Insight into the mind of a Venture Capitalist

Insight - the mind of a VC

Marc Lambrechts - Capricorn Venture Partners

Patrick Polak – Newion Investments Management

BVF Leuven – 2011-05-16

Or…

How many cliché's can you present

in 20 minutes…

Your speakers today

• Dr ir Marc Lambrechts

– research in microsystems and PhD on biosensors at KU Leuven

– industrial R&D experience at Terumo Europe

– RTD programme management experience at IWT

– + 10 years experience as senior investment manager in early stage venture capital

– technology fusion as special area of interest

– board member Boondoggle, fluXXion, Neosens, Leuven.Inc

• Capricorn Venture Partners

– founded in 1993

– independent and partners-owned

– pan-European activity, located in Leuven, Belgium

– hands-on, early stage & technology focus

– investing out of Capricorn Cleantech Fund and Capricorn Health-tech Fund

• Ir Patrick H. Polak (1965)

– TU Delft, Aerospace Engineering (1984-

1992)

– Founder, COO IT company (1991-1996)

– VC Investment manager (1997-2000)

– VC: Managing Partner Newion Investments

(2001-….)

– 18 Relevant Board seats since 1997

• Newion Investments Management

– Founded in 2000

– Independent and partners-owned

– Benelux Focus; located in Heerenveen and

Eindhoven, The Netherlands

– Investing from Newion Investments II and

Private Plus Fund

2011-05-16 Insight the mind of a VC 3

4 Insight the mind of a VC

Portfolio examples

2011-05-16

Portfolio examples

Differences between

Private Equity and Venture Capital

Private Equity invests in private

companies

The invested amounts will go to

the old shareholders and, in

general, bank loans are involved

for the acquisition finance.

Loans will be repaid by the cash

flow of the company.

The investors concentrate primarily

on maximizing of cash flow, and

strategy

Venture Capital invests in fast growing and ambitious companies

The invested amounts will be invested in the company to accelerate growth.

The investors concentrate on rapid market penetration and increase of market share, and acceleration of product development.

Who is the client of a VC?

• Is it the Company where the VC wants to invest in?

• Is it the “Exit partner” where the VC wants to sell it’s shares to? – Strategic, Financial, Stock Market?

• The client of a VC are its Shareholders: Banks, Institutional Investors, Pension Funds, Informal Investors.

– For Investors, VC’s are just a part of their investment mix:

a asset class with a high risk – high reward.

• They invest in: Private Equity for LBO’s, stock markets,

Hedge Funds, VC’s…

The Venture Capital model

8 Insight the mind of a VC 2011-05-16

IP

knowledge

experience

+

proof of concept

business plan

+

market

customers ..entrepreneurs and team

(TTO)

investors

€ € € €

€ € € €

€ € € €

€ € € €

€


Tech VC’s prefer to invest in…

• Entrepreneurs and a team

• Technology as sustainable competitive advantage

– strong and clean intellectual property/capital

– proof of concepts exists and mode of action is

understood

• A business model we understand and like

• Growing and huge markets

• ‘Need to have’ proposals with ‘identified

customer pain’

• Focus combined with mutant potential

• Well funded and capital efficient companies

• Exit perspective @ 5 to 10 x multiple

2011-05-16

Probability of Success

• Technical Success 60 %

• Commercial Success 50 %

• Economic Success 40 %

Overall Probability 12 %


….can a VC make a living?

• Track record Fund level: extreme good Returns: Net IRR >

20%! – after all costs, failures, etc…

• That is why VC’s look for IRR’s of >40%/company!

• No track record, no next fund!

Source: Evca-Thompson study july 2009

Top Quarter Net IRR Venture Funds 10 year 5,5%

Venture Funds 10 year Net IRR -1,4%

Newion Investments Net IRR 2001-2010 22%

Newion Investments DPI 2001-2010 2,5

Organization of a VC

Limited Partner 1 Limited Partner 2 Limited Partner 3 Limited Partner n

Newion Investments

Company 1 Company 2 Company 3 Company n

Newion Investments

Management

Fund Management

Advisory Board

Investment Committee/Board

Managing partners

Investment Directors

Investment managers

Analysts

Lifecycle of a VC...

