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Incoherent Ramblings of a VC

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  1. Incoherent Ramblings of a VC Brian Caulfield Investment Director Trinity Venture Capital

  2. Agenda • Introductions • The post-bubble era • Building your board • Traps for the unwary… • Hope… • Q&A

  3. My background • Engineering graduate (TCD) 1986 • ESPRIT project research 1986-1989 • Landis & Gyr 1989-1992 • Co-founded Peregrine Systems 1992 • Renamed Exceptis Technologies August 2000 • Sold to Trintech (Nasdaq: TTPA) November 2000 • Founder director/shareholder of Prediction Dynamics 2000 • Went into liquidation 2004 • Co-founded Similarity Systems 2001 • With CEO, Garry Moroney • Sold to Informatica (Nasdaq: INFA) January 2006 • Joined Trinity Venture Capital 2002 • Member ICT Ireland Governing Board and CTVR Advisory Board

  4. So why VC?

  5. The post “Post-Bubble” era …now we really are over it…

  6. The Bubble slide… Source: Venture Ec onomics

  7. A clear pattern… • Back to doing it the old-fashioned way… • VC investment levels are now generally back to pre-bubble levels • Average size of deals is showing an upward trend • Numbers of deals are pretty stable • The IPO market is back…if not at the same level • more focus on European IPOs (AIM market) • and IPOs are not as attractive as they used to be

  8. The old-fashioned way… Idea isFeasible TechnologyWorks A Customer Buys P(success) = 80% Req’d IRR = 30% P(success) = 50% Req’d IRR = 50% P(success) = 40% Req’d IRR = 70% ExpansionCaptial P(success) = 30% Req’d IRR = 100% Risk (ß) Capital Seed Funding R&DCapital Go-to-MarketCaptial

  9. Importance of valuation? Time 1970s 1980s Early 1990s Bubble Company Apple Microsoft Cisco Sun AOL Ciena Boo.com Webvan Capital raised US$ 8.6 m 1.0 m 2.4 m 39.0 m 17.0 m 40.6 m 135.0 m 375.0 m Value now US$ 8 B 347 B 140 B 36 B 140 B 4 B Bust Bust

  10. Building your board

  11. Board representation, etc. • Most VC investors will want to be represented on your board • Should add value, corporate governance and discipline • Ideal board post VC investment? • 2 executives • 2 investor representatives (assuming you have two investors) • 2 high quality non-executives with specific know-how driven by company’s needs • Sectoral, i.e. your market • Functional, e.g. sales and marketing or finance • Independent non-executive chairman • VC can help to recruit the right board

  12. How to build the board? • Slowly! • Keep it small early on • It is easy to put someone on a board and very difficult to get them off • Think about how the board should develop over time • Think carefully about the value that a new board member adds • Avoid classic mistakes… • Too many executives on the board • Board already “full” prior to investment • Family members on the board • People with “business experience” on the board

  13. Traps for the unwary… (or, a personal view on where it all goes wrong for university spin-outs…and other start- ups)

  14. A personal view…1 • The difficulty of getting past university TTO with a fundable proposition • Take advice before you reach an agreement • Everything is negotiable • Equity greed • 100% of nothing is nothing… • Mis-allocating value between technology and execution • The value is not all in the technology • Inadequate commitment • You can’t do this and be Head of Department too… • Building the board badly • It’s very easy to put someone on your board…and very difficult to get them off • Over-ambitious projections • Sales • Cash receipts

  15. A personal view…2 • Inadequate customer focus • You must focus on what delivers value to a customer • The value delivered must be sufficient • to overcome risk concerns • to be a priority for the customer…does it move the needle? • But don’t let a single customer drive your specification • Lack of clarity regarding IP ownership • Institution/founder/research partner issues • Beta customer issues • Not hiring (or valuing) the right expertise • You are probably not the CEO (or VP of Sales, or VP of Engineering) because you have never done it before • You rarely have the time to learn on the job • Good CEOs cost money and big equity but they’ll make you rich • Fear of losing control • Would you let your child drive a car in Bangalore?

  16. Hope… (Some personal exit stories)

  17. Some Personal Exit Stories • Exceptis Technologies • Sold to Trintech (Nasdaq: TTPA) November 2000 • $26m stock • Key lesson: Cash is King and timing is everything • Similarity Systems • Sold to Informatica (Nasdaq: INFA) January 2006 • $55m cash • Key lesson: Momentum counts • SteelTrace • Sold to Compuware (Nasdaq: CPWR) April 2006 • $20m cash • Key lesson: Importance of investor alignment

  18. Thank you. Questions? Contact information T: +353-1-205 7700 E: brian@tvc.com W: www.tvc.com

  19. Trinity Venture Capital • Trinity Venture Capital was established in September 1997 • Trinity Venture Capital manages : • Trinity Venture Fund 1 .. .. .. .. .. .. €24m • Trinity Venture Fund 2 .. .. .. .. .. .. €139m • Investor in early and growth stage technology companies in Ireland

  20. Investment Strategy • Focus on software, complex hardware and medical device companies, with their own IP, selling to corporates • Invest early stage, high growth potential • Identify the compelling reason for purchase of product offering (must have) • Help build management team • Take an active role in setting company strategy • Introduce quality partners Sales momentum Reference customers Product development

