Authorised & Regulated by the Financial Services Authority Slide 1

Venture Capital Financing Innovation

Jason Pinto Amadeus Capital Partners Ltd CUTEC Team Meeting 30th November 2011

Slide 2

Outline

Who am I and why are we here.

What is Venture Capital? The investor’s perspective

The Venture Capital Cycle. How do funds (money) flow in this world?

What is Venture Capital? The entrepreneur’s perspective

VC in context of other types of equity investors.

Some examples of Venture Capital and Private Equity transactions

The Venture Capital investment process.

What do venture capitalists look for in an investment?

VC and The Entrepreneur: What are you signing up for taking money from a VC?

Venture Backed Company Cycle: How do VCs (and others) make money investing in technology start-ups

Slide 3

Amadeus Capital Partners Building Market Leaders

Founded in 1997 by Anne Glover and Hermann Hauser

Backing visionary entrepreneurs to build world-class, market-leading companies

Using our networks and experience to help maximise the potential and the value of those companies

We have invested in over 60 companies

We have 9 investment executives, based at our offices in London and Cambridge.

1998 Amadeus I £50 million

2000 Amadeus II £235 million

2002 Amadeus Mobile Seed Fund £3 million

2006 Amadeus III £162 million

2006 Amadeus and Angels Seed Fund £10 + £10 million

2010 Amadeus EI & EII £20 + 20m

Slide 4

Andrea Traversone

Partner

Cambridge

Joined 1998

Executive vice president of Villa Playa Dorada SA, a hotel, construction and development company

MBA Cambridge University BSc Economics, London School of Economics

Amadeus Capital Partners The Team

Anne Glover

CEO

London

Founder 1997

Past Chairman of the British Venture Capital Association; Calderstone Capital Ltd; Virtuality Group; Apax Partners; Bain & Co; Cummins MPPM, Yale University MA Metallurgy & Material Science, Clare College, Cambridge

Richard Anton

Partner

London

Joined 1998

Autonomy Corporation; Apax Partners; Autonomy, Neurodynamics; Rexam; Braxton Associates MBA, INSEAD MA Maths & Management, Christ's College, Cambridge University

Hermann Hauser

Partner

Cambridge

Founder 1997

Founded/Co-founded Cambridge Network Limited, NetChannel, Virata, ETrade UK, Active Book Company and Acorn Computers/ARM PhD Physics, King's College, Cambridge University MA Physics, Vienna University

Alastair Breward

COO

London

Joined 2005

Taylor Wessing law firm; Virtuality Group plc; Bird & Bird law firm; Talman Pty Ltd; Arthur Andersen

SAB in Law, Sydney University BA, Economics and Philosophy, Oxford University

Pat Burtis

Investment Manager

London

Joined 2006

Bain & Co, McKinsey (Electric Power Practice); H2Onsite

Masters of Environmental Engineering, Yale University BA Economics & Writing, Dartmouth College (USA)

Jason Pinto

Investment Manager

Cambridge

Joined 2006

E Ink Corp.; AlliedSignal Inc.

PhD Physics, Cambridge University

MS Materials Science and Engineering, Stanford University BS Materials Science and Engineering, MIT

Slide 5

Amadeus Capital Partners The Amadeus and Angels Seed Fund Team

Alex van Someren

Partner

Cambridge

Joined 2010

Co-founder: nCipher, ANT. Early at ACORN computer. nCipher with became world leader in IT security. Raised a total of £14 million in venture capital. Company listed on the London Stock Exchange in 2000 (LSE:NCH) at a £350 million valuation.

Laurence John

CEO AMSF & AASF

Cambridge

Joined 2001

Personal Offer; Motorola; Smiths Industries in the Aerospace Sensors division

MA Marketing, Kingston University MSc Optics, Imperial College BSc Physics, Imperial College

Slide 6

What Makes Amadeus Different?

