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Venture CapitalWhen and how to raise VC finance
April 17 2007
Ben HolmesIndex Ventures
Who we are
€1.3bn under management
Active investor in web / internet
Pan European Venture Fund
Based London & Geneva
Index Ventures
Selected Investments
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
SeedEarly StageSeries A, (B)
Later Stage(B),C,D…
Pre-IPO / Buy-out
PrivateEquity
Investment Size
Potential Sources of Funds
0 - €1m
Grant-funding
University seed funds
Friends and family
Angel Investors
(Venture Capital)
€2m-€20m
Venture Capital
(Wealthy) Angel investors
€5m-€20m
Venture Capital
€30m+
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
Period of exclusivity to close legals
but that’s so
unfair…
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
Large PotentialMarket Opportunity
Unique Product Or Concept
PassionateFounding Team
Pre-requisites
Intensecompetition
likely
Need to moverapidly
Implications…
Hiring
Infrastructure
VC funding supports
Rapid Product Development
Internationalisation
Partnerships
Commercialisation
When NOT to raise VC
Applicationis a feature
not a product
Market size istoo small
Motivation isnot 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?
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
Team
Identifying relevant VC partners
Has funds to invest
Match of Size/Stage/Geography
RelevantPortfolio
No directlycompetitiveinvestments
Excellenttrack record
Shortlist
Do create a shortlist
Rifle is a better weapon than a shotgun
Good free sources on VC fundinghttp://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
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 - 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
2-4 weeks 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
Value at exit
Probability of getting there
% share of business at exit
Entrepreneur’s Equation Revenues / Profitability
Growth rate
Team quality
Strategic fit with buyer community
Well managed exit process
Fewest strategic errors made
Hiring (quality & speed)
Partnerships
Product development
Valuation at initial round
Valuation and dilution at subsequent rounds
Option grants
Key things to consider
1. RelationshipWith key individual(s); and broader team
2. ReferencesSpeak to other founders
3. PortfolioRelevant experienceNon competitiveCommunity you want to be part of
4. Valuation and associated deal terms
Right partner at a fair price
vs.
Any partner at best price
