prepared for james j. hill reference library march 8, 2006
DESCRIPTION
How to Secure Venture Capital. Prepared for James J. Hill Reference Library March 8, 2006. Agenda. Venture Capital Industry Capturing the Attention of a Venture Capitalist Deal Killers Summary. Venture Capital Industry. Valuations: Pre-Bubble Normal. Small VC Funds Disappearing. - PowerPoint PPT PresentationTRANSCRIPT
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Prepared for
James J. Hill Reference Library
March 8, 2006
How to Secure Venture Capital
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Agenda
Venture Capital Industry Capturing the Attention of a Venture
Capitalist Deal Killers Summary
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Venture Capital Industry
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Valuations: Pre-Bubble Normal
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Small VC Funds Disappearing
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U.S. Venture Capital Market Trend Info
% of U.S. VC
0%
10%
20%
30%
40%
50%
60%
70%
1995
-1
1996
-1
1997
-1
1998
-1
1999
-1
2000
-1
2001
-1
2002
-1
2003
-1
2004
-1
2005
-1
Expansion Later StageEarly Stage Seed Stage
Group Median Expansion – 53% Later Stage – 18% Early Stage – 22% Seed Stage – 4%
Source: PWC MoneyTree
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Minnesota vs. U.S. Venture Capital Market Trend Info
Source: PWC MoneyTree
% of MN VC vs. U.S. VC
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Average MN vs. U.S VC Investment = 1.54%
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Capturing the Attention of a VC
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Finding the Right VC
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Courting the Right VC
Online DatingAnonymousHighly Competitive1 Chance
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Mini Due Diligence ProcessIs it “Venture Capable”
Management Relevant domain expertise Fundable
Product/Service Explicit customer need Clear and compelling value
proposition (ROI)
Market Size (> $250M) and
sustainable business drivers Target segment well defined
Validation Customers, customers,
customers Maturity of the
distribution plan
Deal Reasonable valuation and
terms Raising enough money to
hit meaningful milestones
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How Hard can it Be?
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A Rapidly Evolving World
Yahoo raises $2 million Amazon goes live Netscape goes public 45% heard of www AltaVista 16 million pages
1995
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Model VC Portfolio
-200,000
-100,000
0
100,000
200,000
300,000
400,000
500,000
600,000
1 2 3 4 5 6 7 8 9 10
Cash Flow HistoryDistributions
Contributions
Investment Period
Harvesting Period
$1.0 million commitment $2.0 million in distributed
capital 20% IRR
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Risk Return Ratio
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It’s Very Hard…
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Vulture Capitalist
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Management
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Moe, Curly, Larry
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Investing In TalentFactors considered most important by investment professionals
(Weighted importance out of 100*)
Management Team
Market Sector
Business Model
Proprietary Product/Service
37
24
20
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Source: Spencer Stuart/NVCA VC-backed Leadership survey
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“As a founder, think hardest about the team. Are these the people I want to
be in trouble with for the next 5, 10, 15 years of my life? Because as you
build a new business, one thing’s for sure: you will get into trouble.”
John Doerr, Kleiner Perkins Caufield & Byers
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Product/Service
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Technology is only the Ante
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Explicit Need / Compelling ROI
All Customer ReviewsAverage Customer Review:
IT Budgets and ROI:“Purse strings are loosening ever so slightly, but that won’t slow the quest for better metrics”
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Sustaining vs. Disruptive Technologies
Sustaining Technology Foster improved product performance
Disruptive Technology Bring to the market a very different value
proposition
The Innovator’s Dilemma – Clayton Christensen
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Sustaining vs. Disruptive Technologies
Sustaining Technology Improves
performance along an existing utility curve
A
BSustaining Technology
Cost
Performance
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Sustaining vs. Disruptive Technologies
Disruptive Technology Moves the market to
new utility curve
A
Disruptive Technology
B
Cost
Performance
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Market
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Market Characteristics
Worth Winning $250 million
Sustainable Drivers Y2k
Well Defined Subsegment
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Market - What not to say…
We only need a 10% market share
We have no competition
We are the low-cost solution
We conservatively project
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Validation
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Communicating the Message
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Seeing the FutureCustomers and Distribution
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Deal
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Seed StageSeed Stage
100% – 100% – 30% IRR30% IRR
Early Stage – Early Stage – (Sherpa)(Sherpa)
50% - 20% IRR50% - 20% IRR
Expansion StageExpansion Stage
25% - 15% IRR25% - 15% IRR
Late StageLate Stage
20% - 12% 20% - 12% IRRIRR
Early Adopter Customers
Early Majority Customers
Late Majority Customers
Innovation Customers
Friends & Family
Angels
Institutional - VCs
Public Market
Equity Financing Food ChainReturn Expectations
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Return Expectations
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Return Expectations
5-10x your investment
or
30%+ IRR
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Sherpa Pocket Guide to Success
Quick Go vs. No Go Decision(4x in 5 Years = 32% IRR)
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Deal Killers
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Common Mistakes
Lack of Passion/UrgencyUnrealistic AssumptionsUnderestimating CapitalNot Enough RunwayFlawed Transaction Model Not Pursuing Multiple Paths
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Summary
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“Venture Capable” Opportunity
Team – Team - Team “Been there, done that”
CEO Large/Growing Market Target Market Defined Explicit Problem to
Solve “Unfair”, Sustainable
Advantage
Barriers to Entry for Competition
Market Validation Milestones Established “Wow” Advisory /
Governing Board Exit Strategy Team – Team - Team
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“It is not the strongest of the species that survives, nor the
most intelligent; it is the one that is most adaptable to change.”
Charles Darwin, British Naturalist
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“Work hard, work passionately, but apply your most precious asset – time – to what is most
meaningful to you.”
Randy Komisar, Author of The Monk and the Riddle
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“When all is said and done, the journey is the
reward. There is nothing else.”
Randy Komisar, Author of The Monk and the Riddle
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Rick Brimacomb
Founder, Brimacomb & AssociatesGeneral Partner, Sherpa Partners
Board Member, Minnesota Venture Capital Association