A strong team

– Substantial operational experience

– Deep understanding of technologies and markets

– Wide and strong networks

A focus on European technology clusters combined with a global outlook

Long term commitment

Vision and ambition

Slide 7

What is Venture Capital? The Investor Perspective

A VC has five main characteristics

1. A VC is a financial intermediary, meaning that it takes the investors’ capital and invests it directly in portfolio companies

2. A VC invests only in private companies. This means that once the investments are made, the companies cannot be immediately traded on a public exchange

3. A VC takes an active role in monitoring and helping the companies in its portfolio.

4. A VC’s primary goal is to maximize its financial return by exiting investments through a sale or an initial public offering (IPO)

5. A VC invests to fund the growth of companies.

A financial intermediary is similar to a bank because just as a bank takes money from depositors and then loans it to businesses and individuals, a VC fund takes money from its investors and makes equity investments in companies.

“Venture Capital and the Finance of Innovation,” Andrew Metrick.

Slide 8

The Venture Capital Cycle

VC firms are fund managers and raise pools of capital (funds) from large investors acting as Limited Partners (LPs)

– Pension funds

– Insurance companies

– Banks

– University endowments

– High net worth individuals

LPs typically invest a small portion of their capital in VC, investing the rest in stocks, bonds and other traditional instruments.

Fund structure

– Typically fixed lifetime of 10 years (period from first fund-raising to return of LP capital)

– Range in size from $ millions to $ billions

– Both size and fund life have severe implications for types of companies that a VC will back.

Exits: IPO of

sale of portfolio

companies

Portfolio

Companies

VC funds

managed by

General

Partners (GPs

of VCs)

Limited

Partners

(investors or

LPs)

Slide 9

What is Venture Capital? The Entrepreneurs Perspective

Sources of funding an entrepreneur may consider to fund his/her business

Own capital

– If you are lucky enough to be wealthy or have a business idea that requires very little capital (bootstrapped)

Enterprise and development agencies

– Great sources of ―free‖ money in the form of grants, but can be long process to win

Equity Investors

– What we are here to talk about today. Provide capital in exchange for ownership in company. Hold claims on assets and future profits of company. Greater risk to investor than debt but greater potential gains. Have specific shareholder rights.

• Private investors

• Friends and family

• Business Angels

• Venture capital

Debt

– Lower investor risk as debt paid back first on exit, but limited upside. Need to be backed by some form of collateral. Requires regular repayment of interest.

• Bank loans

• Credit cards

Slide 10

The Equity Investor World VC in Context

VC is a subset of Private Equity (PE), but confusingly the term PE has other uses

Firms focus differentiated by

– Geography e.g. Amadeus invests only Europe and Israel

– Sector e.g. Amadeus does not invest in biotechnology

– Stage of company

– Size of deal (mostly dictated by size of fund, e.g. Amadeus III investment average $10-15m)

Stage R&D Start-up Early Growth

Accelerating Growth

Sustaining Growth

Maturity Growth

Shake Out Relaunch

Type of Funding

Proof of concept

Seed First Round Second Round Development Capital

Replacement Capital

MBO/MBI

Delisting

Relist or trade sale

Source of Funding

Public Sector (<$1m)

Founder, Family & Friends

Angels (< $1m)

Venture Capital (<$20m)

Corporate Venturing

Public Listing/IPO

Private Equity/Buyout (<$5 bn)

Slide 11

The Equity Investor World Some Specific Examples

Company Investors Amt. Invested Rounds

Exit

Cambridge Silicon Radio

Amadeus, Intel Capital, 3i, SEP, Siemens Venture Capital, ARM, Philips …

$80m 4 £250m IPO on LSE

Google Kleiner Perkins, Sequoia, GE Capital …

$25 – 50m 3 $1.2 bn IPO on NASDAQ

Facebook Peter Thiel, Reid Hoffman, Accel Partners, Greylock Partners, Meritech Capital Partners, Founders Fund, Microsoft, Li Ka-shing, European Founders Fund, Digital Sky Technologies, Elevation Partners, Goldman Sachs

$2.34 bn

Freescale Semiconductor

Blackstone, Carlyle, TPG, … $17.6bn 1 $4.3 bn NYSE IPO

TDC Apax, Blackstone, KKR, Permira, Providence

$13.9bn 1

Slide 12

The VC Investment Process

Stage Entrepreneur Entrepreneur & VC VC Reports

Approaching VC firm and evaluating business plan

Prepare business plan

Contact firm

Review business plan Business plan

Initial enquiries and negotiation

Provide supporting information

Meet to discuss business plan

Build relationship

Negotiate outline terms

Conduct initial enquiries

Value the business

Consider financing structure

Term sheet

Due diligence Liaise with external consultants

Initiate due diligence exercise

Consultant reports

Final negotiation Disclose all relevant business information

Negotiate final terms

Document constitution and voting rights

Draw up completion documents

Disclosure letter

Warrants and indemnities

Memorandum and articles of association

Shareholders agreement

Monitoring

Exit

Provide periodic managerial accounts

Communicate regularly with investors

Seat on board

Monitor investment

Constructive input

Involvement in major decisions

Management accounts

Minutes of board meetings

Slide 13

What do VCs Look for in an Opportunity?

