C L E A R S T O N E
Advertisement
This presentation is the property of its rightful owner.
1 / 62

Venture Capital Investing A Primer William Quigley Managing Director Clearstone Venture Partners [email protected] PowerPoint PPT Presentation

C L E A R S T O N E. V E N T U R E P A R T N E R S. Venture Capital Investing A Primer William Quigley Managing Director Clearstone Venture Partners [email protected] C L E A R S T O N E. V E N T U R E P A R T N E R S. Venture Capital.

Download Presentation

Venture Capital Investing A Primer William Quigley Managing Director Clearstone Venture Partners [email protected]

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital Investing

A Primer

William Quigley

Managing Director

Clearstone Venture Partners

[email protected]


Venture capital

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

“I was seldom able to see an opportunity until it had ceased to be one”

Mark Twain


Venture capital1

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


Industry snapshot

C L E A R S T O N E

V E N T U R E P A R T N E R S

Industry Snapshot

  • 400+ institutional VC firms in the U.S.

  • Geographically concentrated

  • Stage/Industry focused

  • General partners/Limited partners

  • 10 year investment horizon

  • Co-investment with other VC’s common


Typical firm profile

C L E A R S T O N E

V E N T U R E P A R T N E R S

Typical Firm Profile

  • 3 to 4 investment professionals

  • Review 1000+ business plans a year

  • Manage $50 to $200 million in capital

  • Buy equity (preferred stock) - rarely make loans

  • Investment horizon - 3 to 6 years

  • Sources of capital:

    - Pension funds - Corporations

    - College endowments - Wealthy individuals


Investment stages

C L E A R S T O N E

V E N T U R E P A R T N E R S

Investment Stages

Most VC’s have a preference for a particular investment stage.

Five Stages:

  • Seed

  • Start-up

  • Early

  • Expansion

  • Mezzanine/Bridge


Stage characteristic

C L E A R S T O N E

V E N T U R E P A R T N E R S

Stage/Characteristic

StageInvestmentCharacteristics

Seed$50-500K- Founder(s) only

- No product

- No customers

- Primary risk: R&D

Start-Up$500K to $1MM- Mgmt. team incomplete

- Prototype or beta product

- No revenues

- Limited customer interest

- Some capital invested

- Primary risk: marketaccept.


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Stage/Characteristic

StageInvestmentCharacteristics

Early$1MM - $3MM- Most of team in place

- Limited revenues

- Not profitable

- Primary risk:execution

Expansion$3MM - $10MM- Meaningful revenues

- Achieving profitability

- Growing customer base

- Primary risk: competition


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Stage/Characteristic

StageInvestmentCharacteristics

Mezzanine/$10MM - $20MM- Significant revenues

Bridge- Profitable

- Industry player

- IPO in 6-12 months

- Risk much lower


The role of the vc

C L E A R S T O N E

V E N T U R E P A R T N E R S

The Role of the VC

  • Board involvement

  • Management recruitment

  • Future capital raising

  • Access to business network

  • Strategy development

  • Patience!


Targeted industries

Information Technology

Medical Services/Devices

Communications

Biotechnology

Some Retail

C L E A R S T O N E

V E N T U R E P A R T N E R S

Targeted Industries

Most of the $10 billion invested by VC’s in 1997 was

concentrated in five industries.Why these?


How do vc s make money

C L E A R S T O N E

V E N T U R E P A R T N E R S

How Do VC’s Make Money?

  • Collect management fees from L.P.’s - 2 1/2% annually

  • Share profits with L.P.’s - 20/80 split on investment gains

Source of VC Income:

How do VC’s earn their income?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


What do vc s want to see

C L E A R S T O N E

V E N T U R E P A R T N E R S

What Do VC’s Want to See?

Venture capitalists tend to focus on five specific areas

when evaluating a company:

Areas of Focus:

  • Management

  • Marketplace

  • Competition

  • Business Economics

  • Risks


Management

C L E A R S T O N E

V E N T U R E P A R T N E R S

Management

The most important question: Has the team had experience

and success in the same industry?

