Venture and Growth Capital

Equity Investments  Holding on to ‘what you’ve got’  Equity investments are a ‘trade-off’ game…

Do you really want an ‘investor?’  Question: “Would you rather have a small slice of a large pie, or have the entire ‘hostess fruit pie’ to yourself?” Do you NEED the money? Do you WANT outsiders involved in your business? WHO do you dare bring into your circle?

Angels  Definition: Individual. Not an organization.  Significant source of startup financing.  Find an angel with expertise as well as cash.  Terrific source for smaller startup needs and EARLY stage financing. (Usually smaller amounts)  They are usually experts in your industry…beware!  Networking is your only hope of finding them…

Venture Capital  Venture Capital is a Process.  Firms look for opportunities to add to the chain of value creation.  Fairly recent phenomena (last 2-3 decades have seen the majority of VC activity)

Definitions  Venture Capital: An Organization that makes equity investments in startup companies, seeking a high return.  Private Funds  Corporate Funds  Lead Funds  Niche Funds

VC Fund Structure  Investor(s): Provide money Process is called ‘raising a fund’  Venture Firm / Partners: Do the Work Screen opportunities Close deals Manage portfolio companies

Compensation and Investor Returns  Partners receive an annual management fee (usually around 2%).  Partners get (on average) 20% of capital gains of the fund.  Investors receive remainder of the capital gains. Distributions are made over very long time frames (sometimes decades)….this is NOT a highly liquid investment vehicle!

Industry Overview  Total of $21.2 Billion invested in 2002 Compares to $41.3 Billion in figure is nearly identical with 1998’s amount  Look here for detail on where the money went (or see handout): DocID/1BE29A405A1233D485256CBC006B65B2 DocID/1BE29A405A1233D485256CBC006B65B2

Recent Statistics

Participation by Industry  Medical Devices Technology  High Tech: Softbank:  Biotechnology: Directory: spatcher?next=vcDirectory spatcher?next=vcDirectory Example firm: Fuqua:

A look at typical VC firms  Kleiner Perkins (The Leader)  Wasatch Ventures (Local)  Charles River (East Coast)  Sequoia Capital (Jobs at partner companies)

Typical Venture ‘target’  Low risk, versus potential return  Industry or strategy fit  High potential  Fit with Venture firm’s goals on stage, amount, control, and growth rate  Has a business plan that got an ‘A’ in B475

Stage Preferences of VCs  Some prefer very late stages (Mezzanine) such as Softbank, in order to lower risk.  Some companies seek earlier stage financing, accepting inherently higher risk, hoping for much higher returns.  Some will go all the way through the process with you…others will drop out…

Where do these people hide?  VC Finding tools… National organizations (see next slide) Magazines (Venture, Inc., Forbes, RedHerring, VCJournal) Broker / Dealers Consultants Investment Bankers COMPANIES in your industry may have a VC arm… Intel Capital:

Key Organizations  NVCA  Venture Economics  Price Waterhouse  Regional Venture Organizations  VC Journal  Red Herring

Typical Deal Flow  Contact / Intro  Business Plan review / Meet management  Due diligence  Valuation / Negotiation stage (depends on lead)  Closing  Managing the investment  Exit (it may be a decade before you hit this stage)…

Due Diligence  Background checks on management  Verification of patents / agreements  Complete disclosure of financials  Review of ALL agreements (lease, customer, etc.)  Review of corporate structure / minutes  Review of pending litigation

Benefits of Dealing with VC  Help with Strategy  Very Experienced Partner  Board participation  Network of industry contacts  Help recruiting key employees  Access to markets, suppliers, customers, key industry figures

Drawbacks to VC funding  It ain’t just your show anymore…  Depends on bargaining position / strength of your company

Increasing your odds…  Focus on a high growth opportunity with very high top-line potential  Leverage relationships to find the ‘right’ VC  Make sure your business plan really works  Seek VCs that ‘fit’ your company  Revenues today greatly increase your chances funding and your ultimate valuation  Do your own due diligence  Demand that the VC deliver Value beyond the cash

Final Note:  If you’re serious about VC: Do a whole bunch of reading to come up to speed on the VC industry and current environment. Consider working with a broker or consultant who has a proven track record of investment placement