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Ben Holmes of Index Ventures speaking at Future of Web Apps in London, February 2007.
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Everything you need to know aboutVenture Capital
20 February 2007
Ben HolmesIndex Ventures
Who we are
€1.3bn under management
Active investor in web / internet
Pan European Venture Fund
Based London & Geneva
Index Ventures
Selected Investments
Agenda
Overview of Venture Capital
When to raise VC finance?
Strategies for VC fundraising
How to choose the right VC partner?
Venture Capital – Size of market
US - 2006– $25.7bn– 1446 transactions– $10.5m average investment
Europe - 2006– €4.1bn– 867 transactions– €14m average investment
55% of transactions within broad IT sector
However rapid increase in Web application investments– UK 2005 - £24m invested– UK 2006 - £79m invested
Sources: Dow Jones VentureOne, Paul Fisher at FirstCapital
Venture Capital – How the VC makes money
Raise fund every 2-4 years– Pension funds, financial institutions and specialist
“fund of fund” investors
Invest money over 3-5 years~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money
Very small management fee on funds managed~ 1-2.5% pa
Carry~ 20-25%x (Total Return – Total Amount Invested)
Venture Capital – Stages of Investment
Seed Early StageSeries A, (B)
Later Stage(B),C,D…
Pre-IPO / Buy-out
PrivateEquity
InvestmentSize
PotentialSources ofFunds
0 - €1m
Grant-funding
University seedfunds
Friends andfamily
Angel Investors
(Venture Capital)
€2m-€20m
Venture Capital
(Wealthy)Angel investors
€5m-€20m
Venture Capital
€30m+
Specialist Latestage techinvestmentfunds
Hedge Funds
Venture Capital – 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 serviceprovider relationships
– Search / recruiting– Branding / PR– Finance, etc
Exit optimisation– Knowledge / contacts
with relevant buyers– Experience with
process
VC Case Study
Company Creation– Index acting as Interim Mgmt
Team Recruitment– Mattias Miksche as CEO
Relocated to Stockholm
Board Hiring– Fred Davis
Additional Finance– Sequoia Capital
Celebrity Partnerships
Fashion Industry Partnerships
VC Case Study
Company establishes HQ inLondon
– Few hundred meters fromIndex
Day to day contact withfounders
Team Recruitment– Mike Volpi, Cisco as Chairman– Saul Klein, Head of Marketing– Etc.
Exit strategy– Index plays key role in
navigating multiple buyerdiscussions
– Successful exit to eBay€2.5bn+
Venture Capital – Typical Deal Terms
Target 20-35% ownership
Board Representation
Liquidation Preference
Participation rights
Element of reverse vesting
Certain control and veto rights
Option Pool
Period of exclusivity to close legals
but that’s sounfair…
Photo Source: Philip Greenspun, MIT
Agenda
Overview of Venture Capital
When to raise VC finance?
Strategies for VC fundraising
How to choose the right VC partner?
Good reasons to raise VC
Large PotentialMarket Opportunity
Unique Product Or Concept
ExcellentDevelopment
Capability
Pre-requisites
Intensecompetition
likely
Need to moverapidly
Implications…
Hiring
Infrastructure
VC funding supports
Rapid Product Development
Internationalisation
Partnerships
Commercialisation
When NOT to raise VC
Applicationis a feature
not a product
Market size istoo small
Motivation isnot financial
Risk is not that you waste time unsuccessfully tryingto raise finance …
… real danger is that you do succeed in raising VCfunds
– Lose opportunity for small exit which could bepersonally lucrative
– Lose opportunity to run lifestyle business– Get bound in to 3+ yrs work you may not enjoy
Agenda
Overview of Venture Capital
When to raise VC finance?
Strategies for VC fundraising
How to choose the right VC partner?
The top tips…
Have a great product
Focus predominantly on thebusiness not fundraising
Evidence of executional ability ismore exciting to VC than a 100page business plan
Identifying relevant VC partners
Has funds to invest
Match of Size/Stage/Geography
RelevantPortfolio
No directlycompetitiveinvestments
Excellenttrack record
Shortlist
Do create a shortlist
Rifle is a better weaponthan a shotgun
Good free sources on VC fundinghttp://www.thealarmclock.com/euro/http://www.vecosys.com
Getting on radar screens
Out of the blue email is a longshot
Try to build context– Analyse portfolio companies – are there any links
there– Analyse contact network and advisors– Analyse press coverage– Participate in blog conversations– Attend events and conferences– Relevant PR around product also helps
VCs spend their time looking for businesses withmomentum
Sharing relevant information
100 page business plan notrequired
20 page ppt which clearlyanswers main questions isbest bet
– Product– Market– Business Model– Team– Competition– Product Roadmap– Technology Overview– Business Development– Financial Status
Pre - first meeting Pre - termsheet Post - termsheet
Dialogue rather thandocumentation – expectlots of meetings
Calls with current /prospective customers orpartners
Meeting broader team
Brainstorming aroundstrategy
Identifying key hires postclosing
Formal presentation to VCpartnership
Some additional referencecalls with partners /customers
Personal reference calls
Legal / accounting audit (ifrelevant)
Drafting legaldocumentation
2-4 weeks 1-2 Months
Agenda
Overview of Venture Capital
When to raise VC finance?
Strategies for VC fundraising
How to choose the right VC partner?
Valuation should not be the decisive factor
Value at exit
Probability of getting there
% share of business at exit
Entrepreneur’s Equation Revenues / Profitability
Growth rate
Team quality
Strategic fit with buyer community
Well managed exit process
Fewest strategic errors made
Hiring (quality & speed)
Partnerships
Product development
Valuation at initial round
Valuation and dilution atsubsequent rounds
Option grants
Key things to consider
1 . RelationshipWith key individual(s); andbroader team
2 . ReferencesSpeak to other founders
3 . PortfolioRelevant experienceNon competitiveCommunity you want to bepart of
4 . Valuation and associateddeal terms
Right partner at a fair price
vs.
Any partner at best price
Thank you
Ben Holmes
Email: benh@indexventures.com
Skype: ben_holmes
Stardoll: binky2128
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