Venture Capital When and how to raise VC finance

1. Venture CapitalWhen and how to raise VC finance April 17 2007 Ben Holmes Index Ventures

2. Who we are Selected Investments Index Ventures • Pan European Venture Fund • Based London & Geneva • €1.3bn under management • Active investor in web / internet

3. Agenda • Overview of Venture Capital • When to raise VC finance? • Strategies for VC fundraising • How to choose the right VC partner?

4. 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)

5. Venture Capital – Stages of Investment Seed Early Stage Series A, (B) Later Stage (B),C,D… Pre-IPO / Buy-out Private Equity Investment Size 0 - €1m €2m-€20m €5m-€20m €30m+ Potential Sources of Funds 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

6. Venture Capital – What a good VC will add • Internationalisation • Trusted service provider relationships • Search / recruiting • Branding / PR • Finance, etc • Exit optimisation • Knowledge / contacts with relevant buyers • Experience with process • Advice and Strategy • Hiring • Developers • Country Managers • Sales • CEO / CFO / COO • Advisory Board • Partnerships • Profile and PR

7. Venture Capital – Typical Deal Terms but that’s so unfair… • Target 20-35% ownership • Board Representation • Liquidation Preference • Participation rights • Element of reverse vesting • Certain control and veto rights • Option Pool • Period of exclusivity to close legals Photo Source: Philip Greenspun, MIT

8. Agenda • Overview of Venture Capital • When to raise VC finance? • Strategies for VC fundraising • How to choose the right VC partner?

9. Good reasons to raise VC Pre-requisites Unique Product Or Concept Passionate Founding Team Large Potential Market Opportunity Implications… Need to move rapidly Intense competition likely VC funding supports Hiring Rapid Product Development Partnerships Infrastructure Internationalisation Commercialisation

10. 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

11. Agenda • Overview of Venture Capital • When to raise VC finance? • Strategies for VC fundraising • How to choose the right VC partner?

12. What does a VC look for? Technology Team 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

13. Identifying relevant VC partners Has funds to invest • Do create a shortlist • Rifle is a better weapon than a shotgun Excellent track record Match of Size/Stage/ Geography Shortlist No directly competitive investments Relevant Portfolio Good free sources on VC funding http://www.thealarmclock.com/euro/ http://www.vecosys.com

14. 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

15. Sharing relevant information Pre - first meeting Pre - termsheet Post - 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 • Some additional reference calls with partners / customers • Personal reference calls • Legal / accounting audit (if relevant) • Drafting legal documentation • 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 2-4 weeks 1-2 Months

16. Agenda • Overview of Venture Capital • When to raise VC finance? • Strategies for VC fundraising • How to choose the right VC partner?

17. Valuation should not be the decisive factor Entrepreneur’s Equation • Revenues / Profitability • Growth rate • Team quality • Strategic fit with buyer community • Well managed exit process Value at exit • Fewest strategic errors made • Hiring (quality & speed) • Partnerships • Product development Probability of getting there • Valuation at initial round • Valuation and dilution at subsequent rounds • Option grants % share of business at exit

18. Key things to consider • 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

19. Thank you Ben Holmes Email: benh@indexventures.com Skype: ben_holmes