“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

March 7, 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?