Venture and Growth Capital

1. Venture and Growth Capital

2. Equity Investments • Holding on to ‘what you’ve got’ • Equity investments are a ‘trade-off’ game…

3. Do you really want an ‘investor?’ • Question: “Would you rather have a small slice of a large pie, or have the entire ‘hostess fruit pie’ to yourself?” • Do you NEED the money? • Do you WANT outsiders involved in your business? • WHO do you dare bring into your circle?

4. Angels • Definition: Individual. Not an organization. • Significant source of startup financing. • Find an angel with expertise as well as cash. • Terrific source for smaller startup needs and EARLY stage financing. (Usually smaller amounts) • They are usually experts in your industry…beware! • Networking is your only hope of finding them…

5. Venture Capital • Venture Capital is a Process. • Firms look for opportunities to add to the chain of value creation. • Fairly recent phenomena (last 2-3 decades have seen the majority of VC activity)

6. Definitions • Venture Capital: An Organization that makes equity investments in startup companies, seeking a high return. • Private Funds • Corporate Funds • Lead Funds • Niche Funds

7. VC Fund Structure • Investor(s): Provide money • Process is called ‘raising a fund’ • Venture Firm / Partners: Do the Work • Screen opportunities • Close deals • Manage portfolio companies

8. Compensation and Investor Returns • Partners receive an annual management fee (usually around 2%). • Partners get (on average) 20% of capital gains of the fund. • Investors receive remainder of the capital gains. • Distributions are made over very long time frames (sometimes decades)….this is NOT a highly liquid investment vehicle!

9. Industry Overview • Total of $21.2 Billion invested in 2002 • Compares to $41.3 Billion in 2001 • 2003 figure is nearly identical with 1998’s amount • Look here for detail on where the money went (or see handout): • http://www.pwcglobal.com/extweb/ncpressrelease.nsf/DocID/1BE29A405A1233D485256CBC006B65B2

10. Recent Statistics

11. Participation by Industry • Medical Devices Technology • http://www.devicelink.com/links/venture.html • High Tech: • Softbank: http://www.sbcap.com/ • Biotechnology: • Directory: http://www.bioworld.com/servlet/com.accumedia.web.Dispatcher?next=vcDirectory • Example firm: Fuqua: http://www.fuquaventures.com/focus.html

12. A look at typical VC firms • Kleiner Perkins (The Leader) • http://www.kpcb.com/ • Wasatch Ventures (Local) • http://www.wasatchvc.com/ • Charles River (East Coast) • http://www.crv.com/ • Sequoia Capital (Jobs at partner companies) • http://www.sequoiacap.com/

13. Typical Venture ‘target’ • Low risk, versus potential return • Industry or strategy fit • High potential • Fit with Venture firm’s goals on stage, amount, control, and growth rate • Has a business plan that got an ‘A’ in B475

14. Stage Preferences of VCs • Some prefer very late stages (Mezzanine) such as Softbank, in order to lower risk. • Some companies seek earlier stage financing, accepting inherently higher risk, hoping for much higher returns. • Some will go all the way through the process with you…others will drop out…

15. Where do these people hide? • VC Finding tools… • http://www.ventureexchangenetwork.com/index.htm • http://www.garage.com/ • http://www.vfinance.com/home.asp?ToolPage=venca.asp • National organizations (see next slide) • Magazines (Venture, Inc., Forbes, RedHerring, VCJournal) • Broker / Dealers • Consultants • Investment Bankers • COMPANIES in your industry may have a VC arm… • Intel Capital: http://www.intel.com/capital/

16. Key Organizations • NVCA • www.nvca.org • Venture Economics • www.ventureeconomics.com • Price Waterhouse • Regional Venture Organizations • VC Journal • Red Herring

17. Typical Deal Flow • Contact / Intro • Business Plan review / Meet management • Due diligence • Valuation / Negotiation stage (depends on lead) • Closing • Managing the investment • Exit (it may be a decade before you hit this stage)…

18. Due Diligence • Background checks on management • Verification of patents / agreements • Complete disclosure of financials • Review of ALL agreements (lease, customer, etc.) • Review of corporate structure / minutes • Review of pending litigation

19. Benefits of Dealing with VC • Help with Strategy • Very Experienced Partner • Board participation • Network of industry contacts • Help recruiting key employees • Access to markets, suppliers, customers, key industry figures

20. Drawbacks to VC funding • It ain’t just your show anymore… • Depends on bargaining position / strength of your company

21. Increasing your odds… • Focus on a high growth opportunity with very high top-line potential • Leverage relationships to find the ‘right’ VC • Make sure your business plan really works • Seek VCs that ‘fit’ your company • Revenues today greatly increase your chances funding and your ultimate valuation • Do your own due diligence • Demand that the VC deliver Value beyond the cash

22. Final Note: • If you’re serious about VC: • Do a whole bunch of reading to come up to speed on the VC industry and current environment. • Consider working with a broker or consultant who has a proven track record of investment placement