Embed Size (px)
Citation preview
Due Diligence for Early Stage Investing g y g g
EVCA Foundation CourseB d t O t b 2008Budapest, October 2008
Uli W. FrickeManaging General Partner
Copyright Triangle Venture Capital Group Management GmbH, October 2008
Managing General PartnerTriangle Venture Capital Group
Agenda
Due Diligence for Early Stage Investing
Agenda
Objectives
Due Diligence ProcessDue Diligence Process
Overall Investment Criteria
Technology, Market, Team, Patent and Phase Fit
Investment Case Modeling
Business / Technology and Patent Due Diligence
Termsheet Negotiationg
Investment Case Definition
Formal Due Diligence / Final Contract Negotiation
| October 2008Page 2
Objectives (1/2)
Due Diligence for Early Stage Investing
Objectives (1/2)
Before making any investment, our goal as venture capitalist is to understand virtually every aspect of the target company.
Address areas of concern.
Avoid significant and otherwise unexpected liability following the investment.
Generate Due Valuation & Add Value & E it Deals
Due Diligence process integrated in value chain.
GenerateDeal Flow
eDiligence Deal Structure
dd a e &Monitoring
Exit Deals
Cost & time effective Due Diligence and early determination of break-up factors.
| October 2008Page 3
Objectives (2/2)
Case Study #1: Handout ADB AG
Objectives (2/2)
Discuss case study in your group
Define suitable due diligence process
Address areas of concern
Discuss lessons learned / impact on Due Diligence
| October 2008Page 4
Due Diligence Process
Multilayered Selection and Due Diligence Process
Due Diligence Process
| October 2008Page 5
Level A (1/2)
Overall Investment Criteria
Level A (1/2)
Objective Very quick pre-screening (few minutes) to define whether the company fits the “Overall Investment Criteria” or not.
Criteria
Investment phase / stage fitCompany origin fitTechnology fitIndustry focus fitG hi l fitGeographical fitInvestment volume fit
| October 2008Page 6
Level A (2/2)Level A (2/2)
Use of Deal Database
ID Name
Date of initial contact Source
Industry focus Short company description
Deal champion
Technology
Date BP request
Date BP received
Date NDA sent
Date decline sent Status
080310 A 02.09.2008 Ernst&Young ICTServices & products for secure SAP programs Fr Software 02.09.2008 04.09.2008 LevelB-ongoing
080312 B 05.09.2008 Cat Cap GmbH ICTMobile banking and money transfer, remote micro payments Pa Software 11.09.2008 LevelA-decline
080313 C 02.09.2008 Bridge Link AG OtherResearch and development company for nutraceuticals Pa Physical 09.09.2008 LevelA-decline
080314 D 05.09.2008INI-GraphicsNet
a technology for infrared camouflage Pa Physical 11.09.2008 LevelA-declineonline platform to match
080316 E 11.09.2008 ICT
psucessful investors with insuccessful investors Fr Physical 11.09.2008 11.09.2008 LevelA-decline
080317 F 11.09.2008 Hr. Broermann MDdiagnoses and therapy of verious cancer diseases inside the body Ge Other 23.09.2008 LevelB-ongoing
Institut für Wirtschaftsber software for contact center
080318 G 11.09.2008Wirtschaftsberatung Other
software for contact center solutions Fr Software 15.09.2008 LevelA-decline
080319 H 03.09.2008 Othersystem for public and crowd gaming Fr Software LevelA-ongoing
080320 I 09.09.2008 F. Müller ICT software solutions for vehicels Pa Software LevelA-ongoing
| October 2008Page 7
Level B (1/2)
Technology, Market, Team, Patent and Phase Fit
Level B (1/2)
ObjectiveDevelop investment hypothesisQuick but well reasoned “no” if company does not fit investment criteriaQuick but well-reasoned no if company does not fit investment criteria
Quality of presentationQ a ty o p ese tat oTechnology / Product (e.g. target segment, key innovation, key competence, level of innovation, level of complexity handled, position in value chain, mission critical application, broad application potential, disruptive character of technology, scalability of product, product development status, technology risk)Market Potential (e g time to market customer needs market size market growth
Criteria
Market Potential (e.g. time to market, customer needs, market size, market growth, growth driver / potential, industry cycle situation, target clients, ability to acquire initial customers, business model, earning mechanics, ability for early revenue generation, competitive situation advantage, competitive entry barriers, competitors strengths, competitors weaknesses)Team (e g track record qualification cooperativeness completeness size Team (e.g. track record, qualification, cooperativeness, completeness, size, compensation structure)Patents (e.g. patent portfolio, first impression of patent situation)Phase (e.g. how early, status of business plan, quality of business plan, extend of input required, investment required, public grants/ co-investment available, exit timing, exit potential)
| October 2008Page 8
Level B (2/2)
Evaluation Tool
Level B (2/2)
| October 2008Page 9
Level C (1/4)
Investment Case Modeling
Level C (1/4)
ObjectiveLearn in depth about investment opportunityDevelop financial modelD t i t f D Dili Determine areas to focus Due Diligence on
Amount (e.g. amount this round total, amount until exit, public loan programs, syndication, entry valuation)
Criteria
