Understanding venture capital

Nic Brisbourne Cass Business School Lecture November 27th 2009

Agenda

• Introduction

• The four aspects of venture capital– Raising money to make investments

– Making investments

– Exiting investments (aka portfolio management)

– Managing ourselves

Nic Brisbourne

• 10 years in venture– 4 years corporate venturing with Reuters

– 6 years with DFJ Esprit

• Career VC

• 2008 Deal of the Year for Buy.at exit

• Focused on the internet

• Blogger at www.theequitykicker.com

• DFJ Esprit is a leading venture capital investor focused on five target segments: technology, media, telecoms, medtech, cleantech and healthcare.

• Esprit aims to provide superior returns for investors in its funds by investing in, and helping entrepreneurs grow world class companies.

• Esprit Capital Partners is the product of the 2006 merger between Cazenove Private Equity and Prelude Ventures.

• Prelude Ventures has been successfully making early stage investments in the UK and European technology, life-science and healthcare businesses for 21 years.

• Cazenove Private Equity has been active as a cross stage investor in the European technology market since 2000, making more than 20 investments in this time.

• Recently announced:

• A new primary fund

• The acquisition of 3i’s European IT venture portfolio

DFJ Esprit

Structure of the venture industry

Fees + Carry

Home runs – the maths demands them

• Target IRR of 30-35% and a four year average holding period implies a 3x multiple on the whole fund– Sample fund of 10 companies, average

investment of £1 per company• Two 10x returns = £20

• Three 3x returns = £9

• Two money back = £2

• Three write offs = £0

• Total = £31, or 3.1x multiple on whole fund

Different funds specialise in investing differing amounts

SeedEarly StageSeries A, (B)

Later Stage(B),C,D…

Pre-IPO / Buy-out

PrivateEquity

Investment Size

Potential Sources of Funds

0 - €1m

Grant-funding

University seed funds

Friends and family

Angel Investors

(Venture Capital)

€2m-€20m

Venture Capital

(Wealthy) Angel investors

€5m-€20m

Venture Capital

€30m+

Specialist Late stage tech investment funds

Hedge Funds

The process of making investments changes with the heat in the market

How VCs find companies

• Decide what sectors to look in– Thematic investing

– Ad hoc/reactionary investing

• The process of finding companies– Network, network, network

– Advisors

– Research

– Cold approaches

Deciding to make an investment

• Fit with fund strategy

• Multiple meetings assessing exit potential – needs to be big!– Market

– Product

– Team

– Why this business will win

• Company needs to have momentum

Investment execution• Termsheet• Formal due diligence• Legal documents

– Articles– Shareholders agreement– Reps and warranties

• Takes time – need to keep performing throughout• Two end-to-end examples

– Buyat – 500 days– Tribold – 90 days

Typical deal terms

• Target 20-35% ownership

• Board Representation• Liquidation Preference• Participation rights• Certain control and veto

rights• Option Pool• Period of exclusivity to

close legals

but that’s so

unfair…

Helping companies to help themselves

• A good board focuses on (per Patrick Dunne):– Right strategy– Right resources– Staying out of jail

• A good VC investor director (generally) focuses on– The high level– Areas where they will make a difference– A small number of issues (ideally one)

What a good VC will add

• Advice and Strategy

• Hiring– Developers– Country Managers– Sales– CEO / CFO / COO– Advisory Board

• Partnerships

• Profile and PR

• Internationalisation

• Trusted service provider relationships

• Search / recruiting• Branding / PR• Finance, etc

• Exit optimisation• Knowledge / contacts

with relevant buyers• Experience with

process

Making the fund a success

• Focus resource where it will make a difference– This is tough

• Keeping sufficient reserve capital

• Maintain decision quality– Stop partners from going native

• Ensure a steady flow of exits– Buy.at example

Internal process for a VC fund

• Typically centres around a weekly partners meeting– Ours has three sections, as above

• Key is good information and good decision making

• Challenge is making it work in a partnership where everyone operates autonomously

Recruitment into a VC fund

In private equity you have to be financially trained and to have an understanding of management, but you also have to have a strategic brain while being sensitive to tactical and people issues. 

““

And a passion for your sector!!!And a passion for your sector!!!

Conclusion

To do this job is a privilege

Thank you&

Questions

Nic Brisbourne, Partner DFJ EspritTheEquityKicker