VC Focus:

  • DIRECT sales experience?

  • Prior P/L responsibility?

  • Personal financial stake?

  • Willingness to share equity

  • “Fire in the belly”?

  • Functional areas covered?


Market

C L E A R S T O N E

V E N T U R E P A R T N E R S

Market

Can management demonstrate a thorough understanding

of the marketplace dynamics?

VC Focus:

  • Market size and growth rate?

  • Market drivers?

  • Customer involvement in the R&D process?

  • Number of competitors?


Competition

C L E A R S T O N E

V E N T U R E P A R T N E R S

Competition

Does management have a clear understanding of the

competitive landscape?

VC Focus:

  • Why are competitors successful?

  • What is the prevailing business model?

  • Barriers to entry?


Business economics

C L E A R S T O N E

V E N T U R E P A R T N E R S

Business Economics

Does management have a deep understanding of the

financial dynamics of the business and industry?

VC Focus:

  • Margins comparable to industry norm?

  • Break-even < 2 years ?

  • Appropriate sales model?

  • Moderate capital intensity?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Risk

Does management recognize, accept, and have strategies to deal with key risks?

VC Focus:

  • Reasonable financial projections?

  • New technology adoption rate?

  • Length of sales cycle?

  • Best and worst case scenarios explored?

  • Regulatory hurdles?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


The venture capital process

C L E A R S T O N E

V E N T U R E P A R T N E R S

The Venture Capital Process

  • Business Plan

  • First Meeting

  • Second Meeting

  • Term Sheet

  • Due Diligence

  • Negotiations


Business plan

C L E A R S T O N E

V E N T U R E P A R T N E R S

Business Plan

“Madam, enclosed please find the novel you commissioned. It is in two volumes.

If I had had more time I could have written it in one.”

Voltaire


Business plan1

C L E A R S T O N E

V E N T U R E P A R T N E R S

Business Plan

#1 objective of the the business plan: Get the VC

interested in hearing more about the opportunity.

Business Plan Basics:

  • Written by the entrepreneur

  • Keep it short

  • Financials (3-5 year proj.)

    • Income statement

    • Balance sheet

    • Cash flow

    • “What-ifs” helpful


Business plan2

C L E A R S T O N E

V E N T U R E P A R T N E R S

Business Plan

  • 50

  • 5

  • 10

Magic Numbers?


Business plan3

C L E A R S T O N E

V E N T U R E P A R T N E R S

Business Plan

Business plan phrases that ‘spook’ VC’s...

  • We have no competition….

  • We conservatively project…..

  • We only need a 10% market share….

  • We will offer the most features at the lowest price….

  • We valued our Internet start-up using multiples of comparable companies…like Netscape, Cisco, Microsoft.…


First meeting

C L E A R S T O N E

V E N T U R E P A R T N E R S

First Meeting

‘Skepticism’ might best describe the venture firm’s

attitude in the first meeting. Don’t be alarmed by this.

The Details:

  • Location: VC’s office

  • Duration: 2-3 hours

  • Attendees: 1 to 2 VC’s

  • Format: Formal presentation with Q/A


Second meeting

C L E A R S T O N E

V E N T U R E P A R T N E R S

Second Meeting

Getting to the second meeting is an important milestone.

The team will now make its case to the entire partnership.

Focus On :

  • Business opportunity - not the technology

  • Addressing concerns of the skeptics - THIS IS CRITICAL!