Market – Large, emerging and fast growing markets

– Does the company have potential for scale and sustained growth?

Technology – Is the product or service commercially viable and significantly better (10x)

than competition?

– Defensible IP that can be protected from competitive barriers over time.

Business Model – How will you make money, how will you sell?

Team – Domain expertise with core technical strength and knowledge of given

market opportunity

– History of success. Does management have the ability to exploit this potential and control the company through the growth phases?

– A willingness to allow VCs to help build team

Does the possible reward justify the risk? Does the potential financial return on the investment meet their investment criteria?

Slide 14

VC and The Entrepreneur What are you signing up for taking money from a VC?

Cheque book. Capital to expand and run your business

Experience. Can draw on many years of experience from executives at firms who have run businesses in your area before

Rolodex. Can draw on the connections of the whole firm built up over many years in business.

Long term partner. Will support company through many rounds of investments and ups and downs.

Potentially big payoff. Entrepreneur ends up with a smaller slice of a much larger pie.

Big ambitions. VCs generally want to grow big companies

Loss of ownership. Equity investors will eventually own large part (generally majority) of company and share in the financial windfall of success.

Loss of control. Equity investors as majority shareholders ultimately control fate of the senior management team and essentially the company

Push to exit. Equity investors need to have company sold of go public in order to return investment.

Slide 15

Venture Backed Company Cycle How do VCs (and others) Make Money

The Cambridge Silicon Radio Story

Source: Equity Fingerprint, The Revolutionary Business Plan Resource

Slide 16

Entrepreneur’s Playbook Tips on Engaging VCs

Determine if you need VC, and don’t approach one if you don’t. VC money is expensive.

Figure out your stage and sector and identify 4 – 5 firms that focus on this area.

Identify which partner is most relevant to your business

Get an introduction to that partner

Send the partner the 1 – 2 page executive summary and be prepared to give 10 – 15 slide presentation if you get to meet them in person.

Only goal of first meeting is to get a second meeting.

Expect a 12 – 16 week process

VCs will need to see

– Presentation

– Financial plan

– Current ownership structure (Cap table)

– Personal references

– Market references

– Market research

– Competitive analysis

– Product plan

VCs will seek

– 20 – 50% of company for their investment

– Valuation that is a function of the stage of the company, ultimate potential, targeted ownership and amount of money you are attempting to raise

– Board seat

– … and lots more

Slide 17

Entrepreneur’s Playbook More Tips on Engaging VCs

Don’t take rejection personally, the odds are against you (most good VCs fund one out of every 100 – 200 opportunities they see).

Every VC is “interested” – push them to work to test their level of interest

Don’t waste too much time trying to change the mind of someone who says no. Ask and accept feedback and use it to shape your next pitch

Don’t shop your plan to multiple partners in a firm if the first one rejects you.

Don’t ignore the junior team members—they can really help and end up doing most of the work anyway

This is a business of people and personal contacts matter—focus on a firm that has some connections to you.

Slide 18

Acknowledgements & References Where I Borrowed Most of this Material From

Presentations from my colleagues: Simon Cornwell, Bill Earner and Roy Merritt

“A Guide to Private Equity,” British Venture Capital Association, http://www.bvca.co.uk/

“A Guide to Venture Capital,” Third Edition, Irish Venture Capital Association in association with InterTradeIreland’s EquityNetwork

“Equity Fingerprint, The Revolutionary Business Plan Resource,” Philip Baddeley et al., http://www.equityfingerprint.com/

“Introduction to Venture Capital” Will Price, Hummer Winblad Venture Partners. http://www.slideshare.net/pricew/introduction-to-venture-capital/

“Venture capital and the finance of innovation,” Andrew Metrick.