plan, multiple Partnerships, financial advisors,Business plan discussions, references, reporting, execution plans Analysts, third parties third party analysts and Due involvement, due exposure, M&A if needed Diligence diligence Lawyers NDA Termsheet Shareholders Financing Share Purchase agreement rounds Agreement Investment Investment manager, analyst Manager, Investment director, analyst and investment Analyst directors Go/no go Team Go/no go Team + Board Go/no go Team + Board
  15. 15. Prepare yourself• Think the whole process through, just like you sell your products and services: Fund raising is a complex sales cycle• Always make sure the information you provide is consistent during the whole process• Make sure you prepare all the necessary data• Prepare your references• Work with professional Advisors especially Lawyers and Tax advisors• Choose the right VC partner: it is a business marriage (same type of companies in their portfolio, industry knowledge, experiences – no first timers -, money in the bank). In a syndicate: make sure all VC’s are aligned with the same expectations, investment philosophy and “mid term visions”.• Ask references from the VC’s• Keep momentum all the time – For a VC it is “killing” if the project is stalled for weeks because the entrepreneur has to deliver something…• 1 VC can ask 1000 stupid questions, more then 10 wise entrepreneurs can answer….
  16. 16. Elevator Pitch ExampleHello Mr. Green,My name is Georges Leclanché, CEO of CleanStore, a French company activein utility-scale electricity storage. We solve the problem of intermittent powergeneration of wind or solar farms and experience increasing market tractionfrom utilities and operators active in renewable energy.Our solution consists of modular battery-based units for load balancing andenergy storage. In comparison with other systems on the market, we havedemonstrated a 10% higher efficiency at half of the investment cost (wellbelow € 200k/MWh) and with minimal operational cost. Our systems arebased on an innovative patented cell chemistry using cheap, safe andabundant materials.We plan to raise a € 5 million series B round by the end of the year and wouldlike to present to Empedocles Ventures our investment case. Are youinterested in receiving more information in preparation of a meeting?16 Insight the mind of a VC 2011-05-16
  17. 17. Business plans…strategy without execution is hallucinationBusiness Plan Execution plan: What will you do within the next• Team 8 quarters• Vision • Product development and road map• Business model • Marketing• Products and solutions • Organization• Intellectual Property (if any) and strategy • Roll out plan:• Market and Market developments – Partner strategy (if any) and actions/timing – Internationalization (if any) and• Product developments actions/timing• Competition • Analyst strategy• Clients (and future clients…) • Sales and account plans• Business cases for your clients• Organization and structure (incl The Execution plan is updated every quarter: on shareholders) which items have been done, not done, changed• History etc, and how this influences the next 8 quarters.• Financials (P&L, Balance sheets, Cash flow forecasts)• Sales and pipeline• Use of proceeds Make sure that all this is done and written before you approach a VC. And make sure it is “ready for due diligence”. Preparation is key for a smooth process
  18. 18. Why investments fail?• Technology – The technology being developed by a start-up may just plain not work. – The technology works in the lab, but takes too long to scale up to a point where the economics work. – The technology works, but something better comes along.• Market – The dogs wont eat the dog food. – Existing solutions may be "sticky" because of existing infrastructure. – The hoped-for market never materializes within the investment timeframe.• People – Gaps in the management team skill set. – Management teams that dont know how to use their Board. – Investors who push for a more capital-intensive growth path.Source : Rob Day venture-investments-fail/ 18 Insight the mind of a VC 2011-05-16
  19. 19. Choosing the business modelLeo Baekeland on the IP license business model"I firmly intended to escape the recurrence of business occupations, as in myVelox days. So I planned, instead of manufacturing myself, to grant licenses toestablished manufacturing concerns, especially experienced in plastics.But I soon was confronted with a repetition of my former experience withVelox: that it was very difficult to teach new methods to men who hadacquired routine in older processes. The preparation of the new resinoid andits molding compositions, which to me seemed very simple, appeared eithervery difficult or needlessly complicated to others.Reluctantly I had to start manufacturing the raw materials in a sufficientlyadvanced stage so that the users had only to complete the operation ofmolding and polymerization.“See also ”The Baekeland story - Lessons for today’s ventures in new materials” Insight the mind of a VC 2011-05-16 19
  20. 20. Team formation• Get business & entrepreneurial experience in the team• Do not force researchers in a CEO role• Build multidisciplinary teams (not all engineers!)• International exposure and language skills• Humans are not scalable• Do not expect the same salary and goodies as in a corporate environment• Key persons that you have to pay more as the founders?• No function in a start-up company is forever• Keep you friends as friends• And keep your Cap Table clean…• Foresee “good leaver – bad leaver” conditions in shareholders agreement and stock option plans 20 Insight the mind of a VC 2011-05-16
  21. 21. ….Some lies….• …Told by Entrepreneurs: • …Told by VC’s: – The market is $2.5 billion – Our money is different! today going to $ 7.5 – There is no need for billion in 2014! signing a NDA! No one in – BMW, GE and Phillips the industry does! have selected our – We can recruit a team of products. first- class of directors – Cisco wants to become a – I will become your board strategic partner member and will be your full time advisor
  22. 22. Conclusion“Strategy without Execution is Hallucination“ (Steve Ballmer CEO Microsoft) Do not try to build castles in the sky…VC’s are still very cautious and “there is no such thing as a free lunch”. Choose the right partners! It is a business marriage… There is no “success guaranteed” recipe! Prepare! Prepare!! Prepare!!! Stay focused, have fun!
  23. 23. For further reading•••• (legal terms)••• TechnologyCompany.pdf•• (silicon valley blog)••• http://www.cleantech.com23 Insight the mind of a VC 2011-05-16
  24. 24. For more information Capricorn Venture Partners Newion Investments Management Dr ir Marc Lambrechts ir Patrick Polak Marc at capricorn dot be Polak at newion-investments dot com Lei 19/1, B-3000 Businesspark Friesland West 27b 8466 SL Leuven, Belgium Nijehaske, The Netherlands Tel. +32 16 28.41.00 Tel: +31513640633 www.newion-investments.com Insight the mind of a VC 24
  25. 25. Capricorn’s investment strategy Companies meeting the following criteria:Geography core activities in the heart of Europe and co-investments in other areas alongside strong and return-driven local VC partnersFinancial instruments equity investments resulting in a significant minority stakeTechnology stage minimum requirement: a proof of concept exists and the mode of action is understood; with a strong preference for defendable intellectual propertyCompany stage € 0.5 to 5 M initial investment in the first and second VC rounds; reserve for follow-on investmentsExit perspective activities applicable to a growing market segment with an exit window of 3 to 7 years after initial investment 25 Insight the mind of a VC 2011-05-16
  26. 26. Newion’s investment strategy Companies meeting the following criteria:Geography core activities in the Benelux-investments and in other areas alongside strong and return-driven local VC partners as long as there is a strong Benelux ‘angle’Financial instruments equity investments resulting in a significant minority stake (minimum 20%)Company stage minimum requirement: First revenues, business model shows traction. Market validation is there. Intellectual property is thereTechnology focus Business to Business Software, innovation is an existing marketCompany stage € 0.5 to € 2 mln initial investment in the first and second VC rounds; reserve for follow-on investments up to max € 4 mlnExit perspective activities applicable to a growing market segment with an exit window of 3 to 7 years after initial investment 26 Insight the mind of a VC 2011-05-16