  • Next steps


What went wrong a few tips

C L E A R S T O N E

V E N T U R E P A R T N E R S

What Went Wrong? - A Few Tips

Dont’s

  • Make vague, ambiguous, or unsubstantiated statements

  • Make reference to unnamed/ mysterious people on the management team

  • Use statistical arguments for market penetration assumptions

  • Use technical jargon

  • Assume you have a deal if there is no term sheet


What went wrong a few tips1

C L E A R S T O N E

V E N T U R E P A R T N E R S

What Went Wrong? - A Few Tips

Dos

  • Involve the entire team

  • Discuss/disclose potential problems

  • Demonstrate financial commitment to the venture

  • Prepare realistic market and sales projections

  • Know your target investor (angel, bank, VC)


What went wrong getting feedback

Some Guidelines:

Needs to be solicited!

From knowledgeable sources

Develop a dialogue first

Avoid answering, debating

Have a market-researcher mindset

“The greatest gift that God hath given us is to see ourselves as others see us.”

Scottish Proverb

C L E A R S T O N E

V E N T U R E P A R T N E R S

What Went Wrong? - Getting Feedback

Getting honest feedback can be challenging…


Term sheet

C L E A R S T O N E

V E N T U R E P A R T N E R S

Term Sheet

After the second meeting, the VC typically provides a

term sheet to the entrepreneur.

Term Sheet - Common questions:

  • Is it a legally binding document?

  • What’s covered?

  • What is it designed to do?

  • Why participating preferred stock?


Term sheet conditions

Post-money valuation

$ amount of the financing

Investors identified

Size of employee option pool

Vesting periods

Key-person insurance

Board representation

Additions to management team, if any

Monitoring covenants, Restrictive covenants

Other deal specific issues

C L E A R S T O N E

V E N T U R E P A R T N E R S

Term Sheet Conditions

The term sheet is intended to embody the overall

conditions of a business agreement. What’s covered?


Due diligence

C L E A R S T O N E

V E N T U R E P A R T N E R S

Due Diligence

The “heavy lifting” for the venture capitalist starts

with the due diligence process.

Due Diligence Overview:

  • Length: 6-12 weeks

  • Will perform up to 100 reference calls

  • Interview customers, former employees, competitors, industry experts

  • Intense legal, financial work


Negotiations

Some flexibility in:

Valuation

Total investment

Vesting periods

Size of option pool

Less flexibility in:

Equity instrument type

Board make-up

Anti-dilution rights

Restrictive covenants

C L E A R S T O N E

V E N T U R E P A R T N E R S

Negotiations

Negotiations take place throughout the due diligence

process. What is negotiable?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


The business plan

C L E A R S T O N E

V E N T U R E P A R T N E R S

The Business Plan

  • Executive Summary

  • Main Body

  • Appendix


Executive summary

Mission statement

Brief company history

Description of investment opportunity

Market overview

Management team

Product & technology

Customers

Strategy

Competition

Capital requirements

C L E A R S T O N E

V E N T U R E P A R T N E R S

Executive Summary

What should the executive summary address?


Main body

C L E A R S T O N E

V E N T U R E P A R T N E R S

Main Body

Management

Key Questions to Address:

  • Who are the key people in the company?

  • Where did they come from, and why are they the right people to run the company?

  • Have they had previous experience and success in growth companies?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Main Body

Product/Technology/Service

Key Questions to Address:

  • What does the customer have access to today?

  • How does it differ from competing offerings

  • What is the superior value proposition to the customer?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Main Body

Marketplace

Key Questions to Address:

  • What is happening in the marketplace? Is it growing, if so, why and at what rate?

  • What is lacking from the market leaders that this product/tech/service will provide?

  • Which customers have been involved in the development of the product and are likely to purchase it?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Main Body

Strategy

Key Questions to Address:

  • Why will the customer be compelled to purchase the product?

  • How will the company maintain its competitive differentiation?

  • What barriers exist/will be created to curtail new entrants?


Appendix

C L E A R S T O N E

V E N T U R E P A R T N E R S

Appendix

Not all business plans require an Appendix section,

but it can be useful.What to include?

