Market Conditions and Venture Capitalist Experience in Start ...
Insight into the mind of a Venture Capitalist
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Transcript of Insight into the mind of a Venture Capitalist
Insight - the mind of a VC
Marc Lambrechts - Capricorn Venture Partners
Patrick Polak – Newion Investments Management
BVF Leuven – 2011-05-16
Or…
How many cliché's can you present
in 20 minutes…
Your speakers today
• Dr ir Marc Lambrechts
– research in microsystems and PhD on biosensors at KU Leuven
– industrial R&D experience at Terumo Europe
– RTD programme management experience at IWT
– + 10 years experience as senior investment manager in early stage venture capital
– technology fusion as special area of interest
– board member Boondoggle, fluXXion, Neosens, Leuven.Inc
• Capricorn Venture Partners
– founded in 1993
– independent and partners-owned
– pan-European activity, located in Leuven, Belgium
– hands-on, early stage & technology focus
– investing out of Capricorn Cleantech Fund and Capricorn Health-tech Fund
• Ir Patrick H. Polak (1965)
– TU Delft, Aerospace Engineering (1984-
1992)
– Founder, COO IT company (1991-1996)
– VC Investment manager (1997-2000)
– VC: Managing Partner Newion Investments
(2001-….)
– 18 Relevant Board seats since 1997
• Newion Investments Management
– Founded in 2000
– Independent and partners-owned
– Benelux Focus; located in Heerenveen and
Eindhoven, The Netherlands
– Investing from Newion Investments II and
Private Plus Fund
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Portfolio examples
2011-05-16
Portfolio examples
Differences between
Private Equity and Venture Capital
Private Equity invests in private
companies
The invested amounts will go to
the old shareholders and, in
general, bank loans are involved
for the acquisition finance.
Loans will be repaid by the cash
flow of the company.
The investors concentrate primarily
on maximizing of cash flow, and
strategy
Venture Capital invests in fast growing and ambitious companies
The invested amounts will be invested in the company to accelerate growth.
The investors concentrate on rapid market penetration and increase of market share, and acceleration of product development.
Who is the client of a VC?
• Is it the Company where the VC wants to invest in?
• Is it the “Exit partner” where the VC wants to sell it’s shares to? – Strategic, Financial, Stock Market?
• The client of a VC are its Shareholders: Banks, Institutional Investors, Pension Funds, Informal Investors.
– For Investors, VC’s are just a part of their investment mix:
a asset class with a high risk – high reward.
• They invest in: Private Equity for LBO’s, stock markets,
Hedge Funds, VC’s…
The Venture Capital model
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IP
knowledge
experience
+
proof of concept
business plan
+
market
customers ..entrepreneurs and team
(TTO)
investors
€ € € €
€ € € €
€ € € €
€ € € €
€
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Tech VC’s prefer to invest in…
• Entrepreneurs and a team
• Technology as sustainable competitive advantage
– strong and clean intellectual property/capital
– proof of concepts exists and mode of action is
understood
• A business model we understand and like
• Growing and huge markets
• ‘Need to have’ proposals with ‘identified
customer pain’
• Focus combined with mutant potential
• Well funded and capital efficient companies
• Exit perspective @ 5 to 10 x multiple
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Probability of Success
• Technical Success 60 %
• Commercial Success 50 %
• Economic Success 40 %
Overall Probability 12 %
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….can a VC make a living?
• Track record Fund level: extreme good Returns: Net IRR >
20%! – after all costs, failures, etc…
• That is why VC’s look for IRR’s of >40%/company!
• No track record, no next fund!
Source: Evca-Thompson study july 2009
Top Quarter Net IRR Venture Funds 10 year 5,5%
Venture Funds 10 year Net IRR -1,4%
Newion Investments Net IRR 2001-2010 22%
Newion Investments DPI 2001-2010 2,5
Organization of a VC
Limited Partner 1 Limited Partner 2 Limited Partner 3 Limited Partner n
Newion Investments
Company 1 Company 2 Company 3 Company n
Newion Investments
Management
Fund Management
Advisory Board
Investment Committee/Board
Managing partners
Investment Directors
Investment managers
Analysts
Lifecycle of a VC...
