page 1 de-mystifying technology venture capital 2000 arjun gupta founder & chief believer (ceo)...

DE-MYSTIFYING TECHNOLOGY VENTURE CAPITAL 2000

Arjun Gupta

Founder & Chief Believer (CEO)

TeleSoft Partners

www.telesoftvc.com

KEY MESSAGES

Stick-to-the-knitting Do-your-own-homework Blow-it-out-of-the-ballpark

www.telesoftvc.com

No better time to start a solid communications company – phenomenal infrastructure build-out worldwide. Carrier capital expenditures worldwide exceeded $100+BN in 1999.

Plenty of diverse sources of capital at all stages – angels, traditional VCs, industry focused funds, mega-funds, hedge funds, corporate funds, buyout funds, etc.

There are mega opportunities to build high-quality, large companies, either independently or with strategic acquisitions.

THE MACRO TELECOM OPPORTUNITY

Source: International Telecommunications Union; McKinsey; World Bank ~1995-1996. From TeleSoft-I Investment Proposal (8/1/98).

www.telesoftvc.com

KEY SEGMENTS IN COMMUNICATIONS

www.telesoftvc.com

NEXT GENERATIONNETWORKS

ROUTING &

SWITCHING

SERVER & STORAGEARCHITECTURES

TRANSMISSION SYSTEMS

BROADBANDWIRELESS

NETWORKTERMINATION

MIDDLEWARE & SERVICES

• Core• Edge• QoS

• QoS• SAN & NAS

• DWDM• Opto-electronics

• NMS & OSS• “Black hole”

• Integrated Access• CPE/CTE/NTE

NETWORK APPLICATIONS

• New s/w category• Internet

• p-t-p• p-t-m-p

• Qwest, Level 3, Hermes

• LMDS, MMDS, PCS

• CLECs, CAPs

SEMICONDUCTORs,

TOOLs, OTHER

RECENT TECHNOLOGY VC INDUSTRY DYNAMICS

• Oak• Spectrum• Battery• Benchmark• Kleiner Perkins• Redpoint• Sequioa• Accel

• <$250MM funds

• Forestman Little• TPG• KKR• Hickes Muse• Thomas Lee• Carlyle Group• Welsh Carson

• Meritech• Bowman• Seligman• Attractor• TCV• ICP• General Atlantic• Amerindo• Madison Dearborn

$50~$100BN

ENTREPRENEURS

• Microsoft• Cisco• Intel• MCI• Frontier• BT/AT&T

• Pequot• Soros• Galleon

ANGELS: ~$1+BN

www.telesoftvc.com

HEDGE FUNDS: $10BN-$20+BN

CROSSOVER FUNDS: $15BN-$20+BN

CORPORATES: $5BN-$10+BN

MEGA-VCs: $10BN-$15+BN

LBOs: $20+BN

TRADITIONAL VCs: ~$5+BN

COMPETITIVE POSITIONING MATRIX FOR EXISTING PLAYERS

STAGE / SIZE ILLUSTRATIVE

Mega Deals, Acquisitions

Public Markets

Buyout firms (e.g., Forstmann Little, KKR, TPG)

Special Situations, Pre-Public,

Bootstrapped

Public / Private Players (e.g., Attractor, Bowman, ICP, TCV)

Public Markets

Madison Dearborn General Atlantic Meritech

Development / Expansion

Summit Partners

TA Associates

Early, Seed/Start-up

Angels

Large Traditional Technology VCs (e.g., IVP, SV, KP)

Ownership: Control:

Role:

1-5% None

Passive

<5-25% Minority Positions

Active

25-50+% Effective Control

Active

80+% Outright Control

Semi-active

TARGET OWNERSHIP AND ROLE

Chatterjee/ Soros

Industry

Focused

Funds Private Placements

www.telesoftvc.com

KEY VALUE FROM YOUR VC

$$$$$$ follow-on financings

Recruiting management, board and advisors

Product roadmap

Corporate partnerships

Anchor carrier customers & beta sites

www.telesoftvc.com

INCREASING

IMPORTANCE

EXAMPLE VC INVESTMENT STRATEGY & PHILOSOPHY

www.telesoftvc.com

Industry Focus: “Smart capital” for next-gen telecom services, software, systems.

Geography: Nationwide investments.

Investment Mix: 1/3 early, 1/3 development/expansion, 1/3 bootstrapped/later stage.

Investment Size: $1-20 million.

Structure: Equity and equity-related instruments (largely preferred stock).

Investments: Estimate 24-36 investments.

Role/Approach: Largely lead or co-lead active investor.

Returns: Target 30+% return on investment.

Deal Flow: Leverage GP team’s telecom knowledge base, Industry & Technology Advisors, Executive Contacts and Corporate & VC relationships to generate proprietary deal flow.

Due Diligence: Due diligence-intensive approach to investing (although for early stage companies there is usually a scarcity of information). Explicit objective to preserve principal in large and/or mezzanine stage deals.

Typical Syndication: Syndicate with firms who bring additional skills and capital that are required by the portfolio company or complement VC.

Ownership/Control: Non-control, minority positions with board representation.

Post-investment Value-add:

Work with portfolio companies to help them overcome execution and market risks and minimize time to market. Help commercialize portfolio company’s products with carriers through corporate partners, industry contacts and a unique bridge to international markets.

Exit Strategy: Largely acquisition or public market offerings.

THE VC’S CHALLENGE AT A GOOD COMMUNICATIONS FUND

Funnel = ~100% or ~700 deals

Explored = ~20% or ~140 deals

Pursued = ~10% or ~70 deals

Consummated = ~5% or ~30 deals

Lost = ~5% or ~30 deals

TeleSoft Guess Estimate:

ENORMOUS DEAL FLOW OF GREAT IDEAS + GREAT TEAMS

www.telesoftvc.com

CAPITAL SHOULD BE ONE OF SEVEN LEVERS FROM YOUR VC

www.telesoftvc.com

VC’S “SMART CAPITAL”

RESOURCES

INSTITUTIONAL INVESTORS

Financial Credibility

Follow-on Financings

GP TEAM

Multi-disciplinary Experience

Significant Biz Development

CORPORATE PARTNERS

Mega-channels

Mega-customers

Mega-acquirers

INDUSTRY & TECHNOLOGY ADVISORS

Senior Industry Network

Telecom & Operating Expertise

PORTFOLIO NETWORK & DEAL FLOW

Focus, Knowledge, Contacts

Post-investment Hands-on Value

CRITICAL MASS

Commercialization with Carriers

Bridge to International Markets

Tech IPOs 1/1/80 – 3/31/98

Public Companies

FOCUS ON BUILDING A GREAT COMPANY, DON’T WORRY ABOUT EXITS

www.telesoftvc.com

16,528 private companies funded

70%

1,243 = 100%

Source: Morgan Stanley

22%

8%Acquired

Out-of-Biz

U.S. PUBLIC MARKETS &

QUALITY ACQUIRORS LIKE

CISCO OR NT WILL BE THERE

FOR HIGH-QUALITY

COMPANIES

3/31/99 Snapshot

KEY SUCCESS FACTORS IN CHOOSING YOUR VC

$$$ Capital (all the same!)

Knowledge in your space

Contacts in your space

Chemistry with your team

www.telesoftvc.com

INCREASING

IMPORTANCE

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