  • Relevant industry articles to bolster management claims

  • Major customer testimonials

  • Other information likely to impress those not familiar with the market


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Valuation

StageCriteriaMethodologyRange

Seed - Mgmt. track record Comparables, $400K to $1.5MM

- Market size/growth Whats the “going

- Competition rate” in the region

- Investment to date

Start-up - Market size/growth Comparables$750K to $2.0MM

- Working prototype?

- Team complete?


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Valuation

StageCriteriaMethodologyRange

Early - Market size/growth Comparables$1.5 to $5.0MM

- Revenue run rate

- Gross margin %

- Performance to date

Expansion - Revenue run rate - 1X salesVaries

- Profitability ratios - EBIT multiple

- Performance vs. plan


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Valuation

StageCriteriaMethodologyRange

Mezzanine/ - Market share/size Multiples of Varies

Bridge - IPO environment proxy companies

- Performance

Relative to plan


Supplemental presentation

C L E A R S T O N E

V E N T U R E P A R T N E R S

Venture Capital

Industry Overview

Screening Venture Opportunities

The Venture Capital Process

The Business Plan

Valuation

Exit

Getting in Touch


Exit strategies

C L E A R S T O N E

V E N T U R E P A R T N E R S

Exit Strategies

  • Sale or Merger

    • Most likely exit

  • Initial Public Offering

    • Small fraction go this way

  • Redemption

    • Least attractive

  • Management buy-out

    • Generally not possible


  • Secrets of success

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Secrets of Success?

    • CEO carried a bag

    • Called on same customer base

    • Gross margin > 50%

    • Some degree of technology

    • Cash flow break-even < $5M

    • Sourced the deal

    • 25% ownership or greater

    • First institutional investor

    The Eight

    Commandments


    Odds of getting a deal done

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Odds of Getting a Deal Done?

    HurdleLikelihood of Occurring

    1. Review the plan and- 1 in 15

    conclude it makes sense

    2. Meet the team and like them- 6 in 10

    3. Be attracted to the market - 7 in 10

    opportunity and the company strategy

    4. Introduce team to the other

    partners and get their buy-in - 7 in 10


    Supplemental presentation

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Odds of Getting a Deal Done?

    HurdleLikelihood of Occurring

    5. Complete the due diligence- 7 in 10

    process satisfactorily

    6. Get a term sheet agreed to - 8 in 10

    in principle

    7. Find co-investors - if necessary- 9.9 in 10

    8. Get legal documentation done- 9 in 10

    9. Fund the company EQUATES TO 1%


    Commonly asked questions

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Commonly Asked Questions

    “Will I have to give up control of my company?”


    Commonly asked questions1

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Commonly Asked Questions

    “Why don’t VC’s sign NDA’s?”


    Commonly asked questions2

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Commonly Asked Questions

    “Raising money - all at once or spread out over time?”


    Commonly asked questions3

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Commonly Asked Questions

    “Its a great invention, so why aren’t they interested?”


    Commonly asked questions4

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Commonly Asked Questions

    “Why do VC’s want to know the other firms that I am talking to?”


    Commonly asked questions5

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Commonly Asked Questions

    “When should I initiate contact with a VC?”


    Supplemental presentation

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Venture Capital

    Industry Overview

    Screening Venture Opportunities

    The Venture Capital Process

    The Business Plan

    Valuation

    Exit

    Getting in Touch


    How do you contact a vc

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    How do you Contact a VC?

    Introductions are best:

    • Attorney

    • Accountant

    • Banker

    • Angel Investor

    • Industry Executive


    Supplemental presentation

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Local Resources

    • The Michael Dingman Center at U of MD.

    • The Morino Institute - Netpreneur Program

    • Baltimore/Washington Venture Group

    • NVTC - Emerging Business Network functions

    • Silicon Valley Bank, other community banks

    • Private Investors Network, Grubstakes (networks of angel investors)

    • Pratts Guide to Venture Capital


    Supplemental presentation

    C L E A R S T O N E

    V E N T U R E P A R T N E R S

    Venture Capital


  • Login