  21. What VCs want…and why (and the importance of business planning)

  22. 1. Market 2. People 3. Technology Great people with great technology and a poor market? Great people in a great market with poor technology? Poor people in a great market with great technology? What VCs always wanted…

  23. And now they want more… • Strong, experienced team with very commercial focus • Serial entrepreneurs reduce risk • The old dog for the hard road • Product solving a critical business need • Multiple customer(s) buy the product at a price that gives a good profit • Clear business case for the customer • Ideas backed by plans - clear (short) paths • to revenue • to cashflow breakeven • Focus on capital efficiency • Doing a lot with a little • Bootstrapping where possible • Risk management – “what happens if…”

  24. Funding development Bootstrapping & 3 “F”s Angels & seed VC investors First round venture capital Second round venture capital Commercial development Market identification & quantification Targeting “beta” customers Early adopter sales “Chasm crossing” or mass market Team development Entrepreneur & CTO Sales director Operations team CFO Product development Proof of concept Beta product Product version 1.x Product version 2.x

  25. Funding development Bootstrapping & 3 “F”s Angels & seed VC investors First round venture capital Second round venture capital Eliminate market risk Commercial development Market identification & quantification Targeting “beta” customers Early adopter sales “Chasm crossing” or mass market Eliminate execution risk Team development Eliminate technology risk Entrepreneur & CTO Sales director Operations team CFO Product development Proof of concept Beta product Product version 1.x Product version 2.x

  26. Mar April May Jun July Aug Sept. Oct Nov Dec Business planning Product Development Core engine framework Testable prototype of core engine Demonstratable prototype of engine Pilot Prototype Pilot site implementation Business/ Market Development Build list of product requirements Make first contact with potential pilot customers Carry out prototype demos Develop sales plan – start selling Develop marketing story People Count Financing Develop Business Case Present to investors Close deal ABSOLUTE DEADLINES 2 3 4 6 7 First pilot site in place Business case completed Financing agreed Prototype ready to demo

  27. Product roadmap Objective for each release Additional component development Initial development focused on core technology Features eliminated from early product versions GUI development focused on sales & marketing requirements GUI for programmer test only

  28. Evolution of terms (from “love letters” to “revenge letters” and back to “term sheets”)

  29. So what’s a term sheet? • An expression of the main commercial terms on which an investor proposes to invest • Investment sum and valuation • Share structure • Board representation • Option pool • Other rights • Usually non-binding, apart from issues such as • Confidentiality • Exclusivity • Payment of fees • Conditions precedent…investment subject to • Due diligence • Other conditions

  30. What should I expect? • Financial instruments you have never heard of… • Redeemable preference shares (“prefs”) • Participating preferred shares • Convertible redeemable preference shares (“creeps”) • Cumulative redeemable preference shares • Make sure you understand the economics clearly • Don’t focus on percentage…focus on the cash waterfall on exit • Downside protections for the venture capitalist • Anti-dilution, exit preference • Management and control • Board composition • Tag, drag and agreement to sell • Transfer of shares (management vesting)

  31. Understanding the economics • It’s not just about percentage… • Think about value at exit • Think about how much capital you need to get there • And percentage does not equal control • What money comes out first in an exit? • Debt • Exit preferences • Any accumulated coupon • How much comes out before the ordinary shares participate? • The so called “pref pile” • Look at what we look at…the cash waterfall on exit

  32. Advice... • Expect it to take at least 3 months • 6-12 weeks post agreed term sheet • But plan conservatively • Advisors can help • Peers/CEOs who have been through the process • Quality non-execs • Experienced legal/corporate finance advisors • …but don’t be afraid to contact VCs directly • Be cautious with milestones • You may be tying your own noose • Be open • Be realistic...

  33. Some questions to answer… • What does your product do for a customer? • What is your value proposition? • Why will lots of customers buy? • Who are your customers? • What do you plan to use the capital for? • What are the key management hires you need to make? • What is your channel to market and sales strategy? • How will you create barriers to entry? • Who are your competitors? • Direct and indirect • Don’t say “we have none” • How will you exit?

  34. More plagiarism (With more apologies to Guy Kawasaki, too)

  35. Top Ten Lies of Enterpreneurs • “Our projections are conservative” • “Gartner says our market will be $50 billion by 2007” • “Boeing will sign our contract next week” • “Key employees will join us as soon as we get funded” • “No one else is doing what we do” • “Several VCs are doing due diligence” • “Oracle is too slow to be a threat” • “Beta sites will pay to test our software” • “Patents make our business defensible” • “All we have to do is get 1% of the market”

  36. Top Ten Lies of Venture Capitalists • “We can make a quick decision” • “I liked your company but my partners didn’t” • “If you get a lead investor, we’ll follow” • “Show us some traction and we’ll invest” • “We have lots of dry powder” • “We’re investing in your team” • “We saw this coming, so we didn’t invest in B2B or B2C” • “This is a vanilla term sheet” • “We can open doors for you at major companies” • “We like early stage investing”