VC Due Diligence BasicsVC Due Diligence Basics

October 15, 2002October 15, 2002

Craig Gomulka

Draper Triangle Venturescraig@dtvc.com

Today’s TalkToday’s Talk

• Who is Draper Triangle

• Our Investment Profile

• Our Investment Timeline

• Three Stages of Diligence

• Case Study: Hypernex

• Questions

Who is Draper Triangle?Who is Draper Triangle?

• Located in Pittsburgh, Pennsylvania

• PA-based fund of Draper Fisher Jurvetson

• First-round, early stage, lead investor

• High-tech fund - Education, MEMS, Data,

Semiconductor, Advanced Software,

Medical Devices, Optical, Automation

The DFJ NetworkThe DFJ Network

Timberline Venture PartnersTimberline Venture PartnersVancouver, WAVancouver, WA

Draper Fisher Draper Fisher JurvetsonJurvetson

Redwood City, CARedwood City, CA

Zone VenturesZone VenturesLos Angeles, CALos Angeles, CA

Wasatch Venture FundWasatch Venture FundSalt Lake City, UTSalt Lake City, UT

Access Venture PartnersAccess Venture PartnersWestminister, COWestminister, CO

Austin, TXAustin, TXDFJ PortageDFJ PortageChicago, ILChicago, IL

Draper AtlanticDraper AtlanticReston, VAReston, VA

Draper Triangle Draper Triangle VenturesVentures

Pittsburgh, PAPittsburgh, PA

DFJ New EnglandDFJ New EnglandCambridge, MACambridge, MA

Draper Fisher Draper Fisher Jurvetson GothamJurvetson Gotham

New York, NYNew York, NY

Sta

ge

National InternationalSeed

Late

Draper International

E-Planet

The Expanded NetworkThe Expanded Network

DFJ Fund and MeVC

Affiliates

Early

Mid

Draper Triangle PortfolioDraper Triangle Portfolio

Investment Profile - We need to see…Investment Profile - We need to see…

• Focus - Solve a specific problem or meet a specific need very well in a defined niche.

• Billion dollar markets

• Sustainable competitive advantage

• Well rehearsed presentations

• Realistic valuation expectations

• Strong exit strategy

• That you’ve done your homework on the private equity community, tell the VC what synergies exist between you and them.

Investment Profile - We need to see…Investment Profile - We need to see…

• Solid Management Team– Should have domain experience

– Smart, driven people

– Credible references help

“We buy dreams, not resumes. Draper looks for people who talk about changing the world, not building a business. When you ask them where it will be in ten years, they have an answer.”

Steve Jurvetson – Partner, Draper Fisher Jurvetson

Investment Profile - We don’t like to seeInvestment Profile - We don’t like to see

• Citing ghost products as competitive advantages

• Quoting your markets too far out

• Raising too much money

• Teams looking only for $$$

• CEO and team members who don’t know their limitations

• Poor market due diligence

The Funding TimelineThe Funding Timeline

1. Review business plan

2. Bring in management team to present

3. Evaluation of opportunity

4. Internal partners meeting

5. Term sheet

6. In-depth due diligence

7. Legal documentation

8. Funding

1 to 4 Months

Initial level of due diligenceInitial level of due diligence

• Level I (after the plan and initial go/no-go)– Meet the team

• Prior entrepreneurial experience

• Experience in the market place

• Would we enjoy working with the team?

– High level understanding of• Product, Market size and Exit Potential

• Competition and Differentiation

• Marketing, Sales, Competitive strategy

– Go or no-go decision

Secondary level of due diligenceSecondary level of due diligence

• Level II (gets more interesting now)– Market research, competitive analysis

– Marketing and sales plan validation

– Financial validation (numbers make sense?)

– Potential/existing customer/partner calls

– Independent industry insider/expert calls

– IP review, existing patent scan

– Better validation of likely exit scenarios

– Have we enjoyed working with the team?

– Go or no-go decision for term sheet

Final level of due diligenceFinal level of due diligence

• Level III (after term sheet, the boring stuff)– Management team background checks

– Corporate and organizational (books in order?)

– Capitalization structure, benefit plan

– Intellectual property (legal review)

– Financials (historical audit/review, tax returns)

– Existing contracts and obligations

– Properties, leases and insurance

– Reps and warranties in the term sheet

Hypernex Case Study: IntroductionHypernex Case Study: Introduction

• Location: State College, PA

• History: Early stage, spinout from ATMI

• Size: At time of investment, 6 person team

• Technology: Rapid crystalline microstructure analysis using X-ray diffraction

• Markets/fields of use: Semi, biotech, others

• Product stage: prototype completed and in use by first prospective customer

• Fund raise: $1.75 M

Hypernex Case Study: the ProductHypernex Case Study: the Product

• Is this a “must-have” or a “nice-to-have” for semiconductor manufacturers?

• What are the hurdles to product completion?• Who do we need to hire to get us there?• Third party technologies/licenses?• Key metrics IBM will use to evaluate the

usefulness of the product?– Device yield– Device performance– Bottom line/ROI

Hypernex Case Study: the TeamHypernex Case Study: the Team

• Do they know the technology?• Do they understand the space?• Do they have contacts they can leverage?• Do we have contacts they can leverage?• Who else do they need to hire?• Team dynamics - work together well?• Are they excited about what they are

doing?• How does their history check out/DD

calls?

Hypernex Case Study: the MarketHypernex Case Study: the Market

• What are the characteristics?– Established growth, but very cyclical

– Very large, over the $1B threshold

• Do we own the whole market or a small part? :Different market sizes acceptable

• Who is driving the sales?

• What market pain are they addressing?

• What trends are in their favor?

Hypernex Case Study: the CompetitionHypernex Case Study: the Competition

• Who else makes XRD for the fab?

• Who else makes XRD for the lab and could cross over into the fab?

• How intimately is the company’s competitive protection tied in to their IP?

• What barriers has the company created via technical, IP or even marketing/biz dev?

• Why has no one else approached this market?

Hypernex Case Study: the FinancialsHypernex Case Study: the Financials

• First 12-18 months, identify each customer, should fit precisely with the sales plan, no blind projections

• What supports the assumptions?– Industry comps

– Management/board prior experience ** adds credibility

• What are the growth drivers of the hockey stick?– Have you become the industry leader/only solution

– Effects of competition, large or small implications

• Bottom line – any realistic thought put into them? There is a difference between an educated guess and POMA

Hypernex Case Study: the ExitHypernex Case Study: the Exit

• Which companies benefit from Hypernex

• Which companies are hurt by Hypernex

Both are potential buyers…

• What evidence supports acquisition vs IPO– Historical instances

– Strategic fit

• Historical acquisition/IPO data very helpful

• VCs statistically can not do low multiple deals

Thank you!Thank you!

2 Gateway Center, Suite 2050

Pittsburgh, Pa 15222

Phone: (412) 288-9800

Fax: (412) 288-9799

craig@dtvc.com

http://www.dtvc.com

For more information and FAQ