Venture Capital Investing A Primer
William Quigley Managing Director Clearstone Venture Partners william@clearstone.com
CLEAR STO 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
CLEAR STO 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
CLEAR STO 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
CLEAR STO 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
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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
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Investment Stages
Most VC‟s have a preference for a particular investment stage. Five Stages:
– – – – – Seed Start-up Early Expansion Mezzanine/Bridge
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Stage/Characteristic
Stage
Seed
Investment
$50-500K
Characteristics
- Founder(s) only - No product - No customers - Primary risk: R&D - Mgmt. team incomplete - Prototype or beta product - No revenues - Limited customer interest - Some capital invested - Primary risk: market accept.
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Start-Up
$500K to $1MM
Stage/Characteristic
Stage
Early
Investment
$1MM - $3MM
Characteristics
- Most of team in place - Limited revenues - Not profitable - Primary risk:execution - Meaningful revenues - Achieving profitability - Growing customer base - Primary risk: competition
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Expansion $3MM - $10MM
Stage/Characteristic
Stage Investment Characteristics
Mezzanine/ $10MM - $20MM - Significant revenues Bridge - Profitable
- Industry player - IPO in 6-12 months - Risk much lower
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The Role of the VC
Board involvement Management recruitment Future capital raising Access to business network Strategy development Patience!
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Targeted Industries
Most of the $10 billion invested by VC‟s in 1997 was concentrated in five industries. Why these? • • • • • Information Technology Medical Services/Devices Communications Biotechnology Some Retail
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How Do VC’s Make Money?
Source of VC Income:
– Collect management fees from L.P.’s - 2 1/2% annually – Share profits with L.P.’s 20/80 split on investment gains How do VC’s earn their income?
5% 95%
Mgmt. Fee
Investment Gains
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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
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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
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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?
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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?
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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?
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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 50% Some degree of technology Cash flow break-even < $5M Sourced the deal 25% ownership or greater First institutional investor
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Odds of Getting a Deal Done?
Hurdle
1. Review the plan and
Likelihood of Occurring
- 1 in 15 - 6 in 10 - 7 in 10
conclude it makes sense 2. Meet the team and like them 3. Be attracted to the market opportunity and the company strategy 4. Introduce team to the other partners and get their buy-in
- 7 in 10
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Odds of Getting a Deal Done?
Hurdle
5. Complete the due diligence process satisfactorily 6. Get a term sheet agreed to in principle 7. Find co-investors - if necessary - 8 in 10 - 9.9 in 10
Likelihood of Occurring
- 7 in 10
8. Get legal documentation done
9. Fund the company
- 9 in 10
EQUATES TO 1%
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Commonly Asked Questions
“Will I have to give up control of my company?”
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Commonly Asked Questions
“Why don’t VC’s sign NDA’s?”
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Commonly Asked Questions
“Raising money - all at once or spread out over time?”
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Commonly Asked Questions
“Its a great invention, so why aren’t they interested?”
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Commonly Asked Questions
“Why do VC’s want to know the other firms that I am talking to?”
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Commonly Asked Questions
“When should I initiate contact with a VC?”
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Venture Capital
Industry Overview Screening Venture Opportunities The Venture Capital Process The Business Plan Valuation Exit Getting in Touch
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How do you Contact a VC?
Introductions are best:
– Attorney – Accountant
– Banker
– Angel Investor – Industry Executive
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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
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Venture Capital
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