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Prepared for James J. Hill Reference Library March 8, 2006
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1 Prepared for James J. Hill Reference Library March 8, 2006 How to Secure Venture Capital
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How to Secure Venture Capital. Prepared for James J. Hill Reference Library March 8, 2006. Agenda. Venture Capital Industry Capturing the Attention of a Venture Capitalist Deal Killers Summary. Venture Capital Industry. Valuations: Pre-Bubble Normal. Small VC Funds Disappearing. - PowerPoint PPT Presentation
Transcript of Prepared for James J. Hill Reference Library March 8, 2006
1
Prepared for
James J. Hill Reference Library
March 8, 2006
How to Secure Venture Capital
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Agenda
Venture Capital Industry Capturing the Attention of a Venture
Capitalist Deal Killers Summary
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Venture Capital Industry
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Valuations: Pre-Bubble Normal
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Small VC Funds Disappearing
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U.S. Venture Capital Market Trend Info
% of U.S. VC
0%
10%
20%
30%
40%
50%
60%
70%
1995
-1
1996
-1
1997
-1
1998
-1
1999
-1
2000
-1
2001
-1
2002
-1
2003
-1
2004
-1
2005
-1
Expansion Later StageEarly Stage Seed Stage
Group Median Expansion – 53% Later Stage – 18% Early Stage – 22% Seed Stage – 4%
Source: PWC MoneyTree
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Minnesota vs. U.S. Venture Capital Market Trend Info
Source: PWC MoneyTree
% of MN VC vs. U.S. VC
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Average MN vs. U.S VC Investment = 1.54%
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Capturing the Attention of a VC
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Finding the Right VC
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Courting the Right VC
Online DatingAnonymousHighly Competitive1 Chance
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Mini Due Diligence ProcessIs it “Venture Capable”
Management Relevant domain expertise Fundable
Product/Service Explicit customer need Clear and compelling value
proposition (ROI)
Market Size (> $250M) and
sustainable business drivers Target segment well defined
Validation Customers, customers,
customers Maturity of the
distribution plan
Deal Reasonable valuation and
terms Raising enough money to
hit meaningful milestones
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How Hard can it Be?
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A Rapidly Evolving World
Yahoo raises $2 million Amazon goes live Netscape goes public 45% heard of www AltaVista 16 million pages
1995
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Model VC Portfolio
-200,000
-100,000
0
100,000
200,000
300,000
400,000
500,000
600,000
1 2 3 4 5 6 7 8 9 10
Cash Flow HistoryDistributions
Contributions
Investment Period
Harvesting Period
$1.0 million commitment $2.0 million in distributed
capital 20% IRR
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Risk Return Ratio
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It’s Very Hard…
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Vulture Capitalist
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Management
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Moe, Curly, Larry
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Investing In TalentFactors considered most important by investment professionals
(Weighted importance out of 100*)
Management Team
Market Sector
Business Model
Proprietary Product/Service
37
24
20
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Source: Spencer Stuart/NVCA VC-backed Leadership survey
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“As a founder, think hardest about the team. Are these the people I want to
be in trouble with for the next 5, 10, 15 years of my life? Because as you
build a new business, one thing’s for sure: you will get into trouble.”
John Doerr, Kleiner Perkins Caufield & Byers
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Product/Service
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Technology is only the Ante
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Explicit Need / Compelling ROI
All Customer ReviewsAverage Customer Review:
IT Budgets and ROI:“Purse strings are loosening ever so slightly, but that won’t slow the quest for better metrics”
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Sustaining vs. Disruptive Technologies
Sustaining Technology Foster improved product performance
Disruptive Technology Bring to the market a very different value
proposition
The Innovator’s Dilemma – Clayton Christensen
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Sustaining vs. Disruptive Technologies
Sustaining Technology Improves
performance along an existing utility curve
A
BSustaining Technology
Cost
Performance
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Sustaining vs. Disruptive Technologies
Disruptive Technology Moves the market to
new utility curve
A
Disruptive Technology
B
Cost
Performance
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Market
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Market Characteristics
Worth Winning $250 million
Sustainable Drivers Y2k
Well Defined Subsegment
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Market - What not to say…
We only need a 10% market share
We have no competition
We are the low-cost solution
We conservatively project
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Validation
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Communicating the Message
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Seeing the FutureCustomers and Distribution
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Deal
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Seed StageSeed Stage
100% – 100% – 30% IRR30% IRR
Early Stage – Early Stage – (Sherpa)(Sherpa)
50% - 20% IRR50% - 20% IRR
Expansion StageExpansion Stage
25% - 15% IRR25% - 15% IRR
Late StageLate Stage
20% - 12% 20% - 12% IRRIRR
Early Adopter Customers
Early Majority Customers
Late Majority Customers
Innovation Customers
Friends & Family
Angels
Institutional - VCs
Public Market
Equity Financing Food ChainReturn Expectations
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Return Expectations
37
Return Expectations
5-10x your investment
or
30%+ IRR
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Sherpa Pocket Guide to Success
Quick Go vs. No Go Decision(4x in 5 Years = 32% IRR)
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Deal Killers
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Common Mistakes
Lack of Passion/UrgencyUnrealistic AssumptionsUnderestimating CapitalNot Enough RunwayFlawed Transaction Model Not Pursuing Multiple Paths
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Summary
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“Venture Capable” Opportunity
Team – Team - Team “Been there, done that”
CEO Large/Growing Market Target Market Defined Explicit Problem to
Solve “Unfair”, Sustainable
Advantage
Barriers to Entry for Competition
Market Validation Milestones Established “Wow” Advisory /
Governing Board Exit Strategy Team – Team - Team
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“It is not the strongest of the species that survives, nor the
most intelligent; it is the one that is most adaptable to change.”
Charles Darwin, British Naturalist
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“Work hard, work passionately, but apply your most precious asset – time – to what is most
meaningful to you.”
Randy Komisar, Author of The Monk and the Riddle
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“When all is said and done, the journey is the
reward. There is nothing else.”
Randy Komisar, Author of The Monk and the Riddle
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Rick Brimacomb
Founder, Brimacomb & AssociatesGeneral Partner, Sherpa Partners
Board Member, Minnesota Venture Capital Association
