s Launching a High Technology Venture Patterns of Entrepreneurship Chapter 13

äScreen Technologies for New Ideas äPrepare the Strategy, Product Positioning and Alliance Plan äDetermine Capital and Resources äTalent and Management team äImplementation Framework for Launching a Technology

äScreen Technologies äIdentify systems and technology äInvestigate environment for technological and market conditions äPlan the technology project äPerform feasibility analysis äExecute market forecasts and benchmarking Framework for Launching a Technology

Technology Trends Internet is changing the model of computing Software architecture of the internet will become the software architecture for the enterprise Computing infrastructure (datacenter) will be the next surprise; fueled by “ASP Services”, outsourced “compute tone”, and internet “geoscale” The “real-time enterprise” will drive carrier demand at increasing rates of growth & create Oracle/SAP scale companies Operations systems to reduce operating cost & total cost of ownership will be a major issue/opportunity Evernet – everyplace, every time, every device thru “mobile IP” (but not a lot of money for new ventures)

The New IP Infrastructure Network Issues & Trends Everything over IP Two layer network Value added services Internet based SW architecture Skills shortage Mission critical technology Rapid, unpredictable growth Legacy encapsulation

Prepare Strategy and Positioning äPrepare Pilot testing of new technology product –Beta site testing in a few selected locations äDevelop a marketing plan to roll out the product –Consider how the product will be positioned and determine pricing plan äUse alliances for cost sharing and efficiency –Be proactive in locating companies to network –Leverage resources.

äDetermine Sources of Financial Needs äLeverage Intellectual Properties äDevelop Exit strategy Determine Capital and Resource Requirements

Players In Private Equity Private Equity/VC Firms Kleiner Perkins Oak Investment Partners Advent International Private Equity/VC Firms Kleiner Perkins Oak Investment Partners Advent International Buy-Out Firms KKR Hicks Muse Forstmann Little Buy-Out Firms KKR Hicks Muse Forstmann Little Captive Corporate Firms GE Capital Intel Nestle Venture Capital Captive Corporate Firms GE Capital Intel Nestle Venture Capital

Capital Risk (ß) Valuation Idea is Feasible Technology Works A Customer Buys Seed Funding R&D Capital Go-to-Market Captial Expansion Captial P(success) = 30% Req’d IRR = 100% P(success) = 40% Req’d IRR = 70% P(success) = 50% Req’d IRR = 50% P(success) = 80% Req’d IRR = 30% Funding Milestones – The Right Way

The VC “LANDSCAPE” in 2000 # of VC Firms in Existence # of Professionals # of First Time VC Funds Raised # of VC Funds Raised This Year VC Capital Raised This Year ($B) Avg VC Fund Size Raised This Year ($M) Source: NVCA Yearbook 2001; Venture Economics

The Committed Capital Bubble Source: VentureOne Years Accumulated Capital Over-commitments ($B)

The Illiquid Bulge From : 14, ,529 1,180 10,776 Companies funded Went public Were acquired Went out of business Remaining Source: Venture Economics; Venture Source - - -

A Generic Late 90’s Model Round TypeDate Amount Raised (MM) Pre-Money Valuation (MM)IRRMultiple 1SeedJan-97 $ 5 $ 3579% stJan-98 $ 10 $ 10065% ndJan-99 $ 25 $ 20059% rdJan-00 $ 60 $ 60052% IPOJan-01 $ 1000 $ 100 Million

A Generic Early 90’s Model Round TypeDate Amount Raised (MM) Pre-Money Valuation (MM)IRRMultiple 1SeedJan-90 $ 0.50 $ 2101% stJan-91 $ 3.00 $ 1070% ndJan-92 $ 8.00 $ 3250% rdJan-94 $ $ 10032% IPOJan-95 $ 150 $ 25 Million

Why It’s Great To Be An Entrepreneur - TODAY US Venture Capital Partnership Returns Versus Public Market Returns Funds Formed (quarterly returns) Source: Venture Economics/NVCA

The HALF-EMPTY view Technology led slowdown Consumer Reaction pile-on Sept 11 The WAR 2002 is history! Financings Unavailable Stay afloat, tread water, hunker down

The HALF-FULL view Less competition Time to develop technology Focus: sustainable advantage, value-add Better critique, Better ventures, Higher Bar Longer Term View/Horizon Lower Funding => Lower Risk

 Market Exists today, high growth, addressable  Management Industry experience, operating track record, vision and guts, trust/ethics  Business Case Convincing value proposition, product vs. service, strategy (chasm!), profitability “in sight”  Technology Defensible, scalable, open, “breeder vs. broker”  Liquidity Cash management & fund raising  Clear Exit Based on market share not “raw” technology value  Self Discipline Don’t get creative; expectation pact and process Venture Investment Criteria

Investment Process First Meeting Initial Information Pack Sent Confidentiality Agreement 2nd Info Pack/ More Meetings Indication Of Interest Initial Due Diligence Early Read Proposed Termsheet Full Due Diligence Closing

äCarry out Recruitment and Selection äBuild the Best Team äConsider Outsourcing Attract Talent and Build the Management team

äTechnology - Transfer Partnerships –A computer hardware company and software company can combine to benefit each other –Setting up joint licensing arrangements äEquity Investment Partnerships äGlobal Partnerships –A technology company received needed cash, and a European company received stock and access to cutting-edge software The New World of Partnerships - Building Strategic Alliances

Consider Minority Equity As Strategic Alternative AcquisitionAcquisition Joint Venture Minority Equity Control Synergy Goodwill Capital Starting Point Complex Short-Term Simple Committed Insider Pre-Acquisition A+A+CC AAAABBBBAABB

äMarketing Partnerships –Combining value added services between two companies. äSupplier Partnerships –Customer-vendor relationships where one can perform a specialized service more effectively than its partner. The New World of Partnerships - Building Strategic Alliances

äEvaluate potential partners carefully –Most partnerships fail –Perform due diligence –Select number 2 or 3 in the market as a partner äAssess possible mutual benefits critically äStrengthen the partnership through “skin in the game” äStrive for open communication Partnership Criteria Evaluation