• In general, VC’s are “closed-end Funds”

– Meaning that they have to close their fund after a certain time.

– 5 years investing, 5 years ‘managing’

• This influences the way you and the VC work together!

– Early stage company in the last year of investing for a VC??..... How long can the VC support your growth and needs?

FUND I

New companies Support companies

FUND II


FUND III


Process within a VC

Introduction

stage

Research stage and

negotiationsValue creation stage

Exit

stage

Elevator Pitch,

Exec summary

Business plan

Business plan, execution

plan, multiple

discussions, references,

third parties

involvement, due

diligence

Building team and company

Partnerships, financial

reporting, execution plans

third party analysts and

exposure, M&A if needed

M&A

advisors,

Analysts,

Due

Diligence

Lawyers

Investment

Manager,

AnalystInvestment director, analyst

Go/no go Team Go/no go Team + Board Go/no go Team + Board

NDA Termsheet

Investment

manager, analyst

and investment

directors

Financing

rounds

Share Purchase

Agreement

Shareholders

agreement

Prepare yourself

• Think the whole process through, just like you sell your products and services: Fund raising is a complex sales cycle

• Always make sure the information you provide is consistent during the whole process

• Make sure you prepare all the necessary data

• Prepare your references

• Work with professional Advisors especially Lawyers and Tax advisors

• Choose the right VC partner: it is a business marriage (same type of companies in their portfolio, industry knowledge, experiences – no first timers -, money in the bank). In a syndicate: make sure all VC’s are aligned with the same expectations, investment philosophy and “mid term visions”.

• Ask references from the VC’s

• Keep momentum all the time– For a VC it is “killing” if the project is stalled for weeks because the entrepreneur has to

deliver something…

• 1 VC can ask 1000 stupid questions, more then 10 wise entrepreneurs can answer….

Elevator Pitch Example

Hello Mr. Green,

My name is Georges Leclanché, CEO of CleanStore, a French company active in utility-scale electricity storage. We solve the problem of intermittent power generation of wind or solar farms and experience increasing market traction from utilities and operators active in renewable energy.

Our solution consists of modular battery-based units for load balancing and energy storage. In comparison with other systems on the market, we have demonstrated a 10% higher efficiency at half of the investment cost (well below € 200k/MWh) and with minimal operational cost. Our systems are based on an innovative patented cell chemistry using cheap, safe and abundant materials.

We plan to raise a € 5 million series B round by the end of the year and would like to present to Empedocles Ventures our investment case. Are you interested in receiving more information in preparation of a meeting?


Business plans…strategy without execution is hallucination

Business Plan

• Team

• Vision

• Business model

• Products and solutions

• Intellectual Property (if any) and strategy

• Market and Market developments

• Product developments

• Competition

• Clients (and future clients…)

• Business cases for your clients

• Organization and structure (inclshareholders)

• History

• Financials (P&L, Balance sheets, Cash flow forecasts)

• Sales and pipeline

• Use of proceeds

Execution plan: What will you do within the next 8 quarters

• Product development and road map

• Marketing

• Organization

• Roll out plan:– Partner strategy (if any) and actions/timing

– Internationalization (if any) and actions/timing

• Analyst strategy

• Sales and account plans

The Execution plan is updated every quarter: on which items have been done, not done, changed etc, and how this influences the next 8 quarters.

Make sure that all this is done and written

before you approach a VC. And make sure it

is “ready for due diligence”.

Preparation is key for a smooth process

Why investments fail?

• Technology

– The technology being developed by a start-up may just plain not work.

– The technology works in the lab, but takes too long to scale up to a point where the

economics work.

– The technology works, but something better comes along.

• Market

– The dogs won't eat the dog food.

– Existing solutions may be "sticky" because of existing infrastructure.

– The hoped-for market never materializes within the investment timeframe.

• People

– Gaps in the management team skill set.

– Management teams that don't know how to use their Board.

– Investors who push for a more capital-intensive growth path.

