“3-5-7 RULE” MEETS “RACING TO

100”

A Back of the Envelope Calculation on Whether a

VC Invests or Not…And Other Tidbits

Alex Tang

SURGE Accelerator Mentor

February 27, 2013

QUICK SNAPSHOT

1

Hi! JUST A QUICK FEW THINGS ABOUT ME…• Former Vice President of Programs and Finance at Clean Energy Trust

• More than 10 years commercialization and venture capital experience

• Co-Founder of Invention Bridge a technology commercialization company

• MBA (University of Chicago); M.S., B.S. Mechanical Engineering (University of Illinois at Urbana-

Champaign)

• Some other career highlights:

• Argonne Venture Accelerator Consortium – Department of Energy EIR2 Grant

• Private equity experience with McNally Capital and MVC Capital

• Senior Manager at STAX, a consulting firm performing due diligence on private equity and

venture capital deals in North America and China.

• Early Stage Venture Capital experience with Open Prairie Ventures where we spun out

technologies from University of Illinois at Urbana-Champaign, University of Illinois at Chicago,

and University of Wisconsin Madison

• Other info:

• Mentor at SURGE Accelerator

• Catalyst Cleantech Advisor to Wisconsin Alumni Research Foundation (WARF)

• Serves on the Entrepreneurial Committee of the Association for Corporate Growth Chicago and

former Board of Director and Co-Chair of the Venture Capital/Cleantech Committee

• Serves on the Advisory Council on Job Creation for the Treasurer’s Office of the State of Illinois

• Member of the Asian American Alternative Investment Managers Association

• Former IT/Cleantech Kauffman Fellows Finalist

HOW DOES A VC EVALUATE ME?

2

MANAGEMENT TEAM• Credibility

• What is Needed to be Successful?

WHAT PROBLEM ARE YOU SOLVING THAT PEOPLE ARE WILLING TO PAY FOR

COMPETITIVE LANDSCAPE• 800 lb gorillas

• Partnership Opportunities

BUSINESS MODEL• Go to Market Approach

• Unit Economics

• Recurring Revenue Streams

EXIT STRATEGY• IPO vs. M&A

IP PROTECTION

Each VC evaluates investment opportunities their own way,

but there are some common themes.

RISK IS THE NAME OF THE GAME

3

Technology Concept

Execution Policy

Field Data/Pilot Testing and Signed Customers Reduces Risk For All.

THE VENTURE CAPITAL ECOSYSTEM

4

LIMITED PARTNERS (LPs)• Typically Pension Funds,

Endowments, High Net Worth

Investors

• Return on Investment metric are

Internal Rate of Return (IRR) and

Cash on Cash Return (CoC)

GENERAL PARTNERS (GPs)• Partners who are entrusted to invest

LP’s money and to return capital at a

future point in time.

• Manage investment pool called Fund I,

Fund II, Fund III, etc.

PORTFOLIO COMPANIES• Entrepreneurs you back

“3-5-7 RULE” FOR LIMITED PARTNERS

5

RIS

K

REWARD

VENTURE

CAPITAL

7x

GROWTH

EQUITY

5x

BUYOUTS

3x

“Today, if a venture capital firm or buyout shop can consistently return 3x CoC or

more to pension funds, they will continue to re-up every time.” - Dan Howell, Senior

Managing Director, Mesirow Financial

RACE TO 100

6

WHAT IS IT?

• It is a phrase I mention often when mentoring entrepreneurs

based on prior VC investment experiences.

• Gauge the difficulty and time needed for a startup company to

generate $100M in sales.

WHY?• Number where companies become attractive to larger

corporations as an acquisition target.

• Size to go public….Sarbanes-Oxley is a $2M annual expense

(and growing) for reporting.

Wait….I thought venture guys want to see billion dollar ideas and 20x exits????

$100 M IN 5 YEARS? NO PROBLEM!

7

“SOFTWARE ON MY MIND”

Source: http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a-technology-empire/ Based on 100 top public Software

companies Q1 2009

VC’s like to exit in this range…if not sooner

WHAT ARE THE PUBLIC MARKET COMPS?

8

Source: Baird’s Energy Technology Monthly, February 2013.

“3-5-7” RULE MEETS “RACE TO 100”

9

KEY TAKEAWAY:• If I am only going to get $33M back, the

most I can invest is $4.75M in order to

achieve a 7x CoC exit.

FOLLOW ON QUESTIONS:• What is the company peak cash need?

$5M, $10M, $100M?

• Peak cash need is the total

amount of cash needed to

generate a self sustaining

business.

• What is considered a show

stopper?

