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Prepared for James J. Hill Reference Library March 8, 2006

How to Secure Venture Capital. Prepared for James J. Hill Reference Library March 8, 2006. Agenda. Venture Capital Industry Capturing the Attention of a Venture Capitalist Deal Killers Summary. Venture Capital Industry. Valuations: Pre-Bubble Normal. Small VC Funds Disappearing.

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Prepared for James J. Hill Reference Library March 8, 2006

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  1. How to Secure Venture Capital Prepared for James J. Hill Reference Library March 8, 2006

  2. Agenda • Venture Capital Industry • Capturing the Attention of a Venture Capitalist • Deal Killers • Summary

  3. Venture Capital Industry

  4. Valuations: Pre-Bubble Normal

  5. Small VC Funds Disappearing

  6. U.S. Venture Capital Market Trend Info Group Median • Expansion – 53% • Later Stage – 18% • Early Stage – 22% • Seed Stage – 4% Source: PWC MoneyTree

  7. Minnesota vs. U.S. Venture Capital Market Trend Info Average MN vs. U.S VC Investment = 1.54% Source: PWC MoneyTree

  8. Capturing the Attention of a VC

  9. Finding the Right VC

  10. Courting the Right VC • Online Dating • Anonymous • Highly Competitive • 1 Chance

  11. Management Relevant domain expertise Fundable Product/Service Explicit customer need Clear and compelling value proposition (ROI) Market Size (> $250M) and sustainable business drivers Target segment well defined Validation Customers, customers, customers Maturity of the distribution plan Deal Reasonable valuation and terms Raising enough money to hit meaningful milestones Mini Due Diligence ProcessIs it “Venture Capable”

  12. How Hard can it Be?

  13. A Rapidly Evolving World • Yahoo raises $2 million • Amazon goes live • Netscape goes public • 45% heard of www • AltaVista 16 million pages 1995

  14. Model VC Portfolio • $1.0 million commitment • $2.0 million in distributed capital • 20% IRR

  15. Risk Return Ratio

  16. It’s Very Hard…

  17. Vulture Capitalist

  18. Management

  19. Moe, Curly, Larry

  20. Investing In Talent Factors considered most important by investment professionals (Weighted importance out of 100*) Management Team 37 24 Market Sector Business Model 20 Proprietary Product/Service 19 Source: Spencer Stuart/NVCA VC-backed Leadership survey

  21. “As a founder, think hardest about the team. Are these the people I want to be in trouble with for the next 5, 10, 15 years of my life? Because as you build a new business, one thing’s for sure: you will get into trouble.”John Doerr, Kleiner Perkins Caufield & Byers

  22. Product/Service

  23. Technology is only the Ante

  24. Explicit Need / Compelling ROI IT Budgets and ROI: “Purse strings are loosening ever so slightly, but that won’t slow the quest for better metrics” All Customer ReviewsAverage Customer Review:

  25. Sustaining vs. Disruptive Technologies • Sustaining Technology • Foster improved product performance • Disruptive Technology • Bring to the market a very different value proposition The Innovator’s Dilemma – Clayton Christensen

  26. Sustaining Technology B A Sustaining vs. Disruptive Technologies Cost Sustaining Technology • Improves performance along an existing utility curve Performance

  27. B Disruptive Technology A Sustaining vs. Disruptive Technologies Cost Disruptive Technology • Moves the market to new utility curve Performance

  28. Market

  29. Market Characteristics • Worth Winning • $250 million • Sustainable Drivers • Y2k • Well Defined • Subsegment

  30. Market - What not to say… • We only need a 10% market share • We have no competition • We are the low-cost solution • We conservatively project

  31. Validation

  32. Communicating the Message

  33. Seeing the FutureCustomers and Distribution

  34. Deal

  35. Equity Financing Food Chain Return Expectations Late Stage 20% - 12% IRR Expansion Stage 25% - 15% IRR Late Majority Customers Early Stage – (Sherpa) 50% - 20% IRR Early Majority Customers Seed Stage 100% – 30% IRR Early Adopter Customers Innovation Customers Angels Public Market Friends & Family Institutional - VCs

  36. Return Expectations

  37. Return Expectations 5-10x your investment or 30%+ IRR

  38. Sherpa Pocket Guide to Success Quick Go vs. No Go Decision (4x in 5 Years = 32% IRR)

  39. Deal Killers

  40. Lack of Passion/Urgency Unrealistic Assumptions Underestimating Capital Not Enough Runway Flawed Transaction Model Not Pursuing Multiple Paths Common Mistakes

  41. Summary

  42. Team – Team - Team “Been there, done that” CEO Large/Growing Market Target Market Defined Explicit Problem to Solve “Unfair”, Sustainable Advantage Barriers to Entry for Competition Market Validation Milestones Established “Wow” Advisory / Governing Board Exit Strategy Team – Team - Team “Venture Capable” Opportunity

  43. “It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change.” Charles Darwin, British Naturalist

  44. Randy Komisar, Author of The Monk and the Riddle “Work hard, work passionately, but apply your most precious asset – time – to what is most meaningful to you.”

  45. “When all is said and done, the journey is the reward. There is nothing else.” Randy Komisar, Author of The Monk and the Riddle

  46. Rick Brimacomb Founder, Brimacomb & Associates General Partner, Sherpa Partners Board Member, Minnesota Venture Capital Association 612.803.3169 rick@brimacomb.com rick@sherpapartners.com

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