Raising Venture Capital July 2008
William Quigley Managing Director Clearstone Venture Partners
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Type A
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Type B
don‟t know” “I don‟t care” “And It doesn‟t make any difference”
“I
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Only One Quadrant Makes Serious Money
Non Consensus View
Consensus View
Incorrect Prediction
Correct Prediction
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Why
is this so difficult?
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Need To Be Right Twice
Prediction
Time
Frame
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When Heresy Becomes Orthodoxy
A Brief History of Consumer Internet
1995-1998 1999-2000 2001-2004 2005 Present
= Free is silly, but fun! = Free is smart! = Free is stupid! Paid is smart = Free is brilliant! Paid is dumb! = Free is the way things work…paid is passé
Confidential
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When is Venture Capital Useful?
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Clearstone Screening Criteria
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8 Important Traits
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Important Deal Characteristics
No
suitable alternative exists
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Important Deal Characteristics
Substantial
„know-how‟ component to the business
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Important Deal Characteristics
Means
to achieve a distribution edge
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Important Deal Characteristics
Revenue
predictability (eventually)
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Important Deal Characteristics
Benefiting
from a large scale
trend
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Important Deal Characteristics
Recruiting
advantage
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Important Deal Characteristics
Data/information
heavy
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Important Deal Characteristics
Potential
acquirers can be
identified
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Anything Else?
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What Matters Most?
Culture is the distinguishing factor for success
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What Matters Second….
Brilliant insight
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Most Common Mistake…
Focusing
on a near term problem….
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How Do You Demonstrate Insight?
An
understanding of where the market is going
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…....and finally….
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The Ten Commandments
Do
you know the ten commandments of your industry……
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Trends in Venture Capital Investing
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Building a Widget…..
The
self funding myth….
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Becoming More Selective
A general raising of standards
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Emphasis on Sector Expertise
More specializing
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Strong Sector Bias
Venture
capital is a fashion business……
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Where’s The Biggest Investment Opportunity Today?
Greentech
55%
Internet B2B
23%
Mobile/Wireless
11%
Media & Entertainment
7%
Security
4%
Poll conducted at AlwaysOn Conference Summer 2007 CLEAR STO N E
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Importance of Potential
Investors
are increasingly sophisticated about what a company can become….
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More Value Accruing to Venture Investors at IPO
- $ Billions -
Earlier Tech Cycles
*Facebook Pre-Money IPO valuation rumored to be greater than $50B
New Tech Cycle
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Why Are Early Stage Companies Capturing More Value?
Companies are able to hit critical mass faster
• Impact of Internet, new communication technologies, leveraging managed services
Addressing global opportunities earlier in their life cycle
• From 300M to 2.5 billion consumers
Capital markets much better informed
• More willing to factor in growth potential
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Issues VCs – and Founders Must Contend With
Traditional
tech sectors maturing (and
slowing) 4 year vesting cycle obsolete Longer path to liquidity Shrinking base of buyers….
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Time + Money
Building
a sustainable company does not come cheap or quickly…..
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A Shrinking Buyer Base
1640
public tech companies today
• Down 35% from Peak in 2000 • 7 straight years of fewer public tech companies
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VC Exits above $50M
IPO 1990‟s Past 4 years
Paul Denniger, Jeffries & Co; 2003-2007
M&A 40%
60% 10%
90%
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What Investment Themes Look Attractive?
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Themes of Interest to Clearstone…
Improving
prediction capabilities
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Themes of Interest to Clearstone
Capturing
and managing the growing body of digital information
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Themes of Interest to Clearstone
Linking
location information to commerce
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Themes of Interest to Clearstone
Increasing
mobility of enterprise workers
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Themes of Interest to Clearstone
Proliferation
of managed
services
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Themes of Interest to Clearstone
Enormous
increase in video
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Perseverance Pays….
1982-2001 Compound Annual Return
•All trading days •Minus 10 best days •Minus 30 best days •Minus 50 best days
11.8% 9.0% 5.3% 2.4%
Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar.
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Following The Crowd Doesn’t…
Net Inflow into Real Estate Mutual Funds 2006
$9.4 billion
2007 Return of Real Estate Funds
- 8.5%
Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar.
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Some Specific Thoughts on Raising Money
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What
VCs should you approach?
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Screening VCs
Stage
Sector
Geography Portfolio Partner
capacity Firm temperament…..
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Firm Temperament Will Drive…..
Lead
or follower Syndication preference Ownership % Follow-on reserve
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Anything
else to focus
on….?
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What is ‘Smart Money’
Characteristics
of a valuable VC…..
• • • • •
Informed and excited Great spokesperson for the business Adaptive Capable of dealing with set backs Shared goals
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How
to know if you are getting traction – or not – with a VC….
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How Do I Know if the Meeting Went Well?
Comments
that might spell trouble….
• • • •
We want to see more traction/customers We don‟t really understand this space We don‟t see how this gets to $100M It‟s a little early for us
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How Do I Know if the Meeting Went Well?
Signs
of a productive meeting…..
• • • • •
I‟d like to drill down on the market sizing I‟d like to understand the sales pipeline I‟d like to meet more of the team So who else are you talking to? How close are you to term sheets?
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The Term Sheet
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terms to pay attention to:
Valuation Stock option pool Founder shares vesting Liquidation preference Board make-up Redemption right Expiration date
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1. 2. 3. 4. 5. 6. 7.
What
to expect post funding?
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Board Matters
Focus
will be on
• Management team additions • Perfecting repeatability • Quarterly performance objectives • Value created from an extra $____ spent on mrkting, eng, etc… • Hitting milestones…..
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And….raising
the next
round
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Raising Venture Capital July 2008
William Quigley Managing Director Clearstone Venture Partners
CLEAR STO N E
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do you meet VCs – connect DLP Piper Venture Pipeline First time pitching Crafting the pitch to make it stand out Entrepreneur game to paint a picture VCs expect the company to be far beyond where it is today What is the tease to get the VC excited First 3 slides CLEAR STO N E
How
V E N T U R E P A R T N E R S
It
is who you know that matters for meeting VCs Lots of angels to go after and who should you use Who are the guys you should not waste time with. Esoteric deals are hard to pitch Decide whether you are going VC or not (set the course)
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Pre
revenue or modest revenue How do you build a big company if starting with a million dollar angel
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