Working with the Venture Capital Community
Presented by Grady Vanderhoofven Meritus Ventures, L.P. Southern Appalachian Fund, L.P.
Carolina Connect Conference 2007
October 11, 2007
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Venture Capital
Venture Capital: “Funds made available for
startup firms and small businesses with exceptional growth potential. Managerial and technical expertise are often also provided.”
A Venture Capitalist: “A speculator who
makes money available for innovative projects (especially in high technology).”
A Venture Capital Firm: “An investment
company that invests its shareholders’ money in startups and other risky but potentially very profitable ventures.”
Source: Ask.com
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What Does This Mean?
Key words:
Investment; anticipation of return; not a grant or a gift Risk; not a sure thing, but calculated/studied Considerable … Profit; potential exceeds traditional / mainstream
investments
New / startup / fresh / innovative enterprise; differentiated from others Shareholder’s; other people’s money
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Capital Continuum
Seed Early
Early
Growth
Expansio
Later
Seed Stage – Product/service in development. Company is managed n by one or two founders and is likely not fully operational/functional. The company is usually less than 18 months old. Early Stage – Product/service in testing or pilot production. In some cases, the product may be commercially available. Company has an incomplete management team and may or may not be generating revenues. The company is usually less than three years old. Growth Stage – Product/service in production and commercially available. Company has a complete management team and demonstrates significant revenue growth, but the company may or may not be showing a profit. The company is usually more than three years old. Later Stage – Product/service widely available. Company is generating on-going revenue, is probably cash flow positive, and is likely profitable.
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Capital Sources
Seed
Savings Credit cards Friends Family Angels
Early
Angels Strategic Investors + VCs
Growth
Strategic Investors
Later
Strategic Investors
Banks
Private Equity
Banks
Investment Banks
+ VCs
SBIR/STTR +
Select VCs
Private Equity/LBO
+ VCs
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Understanding a Venture Capitalist
What do VCs want? ROI and IRR (large and timely return on investment) What do VCs do? Invest in companies Management, Market, Product/Service, Capital Manage risk and take calculated risks Are interested in “shared risk” Due diligence, covenants, BOD Place a premium on competitive advantage (e.g., IP) Add value beyond the capital invested Networks, experience, objectivity BOD representation
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What do VCs Look For?
Workable business plan based on a solid business
model and strategy; must solve a real problem
Large, growing, and verifiable market Realistic but exciting financial projections Measurable milestones Protectable competitive advantage Solid management with relevant experience High-value-added co-investors High return (e.g., 30% IRR) & viable exit strategy
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VCs Manage Risk
Anticipate 20-60-20 investment performance Require high returns to justify risk Seek well-defined exit strategies Ask an exhaustive number of pre-investment
questions
Are interested in “shared risk” Value management capability more than technology Require third-party certification/validation Invest in what they know (e.g., market/technology) Place a premium on competitive advantage (e.g., IP)
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Steps in the Investment Process
Introduction and initial information gathering Getting acquainted and gathering of additional
information
Face-to-face meeting, review of business plan
and financial statements (term sheet) sheet)
Meeting with Investment Committee (term Due Diligence Negotiation of investment documents Closing of investment
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A Rural Business Investment Company www.meritusventures.com
A New Markets Venture Capital Company www.southappfund.com
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Meritus Ventures / Southern Appalachian Fund
$53M Under Management
$49M equity & $4M operational assistance funding 33 investors from throughout United States 90% institutional (banks, fin. inst., foundations, TVA, UK, other) Two fund managers / offices Ray Moncrief – London, KY Grady Vanderhoofven – Oak Ridge, TN Investment Activity 9/30/03 through 9/30/07 11 companies in central and southern Appalachia Kentucky, Tennessee, South Carolina, Mississippi $9.3M equity investments; $1.3M operational assistance Co-investors have invested additional $55M+
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Investment Strategy
Number of Investments:
SAF currently has 8 portfolio companies
Meritus will invest in 10 – 15 companies over a period of 3 – 4 years Focus on central and southern Appalachia Invest primarily in “underinvested” areas, including rural and low income
Geography
Investment Focus
Generalists with preference for technology (but not limited)
Don’t invest in pharma, biotech, real estate, traditional retail, restaurants, individual franchises, “lifestyle businesses”
Investment size: $250K - $2.5M Investment Approach
Lead or co-invest
Invest in multiple rounds - Milestone-based financing
Exits: Hold investments 4 – 7 years, and exit via merger/acquisition, management buyout, other Targeted return:
15% - 20% IRR for the fund
10X in 5 years with respect to deal pricing 11
Geographic Focus of Investments
Entirety of:
Kentucky Tennessee Arkansas
Appalachian Counties of:
Ohio West Virginia Virginia North Carolina South Carolina Georgia Alabama Mississippi
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Portfolio of Technology-Based Companies
www.zipitwireless.com Greenville, SC
www.proteindiscovery.com Knoxville, TN
www.internap.com Knoxville, TN
www.smartfurniture.com Chattanooga, TN
www.tricycleinc.com Chattanooga, TN
www.numarkets.com Etowah, TN
www.tier1performance.com Covington, KY
www.bbrwm.com Louisville, KY
www.semisouth.com Starkville, MS
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A Vision for the Future …
Volume 2, Issue 3, 2006
http://www.frbsf.org/publications/ community/review/122006/index.html
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Working with the Venture Capital Community
Carolina Connect Conference 2006
Thank You
Grady S. Vanderhoofven 865-220-2020 grady@meritusventures.com www.meritusventures.com
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