• In general, VC’s are “closed-end Funds”
– Meaning that they have to close their fund after a certain time.
– 5 years investing, 5 years ‘managing’
• This influences the way you and the VC work together!
– Early stage company in the last year of investing for a VC??..... How long can the VC support your growth and needs?
FUND I
New companies Support companies
FUND II
New companies Support companies
FUND III
New companies Support companies
Process within a VC
Introduction
stage
Research stage and
negotiationsValue creation stage
Exit
stage
Elevator Pitch,
Exec summary
Business plan
Business plan, execution
plan, multiple
discussions, references,
third parties
involvement, due
diligence
Building team and company
Partnerships, financial
reporting, execution plans
third party analysts and
exposure, M&A if needed
M&A
advisors,
Analysts,
Due
Diligence
Lawyers
Investment
Manager,
AnalystInvestment director, analyst
Go/no go Team Go/no go Team + Board Go/no go Team + Board
NDA Termsheet
Investment
manager, analyst
and investment
directors
Financing
rounds
Share Purchase
Agreement
Shareholders
agreement
Prepare yourself
• Think the whole process through, just like you sell your products and services: Fund raising is a complex sales cycle
• Always make sure the information you provide is consistent during the whole process
• Make sure you prepare all the necessary data
• Prepare your references
• Work with professional Advisors especially Lawyers and Tax advisors
• Choose the right VC partner: it is a business marriage (same type of companies in their portfolio, industry knowledge, experiences – no first timers -, money in the bank). In a syndicate: make sure all VC’s are aligned with the same expectations, investment philosophy and “mid term visions”.
• Ask references from the VC’s
• Keep momentum all the time– For a VC it is “killing” if the project is stalled for weeks because the entrepreneur has to
deliver something…
• 1 VC can ask 1000 stupid questions, more then 10 wise entrepreneurs can answer….
Elevator Pitch Example
Hello Mr. Green,
My name is Georges Leclanché, CEO of CleanStore, a French company active in utility-scale electricity storage. We solve the problem of intermittent power generation of wind or solar farms and experience increasing market traction from utilities and operators active in renewable energy.
Our solution consists of modular battery-based units for load balancing and energy storage. In comparison with other systems on the market, we have demonstrated a 10% higher efficiency at half of the investment cost (well below € 200k/MWh) and with minimal operational cost. Our systems are based on an innovative patented cell chemistry using cheap, safe and abundant materials.
We plan to raise a € 5 million series B round by the end of the year and would like to present to Empedocles Ventures our investment case. Are you interested in receiving more information in preparation of a meeting?
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Business plans…strategy without execution is hallucination
Business Plan
• Team
• Vision
• Business model
• Products and solutions
• Intellectual Property (if any) and strategy
• Market and Market developments
• Product developments
• Competition
• Clients (and future clients…)
• Business cases for your clients
• Organization and structure (inclshareholders)
• History
• Financials (P&L, Balance sheets, Cash flow forecasts)
• Sales and pipeline
• Use of proceeds
Execution plan: What will you do within the next 8 quarters
• Product development and road map
• Marketing
• Organization
• Roll out plan:– Partner strategy (if any) and actions/timing
– Internationalization (if any) and actions/timing
• Analyst strategy
• Sales and account plans
The Execution plan is updated every quarter: on which items have been done, not done, changed etc, and how this influences the next 8 quarters.
Make sure that all this is done and written
before you approach a VC. And make sure it
is “ready for due diligence”.
Preparation is key for a smooth process
Why investments fail?
• Technology
– The technology being developed by a start-up may just plain not work.
– The technology works in the lab, but takes too long to scale up to a point where the
economics work.
– The technology works, but something better comes along.
• Market
– The dogs won't eat the dog food.
– Existing solutions may be "sticky" because of existing infrastructure.
– The hoped-for market never materializes within the investment timeframe.
• People
– Gaps in the management team skill set.
– Management teams that don't know how to use their Board.
– Investors who push for a more capital-intensive growth path.
