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CUHK EMBA talk

CUHK EMBA talk. December 4th 2006 Hong Kong. The venture business – Venturing into the unknown. Creating new businesses often with new technologies Economic growth engines Fast moving - a dynamic and often chaotic environment High risk of failure. The venture capitalist.

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CUHK EMBA talk

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  1. CUHK EMBA talk December 4th 2006 Hong Kong

  2. The venture business – Venturing into the unknown • Creating new businesses often with new technologies • Economic growth engines • Fast moving - a dynamic and often chaotic environment • High risk of failure

  3. The venture capitalist • Not the company founder - the entrepreneur • A professional interposed between the provider and consumer of venture capital • Angel investor (friends and family) versus institutional venture investor • Makes financial investments in start-up or young companies and helps them grow • The portfolio approach

  4. The venture investing process • Deal generation • Analysis • Deal mechanics • Growing the investee company • Exit / liquidity

  5. Deal generation • The bottom-up approach • The top-down approach

  6. Deal generation - networking • VCs run in packs • Who are your friends – - birds of the same feather? - Mainstream vs the fringe • How big is your rolodex? • What is the quality of your network? • Why should someone be your friend?

  7. Deal generationHigh probability networks • Other VCs – why would you be invited into the deal? • Serial entrepreneurs • Academics • Industry focus

  8. Deal generation – big trends • Top down, macro trend • Big trends change with time • A keen observer of the world • In tune with global leaders in different industries • In tune with local conditions and idiosyncracies • The VC as a generalist and a quick study

  9. Deal generation –Attributes of a VC • An optimist • A risk taker • Curious • Activist agent of change • Legwork • Sleuth work • Parallel processing • Personable • Perceived to be valuable

  10. Deal generation – the intermediary • Buy side vs the sell side • Inherent conflict of interests • Market inefficiencies

  11. Deal generation – having a history helps • Your track record - a history that cannot be erased • High profile successes • Reputation • Brand building • The haves will have more

  12. Analysis – what is a good deal • Multivariate • Fuzzy • No perfect information • A judgment call • Honing your instincts

  13. Analysis – a reductionist approach • Reducing the analysis to discrete variables enforces discipline • Examples in two dimensional space

  14. Example 1 high barrier to entry for competitors high low operational intensity low

  15. high Dependence on creativity high low cash to breakeven low Example 2

  16. high life-time revenue per customer high low cost of customer acquisition low Example 3

  17. Analysis – contextual epistemology • Analysis is not abstract, it is contextual • A n-dimensional space into which one maps any given opportunity • The case study method

  18. Analysis – the value proposition • Technology based - More likely to be universal - IP as defense and repository of value • Business model based - More likely to be locally relevant - First mover advantage and customer based as defense and repository of value

  19. Analysis - risks • Not only quantitative, cannot be reduced to a single variable such as volatility • Qualitatively different kinds of risks - Financial risks - Technology risks - Market risks - Execution risks - People risks - Regulatory risks - Political risks - Etc etc

  20. Analysis – the Business Plan • Committing to writing helps to distill essential considerations and crystalize defensible conclusions • Be quantitative even if it involves assumptions • Keep it simple, ask important questions

  21. Deal Mechanics –the structure of a deal • Pre-money valuation - No rules, but there are ballparks - Subject to market sentiment - Beauty is in the eyes of the beholder - Up, flat or down rounds - Cramp-down rounds • Investment amount - Tranches - Milestones

  22. Deal Mechanics • Financial instruments - preferred - common - warrants - debt - bridge loan • Other terms - option pool • liquidation preference • ratchet • Claw back

  23. Growing the company • Executing the business plan - Discipline - Proof of concept and adjusting along the way as new information is available - Multiple incarnations of a company - When to persist and when to change • Hiring and team building • Control of the burn rate • The functioning of the board • Outside board members • Entrepreneur-in-residence • Fighting one fire after another

  24. Growing the Company – funding the growth • Burn rate • Raise money when you have a runway • What other values come with the money

  25. Attributes of a VC • Good - Strong capital base - Informed and realistic expectations - Support and guidance to the company / entrepreneur - Peripheral vision, connecting the dots - Connections - Brand equity

  26. Attributes of a VC • Bad - Out-of-control ego - Too authoritarian - Too indulging - Fair weather friends - A zero-sum-game view of the world

  27. Exit • Good companies will always have exit alternatives for their shareholders • Public market for growth companies - Nasdeq, GEM, AIM etc - Valuation and depth of the market - The IPO window • When to sell the listed shares - Philosophy of not being a stock market player - Timing of stock disposition according to the company’s prospect - SEC rules • Trade sales

  28. Hong Kong • The economy - Small population - Mature economy with oligarchic characters - Factors important in HK’s past development have only weak linkages to conditions conducive to a technology based economy - Former advantages marginalized by China’s development

  29. Hong Kong • Owners of financial capital - Family run fortunes - Impatience of a trading mentality exacerbated by the refugee mentality - Comfortable with real property vs intellectual property • Fuzzy boundary • Unbounded supply

  30. Hong Kong • Science and technology - No technology-based economy - The scientific research base being too small - Mediocre research • Excessive pragmatism leads to short-term research agendas • Lack of long-term government policy

  31. Kong Hong • The society • Inward looking • Complacent - A shallow and hedonistic culture - Young people grow up in a green house lacking the drive to do great things

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