Venture Capital When and how to raise VC finance

Venture Capital When and how to raise VC finance Ben Holmes Index Ventures April 17 2007 Who we are Index Ventures Pan European Venture Fund Based London & Geneva Selected Investments €1.3bn under management Active investor in web / internet Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner? Venture Capital – How the VC makes money Raise fund every 2-4 years • Pension funds, financial institutions and specialist “fund of fund” investors Invest money over 3-5 years ~ 1/2 of investments lose money ~ 1/3 of investments break even ~ 1/6 of investments make (lots) of money Very small management fee on funds managed ~ 1-2.5% pa Carry ~ 20-25%x (Total Return – Total Amount Invested) Venture Capital – Stages of Investment Seed Investment Size Potential Sources of Funds 0 - €1m Early Stage Series A, (B) €2m-€20m Later Stage (B),C,D… €5m-€20m Pre-IPO / Buy-out €30m+ Private Equity Grant-funding University seed funds Friends and family Angel Investors (Venture Capital) Venture Capital (Wealthy) Angel investors Venture Capital Specialist Late stage tech investment funds Hedge Funds Venture Capital – What a good VC will add Advice and Strategy Hiring • Developers • Country Managers • Sales • CEO / CFO / COO • Advisory Board Partnerships Profile and PR Internationalisation Trusted service provider relationships • Search / recruiting • Branding / PR • Finance, etc Exit optimisation • Knowledge / contacts with relevant buyers • Experience with process Venture Capital – Typical Deal Terms Target 20-35% ownership Board Representation Liquidation Preference Participation rights Element of reverse vesting Certain control and veto rights Option Pool but that’s so unfair… Period of exclusivity to close legals Photo Source: Philip Greenspun, MIT Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner? Good reasons to raise VC Pre-requisites Unique Product Or Concept Passionate Founding Team Large Potential Market Opportunity Implications… Intense competition likely Need to move rapidly VC funding supports Hiring Rapid Product Development Internationalisation Partnerships Infrastructure Commercialisation When NOT to raise VC Application is a feature not a product Market size is too small Motivation is not financial Risk is not that you waste time unsuccessfully trying to raise finance … … real danger is that you do succeed in raising VC funds • Lose opportunity for small exit which could be personally lucrative • Lose opportunity to run lifestyle business • Get bound in to 3+ yrs work you may not enjoy Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner? What does a VC look for? Team Technology Traction Can evaluate each as • Exceptional • Good / credible • Mediocre / incomplete Misconception that being good / credible across the board is what VCs look for • Can always add credible attributes to the mix later We focus on finding opportunities which rate as exceptional in one attribute Identifying relevant VC partners Has funds to invest Excellent track record Match of Size/Stage/ Geography Do create a shortlist Rifle is a better weapon than a shotgun Shortlist No directly competitive investments Relevant Portfolio Good free sources on VC funding http://www.thealarmclock.com/euro/ http://www.vecosys.com Getting on radar screens Out of the blue email is a longshot Try to build context • Analyse portfolio companies – are there any links there • Analyse contact network and advisors • Analyse press coverage • Participate in blog conversations • Attend events and conferences • Relevant PR around product also helps VCs spend their time looking for businesses with momentum Sharing relevant information Pre - first meeting 100 page business plan not required 20 page ppt which clearly answers main questions is best bet • Product • Market • Business Model • Team • Competition • Product Roadmap • Technology Overview • Business Development • Financial Status Pre - termsheet Dialogue rather than documentation – expect lots of meetings Calls with current / prospective customers or partners Meeting broader team Brainstorming around strategy Identifying key hires post closing Formal presentation to VC partnership 2-4 weeks Post - termsheet Some additional reference calls with partners / customers Personal reference calls Legal / accounting audit (if relevant) Drafting legal documentation 1-2 Months Agenda Overview of Venture Capital When to raise VC finance? Strategies for VC fundraising How to choose the right VC partner? Valuation should not be the decisive factor Entrepreneur’s Equation Revenues / Profitability Growth rate Value at exit Team quality Strategic fit with buyer community Well managed exit process Fewest strategic errors made Hiring (quality & speed) Probability of getting there Partnerships Product development Valuation at initial round % share of business at exit Valuation and dilution at subsequent rounds Option grants Key things to consider 1. Relationship With key individual(s); and broader team References Speak to other founders Portfolio Relevant experience Non competitive Community you want to be part of Valuation and associated deal terms Right partner at a fair price vs. Any partner at best price 2. 3. 4. Thank you Ben Holmes Email: benh@indexventures.com Skype: ben_holmes