Venture Capital Investing: an Overview
Paulo de Rezende Zone Ventures
paulo@zonevc.com (213) 628-2400 www.zonevc.com
Agenda
About Zone Ventures The Business of Venture Capital Financing a Growing Venture
Agenda
About Zone Ventures The Business of Venture Capital Financing a Growing Venture
About Zone Ventures
LA affiliate of Silicon Valley-based VC firm Draper Fisher Jurvetson $135 million under management (Zone Funds I & II) Focus on information technology, advanced materials, and micro-systems Our job: fund entrepreneurs with energy, passion, vision, and experience to build great companies. Our role: help entrepreneurs achieve their maximum potential through team building, partnership, advice, support, and investments
Investment Opportunities
Network Operating Systems Digital Media Technologies Data Management Network Load Balancing
MEMS Next Generation Internet
Distributed Computing
Information technology
Communication Digital Asset Protocols Management Digital Security
Microsystems
Micro-component Fabrication Photonics
Advanced Materials
Software Tools
Quantum Computing
Nanotechnology Distributed Computing
Bioinformatics
Switching Components
Reprogrammable Chips Optoelectronics
Wireless Chipsets Next Generation Power Cells
Tunable Lasers
Semiconductors
Agenda
About Zone Ventures The Business of Venture Capital Financing a Growing Venture
The Business of Venture Capital
Finance new and rapidly growing companies by purchasing equity securities in emerging private companies Assist in the development of new products or services Add value to the company through active participation and expert advice Have a long-term orientation (5 to 7 years to maturity)
RETURN CAPITAL WITH PROFIT TO VENTURE CAPITAL FUND INVESTORS!
Recommended reading: “That Thing Venture Capitalists Do” by Mitchell Berlin, Federal Reserve Bank of Philadelphia
VC Business Cycle
Establish fund Target investment opportunities Raise capital for investment fund Cultivate relationship with limited partners Raise capital for next fund
Generate deal flow and identify high potential startups Screen e evaluate business plans Valuate, negotiate, and structure deals
ADD VALUE: active board membership, contact to later round investors, management recruiting, relationships to other portfolio companies, etc. Craft and execute a “liquidity event”
What VCs are looking for…
…is the most valuable combination of four elements:
Great people with passionate vision Terrific technology solving real customer problems Fast growing, unexplored markets Sound financials and attractive business models
Qualities of attractive business models
Capital efficiency
– Lower capital needs provide higher ROI
Flexibility
– Few fixed assets make it easy to change strategy
Leverage
– Reduce required capital by leveraging resources available in the industry, environment, competitors, partners, government, etc.
Profitability
– Margins (gross and net) must justify the investment
“Quick cash”
– Short cash collection cycles; ideally “get cash first, build afterwards”
“Greed and Fear” dictate investment cycles
As most asset classes, venture capital experiences investment cycles motivated by greed and fear (aka herd mentality) A few examples from my experience:
– – – – – – – 1999: Consumer Internet (B2C) 2000: Application Service Providers (B2B) 2001: Internet applications for Cell Phones (B2C & B2B) 2002: Nanotechnology and Fuel Cells 2003: RFID (Radio Frequency ID) 2004: Social Networks 2005: Digital Media and Search Engines
What’s hot today?
