QUARTERLY REPORT, APR-JUN 2007 An Introduction To Venture Capital Anand Lunia Executive Director & CFO, SEEDfund

QUARTERLY REPORT, APR-JUN 2007 What is Venture Capital

Private Equity & Venture Capital “Private Equity” means capital to companies not quoted on a stock market,in exchange for an equity participation. Venture Capital (VC) is a sub-class of Private Equity characterized by investments made for the purpose of developing, launching, and expanding new products or service offerings.

How VC’s work Investor VC fund Investor Startup

Capital Lifecycle Seed (< € 1 mil)Early Stages (€ mil)Expansion/ (€ 10+ mil) development AngelsIncubatorsAcceleratorsVenture CapitalPrivate Equity & Merchant Banks

What Venture Capitalists do... Sift through thousands of (good and bad) investment propositions

What Venture Capitalists do... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them – in exchange for private equity (usually a minority stake) – structure the deal

What Venture Capitalists do... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them Support the entrepreneurs in succeeding. E.g.: – providing financial advice – in headhunting and setting up advisory boards – in contacting customers, channels, … – in steering and positioning the company – in managing PRs activities – in managing IP and legal issues

What Venture Capitalists do... Sift through thousands of (good and bad) investment propositions Identify a few valid initiatives and finance them Support the entrepreneurs in succeeding. E.g.: Look after value creation – further round of financing – merger and acquisition, IPO, …

Attributes of a Great VC Bets on people not trends Driven by the big idea Looking for a ‘Winner’ Not afraid of failure Understand how to manage a portfolio of risk Serves as a fantastic coach Does her best work outside of the board room Not waiting for validation from other VCs

QUARTERLY REPORT, APR-JUN 2007 Deciding whom to give money

In the VC’s Mind Is this the right team? What’s the entrepreneur's motivation? Is this a billion dollar opportunity? Is it a game changer? How competitive is the space? How defensible is the product? How much is this thing going to take? How long to maximize value and exit?

In the VC’s mind IRR (Internal Rate of Return) – Company’s Current and Future Valuation Comparables (P/E,P/S,…), “Number of”, DCF, … – What’s The Best Strategy To Create Value Which are the achievable milestones and what’s the financing needed ? When is the break-even expected ? With which margins and revenues. – Exit Strategy Trade sale, IPO, N th +1 round of financing,.. Minimizing Risks – Diluting the investment – Liquidation Preference rights

Stages of Investment

Stage v/s Return

Assessing the Entrepreneur Understanding motivations Determining commitment level and willingness to sacrifice Gauging ego Appetite for risk Domain expertise Leadership abilities and vision

Assessing Portfolio Risk

Why 10x? The “Portfolio Effect” – Out of Ten Start-ups Funded 2 successes at 10x or better 5 ‘OK’ returns at 2x to 5x 3 write-offs, total loss of invested money Venture Capital is fundamentally an institutionalized form of aiming for Outliers!

QUARTERLY REPORT, APR-JUN 2007 Which VC to go with?

Most Appreciated VC Contributions Financial Advice Corporate Strategy & Direction Sounding board for ideas Challenging status quo Contacts or market information Management recruitment Money !!!! Source: “The Economic Impact of Venture Capital in Europe” (EVCA and Coopers & Lybrand)

What to look for in a VC People you LIKE ! – Trustworthy & Collaborative Can bring value, not money only ! – Do not have to be experts in the sector but have to understand the business. – Good network of contacts. Ask for references

What VCs are Not Good at Long term research investments Sustainability Evolutionary development Asset maximization Billion $ capital requirements

QUARTERLY REPORT, APR-JUN 2007 Want to raise VC money?

The Financing Lifecycle Approach – Elevator’s Pitch and Info Memo Presentation – Business plan – Meetings Negotiation – Term Sheet (or Letter of Intent) Verification and Validation – Due diligence Closing & Financing Value Creation Exit

The Business Plan A Product/Service description – Pros and cons of the solution – Market needs it satisfies – Barriers to Competition Business Model – Market Analysis (strategic and tactical) Competitors – Execution Plan Marketing and Sales Plan Research and Development Plan Operations Plan Team Financials – Valuation Model & Placement Terms – Income Statement, Balance Sheet & Cash Flow 3 years minimum, quarterly breakdown 1st year in monthly breakdown

The Business Plan -MYTH +++= Marine Lines

The Term Sheet The parties Securities to be issued Amount of financing & disbursement schedule Pre-financing valuation Option plan & earn-out Use of proceeds Liquidation Preference Protective Provisions, Voting Rights and BoD participation Anti-dilution Lock-ups Tag along and drag along Exclusivity Reporting...

Board Seats and Reserved Matters Corporate boards: Not involved in day-to-day operations Hold extreme control in major corporate events (sale, mergers, acquisitions, IPOs, bankruptcy) Lead VC in each round takes seat(s) Reserved matters (veto or approval): Any sale, acquisition, merger, liquidation Budget approval Executive removal/appointment Strategic or business plan changes

Other Typical VC Rights Right of first refusal on sale of shares Tag-along rights: follow founder sale on pro rata basis Drag-along rights: force sale of company Liquidation preference: multiple of investment No-compete conditions on founders Right to participate in subsequent rounds (usually follow-on) Later VC rights often supercede earlier Anti-Dilution Protection Recompute VC shares based on subsequent “down round” so that issuing more shares does not “dilute” the value of VC’s holding

QUARTERLY REPORT, APR-JUN 2007 Trends in VC investing

What’s Going to be Hot Virtualization Mobility services Location based services Enterprise services & software Internet gaming and entertainment Gen Y lifestyle products & services

QUARTERLY REPORT, APR-JUN 2007 Thank You