Source : Rob Day www.greentechmedia.com/cleantech-investing/post/why-cleantech-
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Choosing the business model
Leo Baekeland on the IP license business model
"I firmly intended to escape the recurrence of business occupations, as in my Velox days. So I planned, instead of manufacturing myself, to grant licenses to established manufacturing concerns, especially experienced in plastics. But I soon was confronted with a repetition of my former experience with Velox: that it was very difficult to teach new methods to men who had acquired routine in older processes. The preparation of the new resinoid and its molding compositions, which to me seemed very simple, appeared either very difficult or needlessly complicated to others. Reluctantly I had to start manufacturing the raw materials in a sufficiently advanced stage so that the users had only to complete the operation of molding and polymerization.“
See also ”The Baekeland story - Lessons for today’s ventures in new materials”http://be.linkedin.com/in/marclambrechts
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Team formation
• Get business & entrepreneurial experience in the team
• Do not force researchers in a CEO role
• Build multidisciplinary teams (not all engineers!)
• International exposure and language skills
• Humans are not scalable
• Do not expect the same salary and goodies as in a corporate environment
• Key persons that you have to pay more as the founders?
• No function in a start-up company is forever
• Keep you friends as friends
• And keep your Cap Table clean…
• Foresee “good leaver – bad leaver” conditions in shareholders agreement
and stock option plans
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….Some lies….
• …Told by Entrepreneurs:
– The market is $2.5 billion today going to $ 7.5 billion in 2014!
– BMW, GE and Phillips have selected our products.
– Cisco wants to become a strategic partner
• …Told by VC’s:
– Our money is different!
– There is no need for signing a NDA! No one in the industry does!
– We can recruit a team of first- class of directors
– I will become your board member and will be your full time advisor
Conclusion
“Strategy without Execution is Hallucination“ (Steve Ballmer CEO Microsoft)
Do not try to build castles in the sky…VC’s are still very cautious and “there is no such thing as a free lunch”.
Choose the right partners!
It is a business marriage…
There is no “success guaranteed” recipe!
Prepare! Prepare!! Prepare!!!
Stay focused, have fun!
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For further reading
• http://www.bva.be
• http://www.bvca.co.uk
• http://www.evca.eu
• http://www.brownrudnick.com/nr/request.asp?ID=3 (legal terms)
• http://www.mit100k.org
• http://entrepreneurship.mit.edu/15975/index.php
• http://www.enterprise.cam.ac.uk/uploads/File/BuildingBusiness/StartingATechnologyCompany.pdf
• http://www.openinnovation.eu
• http://www.venturebeat.com (silicon valley blog)
• http://www.redherring.com
• http://www.tornado-insider.com
• http://www.cleantech.com
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For more information
Capricorn Venture Partners
Dr ir Marc Lambrechts
Marc at capricorn dot be
Lei 19/1, B-3000
Leuven, Belgium
Tel. +32 16 28.41.00
www.capricorn.be
Newion Investments Management
ir Patrick Polak
Polak at newion-investments dot com
Businesspark Friesland West 27b 8466 SL Nijehaske, The Netherlands
Tel: +31513640633
www.newion-investments.com
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Capricorn’s investment strategy
Companies meeting the following criteria:
Geography core activities in the heart of Europe and co-investments in other areas alongside strong and return-driven local VC partners
Financial instruments equity investments resulting in a significant minority stake
Technology stage minimum requirement: a proof of concept exists and the mode of action is understood; with a strong preference for defendable intellectual property
Company stage € 0.5 to 5 M initial investment in the first and second VC rounds; reserve for follow-on investments
Exit perspective activities applicable to a growing market segment with an exit window of 3 to 7 years after initial investment
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Newion’s investment strategy
Companies meeting the following criteria:
Geography core activities in the Benelux-investments and in other areas alongside strong and return-driven local VC partners as long as there is a strong Benelux ‘angle’
Financial instruments equity investments resulting in a significant minority stake (minimum 20%)
Company stage minimum requirement: First revenues, business model shows traction. Market validation is there. Intellectual property is there
Technology focus
Company stage
Business to Business Software, innovation is an existing market
€ 0.5 to € 2 mln initial investment in the first and second VC rounds; reserve for follow-on investments up to max € 4 mln
Exit perspective activities applicable to a growing market segment with an exit window of 3 to 7 years after initial investment