• What is the financing strategy and

number of rounds of funding is needed?

• Tranche

• Multi-round

Alex Tang

alex.d.tang@gmail.com

@alexdtang

QUESTIONS?

PANELISTS

John Banta, CEO and Managing Director,

Illinois Ventures

John Krzywicki, Principal,

True North Ventures

Armando Pauker, General Partner,

Apex Venture Partners

David Cruikshank, Vice President,

ARCH Venture Partners

PANELIST BIO

John Banta, CEO and Managing Director, Illinois VenturesJohn Banta serves as the CEO & Managing Director of IllinoisVENTURES, LLC, and the Managing Partner for the Illinois Emerging

Technologies Funds managed by the firm. John is the former President and COO of DigitalWork, Inc., a Draper Fisher Jurvetson, TL

Ventures and Dell Ventures portfolio company, having also served as its Senior Vice President of Corporate and Business Development.

Prior to DigitalWork, John served as Vice President of Corporate Services for UBS, and as a member of the Board of Directors of the

Investment Management Consultant's Association. John works with a wide variety of portfolio companies, with an emphasis on clean

technologies including renewables fuels and chemicals, water, and agriculture. He serves as a Director on behalf of numerous portfolio

businesses, as well as the Board of Directors of the Illinois Venture Capital Association and the iBio Institute, and the Advisory Boards of

the Midwest Governor's Association, the Argonne Venture Accelerator Consortium, the Chicago Energy Trust and the Initiative for

Sustainability and Energy at Northwestern. John earned an MBA in finance and statistics with high honors from the University of Chicago

Graduate School of Business where he has been a frequent guest lecturer, and a bachelor's degree in finance from the University of

Illinois College of Commerce.

David Cruikshank, Vice President, ARCH Venture Partners

David Cruikshank is a Vice President with ARCH, joining the company as an Associate in August 2007. Mr. Cruikshank focuses on

semiconductors, advanced materials, consumer electronics, and communications technologies. He has been instrumental leading the

due diligence on ARCH investments such as 908 Devices, PixelEXX Systems, Boreal Genomics, and Ciespace, and has provided

operating assistance with these companies and assisted as a board observer as well. He also oversees the ARCH internship program

with the University of Chicago. Mr. Cruikshank was formerly with Toshiba America Electronic Components as an engineer and manager

in Business Development and was responsible for North American audio, video, and automotive semiconductor product lines with annual

sales of $50 million. Prior to that, he was with Conexant Systems (originally Rockwell Semiconductor) as an Industrial Engineer.

Mr. Cruikshank holds an M.B.A. with Honors from the University of Chicago, an M.S. in Industrial Engineering and Operations Research

from University of California, Berkeley, and a B.S. in Mechanical Engineering from the University of California, Los Angeles, where he

graduated Summa Cum Laude and was elected to Phi Beta Kappa.

PANELIST BIO (CONT.)

John Krzywicki, Principal, True North Ventures

John focuses on identifying early stage investment opportunities, executing investments, and assisting portfolio companies. John

graduated from Stanford in 2011 with an MBA and MS in Environment & Resources, where he was the President and CFO of the Energy

Club. From 2007 to 2009, John was an Associate with Alloy Ventures, an early stage VC firm managing >$1B and investing in

Cleantech, High Tech and Biotech, where he focused on target due diligence and transaction execution. John began his career at the

Boston Consulting Group.

John graduated from Stanford University with an MBA and MS in Environment & Resources. John also holds a BA in International

Relations from Stanford University.

Armando Pauker, General Partner, Apex Venture Partners

Armando is a general partner with an investment focus in enterprise infrastructure (hardware, software, security) and cleantech. Prior to

joining Apex, Armando served as Vice President of Networking Products for Cybernet Systems Corporation, a Linux-based software

start-up. Previously, he was a senior product manager for Electronics for Imaging, a developer of high performance digital imaging

servers. Armando also served as a management consultant with Booz Allen Hamilton, where he worked with clients in technology

industries. Prior to Booz, Armando was a senior engineering manager at Tandem Computers, Inc., where he led product strategy, and

hardware and software development in computer subsystems. Armando holds an MBA with High Distinction from the University of

Michigan, and he received his BS in Engineering from the California Institute of Technology.

Armando led Apex's investment in Illumitex and Suniva. He previously served on the boards of BrightCloud (acquired by Webroot),

Initiate Systems (acquired by IBM), Informative (acquired by Satmetrix), Integrated Chipware (acquired by Serena), EVS (acquired by

First American), and SiliconBlue (acquired by Lattice Semiconductor).