Source : Rob Day www.greentechmedia.com/cleantech-investing/post/why-cleantech-

venture-investments-fail/18 Insight the mind of a VC 2011-05-16

19

Choosing the business model

Leo Baekeland on the IP license business model

"I firmly intended to escape the recurrence of business occupations, as in my Velox days. So I planned, instead of manufacturing myself, to grant licenses to established manufacturing concerns, especially experienced in plastics. But I soon was confronted with a repetition of my former experience with Velox: that it was very difficult to teach new methods to men who had acquired routine in older processes. The preparation of the new resinoid and its molding compositions, which to me seemed very simple, appeared either very difficult or needlessly complicated to others. Reluctantly I had to start manufacturing the raw materials in a sufficiently advanced stage so that the users had only to complete the operation of molding and polymerization.“

See also ”The Baekeland story - Lessons for today’s ventures in new materials”http://be.linkedin.com/in/marclambrechts

2011-05-16Insight the mind of a VC

Team formation

• Get business & entrepreneurial experience in the team

• Do not force researchers in a CEO role

• Build multidisciplinary teams (not all engineers!)

• International exposure and language skills

• Humans are not scalable

• Do not expect the same salary and goodies as in a corporate environment

• Key persons that you have to pay more as the founders?

• No function in a start-up company is forever

• Keep you friends as friends

• And keep your Cap Table clean…

• Foresee “good leaver – bad leaver” conditions in shareholders agreement

and stock option plans


….Some lies….

• …Told by Entrepreneurs:

– The market is $2.5 billion today going to $ 7.5 billion in 2014!

– BMW, GE and Phillips have selected our products.

– Cisco wants to become a strategic partner

• …Told by VC’s:

– Our money is different!

– There is no need for signing a NDA! No one in the industry does!

– We can recruit a team of first- class of directors

– I will become your board member and will be your full time advisor

Conclusion

“Strategy without Execution is Hallucination“ (Steve Ballmer CEO Microsoft)

Do not try to build castles in the sky…VC’s are still very cautious and “there is no such thing as a free lunch”.

Choose the right partners!

It is a business marriage…

There is no “success guaranteed” recipe!

Prepare! Prepare!! Prepare!!!

Stay focused, have fun!


For further reading

• http://www.bva.be

• http://www.bvca.co.uk

• http://www.evca.eu

• http://www.brownrudnick.com/nr/request.asp?ID=3 (legal terms)

• http://www.mit100k.org

• http://entrepreneurship.mit.edu/15975/index.php

• http://www.enterprise.cam.ac.uk/uploads/File/BuildingBusiness/StartingATechnologyCompany.pdf

• http://www.openinnovation.eu

• http://www.venturebeat.com (silicon valley blog)

• http://www.redherring.com

• http://www.tornado-insider.com

• http://www.cleantech.com

2011-05-16

For more information

Capricorn Venture Partners

Dr ir Marc Lambrechts

Marc at capricorn dot be

Lei 19/1, B-3000

Leuven, Belgium

Tel. +32 16 28.41.00

www.capricorn.be

Newion Investments Management

ir Patrick Polak

Polak at newion-investments dot com

Businesspark Friesland West 27b 8466 SL Nijehaske, The Netherlands

Tel: +31513640633

www.newion-investments.com

2011-05-16 Insight the mind of a VC 24

http://creativecommons.org/licenses/by-nc-sa/3.0/


Capricorn’s investment strategy

Companies meeting the following criteria:

Geography core activities in the heart of Europe and co-investments in other areas alongside strong and return-driven local VC partners

Financial instruments equity investments resulting in a significant minority stake

Technology stage minimum requirement: a proof of concept exists and the mode of action is understood; with a strong preference for defendable intellectual property

Company stage € 0.5 to 5 M initial investment in the first and second VC rounds; reserve for follow-on investments

Exit perspective activities applicable to a growing market segment with an exit window of 3 to 7 years after initial investment


Newion’s investment strategy

Companies meeting the following criteria:

Geography core activities in the Benelux-investments and in other areas alongside strong and return-driven local VC partners as long as there is a strong Benelux ‘angle’

Financial instruments equity investments resulting in a significant minority stake (minimum 20%)

Company stage minimum requirement: First revenues, business model shows traction. Market validation is there. Intellectual property is there

Technology focus

Company stage

Business to Business Software, innovation is an existing market

€ 0.5 to € 2 mln initial investment in the first and second VC rounds; reserve for follow-on investments up to max € 4 mln

Exit perspective activities applicable to a growing market segment with an exit window of 3 to 7 years after initial investment