The answer depends whom you ask, since VC firms have proprietary deal flows Following markets or technologies have strong momentum right now (too late to invest as top players are well positioned)
– – – – – – Voice over IP Digital Media related technologies Biotech (drug discovery) Enterprise Application Integration Cell phones (chips, applications and infrastructure) Clean energy
Agenda
About Zone Ventures The Business of Venture Capital Financing a Growing Venture
Financing a growing venture (I)
Seed/Angel Round Instrument: First Round Second Round IPO or acquisition
Options, Common or Preferred Stock $100,000 $400,000 $500,000
Amount raised: Pre-money Post-money
• • • •
Source: Entrepreneur Family & Friends Angels Venture Capital
Management Milestones • • • • Assemble founder team Write business plan Achieve proof of concept Close initial founding
Investors Activities
• Identify entrepreneur • Help structure the company • Close the deal
Financing a growing venture (II)
Seed/Angel Round Instrument: First Round Second Round IPO or acquisition
Preferred Stock
Source: • Venture Capital
Amount raised: Pre-money Post-money
$2,000,000 $6,000,000 $8,000,000
Management Milestones • Hire 3-5 key managers • Finalized product, refine marketing strategies and business model • Attract „serious“ capital (from VC)
Investors Activities
• • • • Due diligence Structure Board of Directors Identify key management candidates Structure employee comp. and pool
Financing a growing venture (III)
Seed/Angel Round Instrument: First Round Second Round IPO or acquisition
Preferred Stock
Source: • Venture Capital
Amount raised: Pre-money Post-money
$10,000,000 $35,000,000 $45,000,000
Management Milestones • • • • Complete key management team Reassess marketing strategy Generate revenue Redefine company strategy
Investors Activities
• • • • Help recruit and select management Help identify additional board members Attract co-investor Attract business partners
Financing a growing venture (IV)
Seed/Angel Round Instrument: First Round Second Round IPO or acquisition
Common Stock
Source: • Public Investors or acquirer
Amount raised: Pre-money Post-money
$ 50,000,000 $200,000,000 $250,000,000
Management Milestones • Achieve revenue and earnings growth objectives • Conduct IPO road show
Investors Activities
• Choose investment bankers • Help identify acquirer
How to approach VCs
Introduction and Networking
– Try to get your plan referred by someone close to a VC
Submit a Business Plan
– Remember: VCs usually do not sign NDAs2!
Pitch your plan
– Well prepared, short, and clear presentation – Remember: talk AND listen!
Visit
– Visit for a demo or meeting – “Air-plane test” and the “chicken and pig” commitment
(2) NDA: Non-Disclosure Agreement
How to deal with VCs
Due diligence
– Prepare your contacts for reference calls during the due diligence – Help the VC in the process (time is precious!)
Negotiating the term sheet
– Valuation is a combination of many things… – Expect little room for valuation negotiation
Be patient but also insist! Priorities may change rapidly within a VC firm.
Before investing, VCs perform due diligence
Check:
– Interest and/or commitments by potential customers to buy the new product or service – Ability to take control of the knowledge and value generated by an innovation – Ability to control the assets necessary to exploit the innovation – Porter Five Forces: Understanding the dynamics of power in the value chain (Suppliers, Buyers, Substitutes, Potential entrants, Rivalry) – Reference on the management team (professional and personal)
Investment Round Timeline
Deal Flow • Passive: web, conferences, referrals, etc. Bus Plan Screening • Identify interesting plans • Analyze, meet, investigate good plans, teams, and technologies • Reply to all Due Diligence • Analyze all aspects of deal • Diligence by lead partner • Formal process • Industry and customers feedback Deal Structuring • Negotiate terms • Interact with coinvestors, company, and legal counsel
• Pro-active: analyze technology sectors and prospect specific deals
• Review closing docs
Ongoing 2 – 6 weeks
As long as needed…
As long as needed…
Recommended reading materials and sources
1.
New Venture Creation : Entrepreneurship for the 21st Century
by Jeffry A. Timmons (ISBN: 0072443014)
2.
“That Thing Venture Capitalists Do”
by Mitchell Berlin, Federal Reserve Bank of Philadelphia http://www.phil.frb.org/files/br/brjf98mb.pdf (free download)
3.
Larta web site
To stay tuned in Southern California!
http://www.larta.org/
4.
Small Business Administration web site
The site has a lot of interesting content!
http://www.sba.gov/ (free downloads)
Paulo de Rezende Zone Ventures paulo@zonevc.com (213) 628-2400 www.zonevc.com
Back-up Slides
The business plan plays important roles
While fundraising
– Provides potential investors with all relevant information about the team, the technology, the problem solved, the market and growth potential, and the funding strategy – Demonstrates entrepreneurs’ understanding of the market dynamics and competition – Explains how the entrepreneurs will build a successful businesses
While building the business
– Helps entrepreneurs to clarify the driving vision behind the business – Provides an opportunity to review assumptions and refine strategy – Offers an ongoing self-evaluation tool
When I read a business plan
I am looking for an… Innovative solution to a hard-to-solve problem that inflicts costly pain in the target customers is surrounded by a well balanced team of managers who are candid about the business weaknesses and strengths and have a clear vision of how to change the world I see a red flag when…
… there is a technology looking for a problem to be solved … there are many other companies competing for the same customer’s budget … pro-forma financials are unrealistic … nobody in the team has relevant experience in the technology and target market … team does not have a clear understanding of the many existing competitive offerings