p g , y , y )Timeframe (e.g. liquidity secured until, liquidity buffer, Cash flow)Milestones (e.g. technology, patents, market / sales, team, revenue, EBIT, liquidity)Exit (e.g. when, main target, multiple goal)Opportunities (e.g. technology, patents, market, people, exit, other)Challenges (e.g. technology, patents, market, people, exit, other)
| October 2008Page 10
Level C (2/4)
Managing Risks and Roads to Exit
Level C (2/4) C
apit
al
Use of sophisticatedfinancial monitoringsystems to control riskand measure progress
Inve
sted
C
and measure progress
Focus on early revenuegeneration
Ti h l Tightly manage costsagainst milestones
Leverage Triangle’sexpertise and connectionsexpertise and connections
| October 2008Page 11
Level C (3/4)
Scenario Analysis
Level C (3/4)
| October 2008Page 12
Level C (4/4)
Scenario Analysis
Level C (4/4)
| October 2008Page 13
Level D (1/2)
Business / Technology and Patent Due Diligence
Level D (1/2)
ObjectiveConfirm investment hypothesisUnderstand risksAd ocate the dealAdvocate the deal
Technological Due Diligence (e.g. advisors involved, IP status, IP potential, IP i f i i h l i f li i infringement, competing technologies, amount of current applications, development stage of applications, quality of applications, potential for future applications, competing applications)Commercial Due Diligence (e.g. geographical region with largest technology threat, geographical region with largest market potential, timing of revenue generation,
Criteria
scalability of sales, sustainability of revenue growth, risk factor in business model, target clients)Financial Planning (e.g. reliable pattern of expectations and considerations, planning scarce resources driven, all necessary information and data included, realistic basis for execution)Shareholder (e.g. current structure, risks in shareholder structure, social event with / meet founders wives / family)Sales and Marketing Plan (e.g. selected target markets - appropriate / attractive, status business development activities, existing sales pipeline, sales plan and budget in line with revenue target, marketing support - appropriate)
| October 2008Page 14
budget e t e e ue ta get, a et g suppo t app op ate)
Level D (2/2)Level D (2/2)
Patent Due Diligence
| October 2008Page 15
Level E (1/2)
Termsheet Negotiation
Level E (1/2)
ObjectiveDefinition of key terms, financials and milestonesAgreement of all parties on key terms before continuation
max
liquidation preferencesplus ratchet
Gai
n well structuredliquidation preferences
in
unstructured
| October 2008Page 16
min max
m
Level E (2/2)
Termsheet Negotiation
Level E (2/2)
Rights to exert Non compete clauses (management team)Reps and warranties
control and influence (Board)
Board representationBoard approval guidelinesReportingVeto rights
Rights to secure /
Liquidation preferencesAnti dilution clausesRatchetsMilestones
maximize value
Protective provisions / RoFRVestingIP representation
Right to exit, exit trigger
and process
Tag – alongDrag – alongTrade sale & IPO provisions
| October 2008Page 17
Level F (1/5)
Investment Case Definition
Level F (1/5)
Finetuning of Level C outcomeObjective
| October 2008Page 18
Level F (2/5)
Risk Management – Measurements and Tools
Level F (2/5)
ObjectivePerformance analysis for strategy analysis and reviewEarly recognition of challenges and hurdlesEa l sta e si al fo e fo ma ce deficitsEarly –stage signal for performance deficits
Balance Scorecard based on company’s business plan and milestonesA l i f d i i l lAnalysis of derivations plan – actual
Pipeline Analysis Analysis of delays of order projectionAnalysis of changes in order number of volume
Criteria & Tools
Analysis of changes in order number of volumeLost order statistics and analysis
Project Tracking of R&D Projects
Ongoing todo list monitoring
| October 2008Page 19
Level F (3/5) Level F (3/5)
Risk Management – Derivation Analysis with BSC
6 000 000
7,000,0008,000,000
9,000,000
80%
100%
3,000,0004,000,000
5,000,0006,000,000
40%
60%
0
1,000,0002,000,000
Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 050%
20%
Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05
plan actual fulf illed
| October 2008Page 20
Level F (4/5) Level F (4/5)
Risk Management – Analysis of delays and changes of orders projected
Dec-08
Feb-09
Sep-08
Oct-08
Jul-08
Sep 08
oje
cted
Sig
nin
g D
ate
Apr-08
Jun-08
Pro
Feb-08
| October 2008Page 21
Jan-08
Jan-08 Feb-08 Apr-08 Jun-08 Jul-08 Sep-08
Pipeline Date
Level F (5/5) Level F (5/5)
Risk Management – Project Tracking of R&D ProjectsForecast at closing
R&D 1092nm - 1W532nm - 1W532nm - 100mW/ 300 mW442 nm - 0.02W266 nm - 0.1W
2006 2007 2008Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Operational manufacturing documentation certification of manufacturingproduction processes due to industry standards maturial phase
Revenue 600k 2.83kOrders test apps 3 1 4 0Orders test apps 3 1 4 0Orders regular 10 12 32 24 78 17 38 48 60 163
Forecast 01/2008
R&D 1092nm - 1W532 nm - 1W532 100 W/ 300 W532 nm - 100mW/ 300 mW
532nm - 30 mW532 nm - 10mW
488 nm442 nm - 0.02W266 nm - 0.1W
2006 2007 2008 2009Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Operational clean room set up and start of manufacturingtech certifications
Operational manufacturing documentationproduction processes due to industry standards
certification of manufacturing
| October 2008Page 22
maturial phaseRevenue 60k 1.490kOrders test apps 0 0 1 4 5 7 3 3 13Orders 2 0 5 41 48 21 44 45 57 167
Level G (1/2)
Formal Due Diligence / Final Contract Negotiation*
Level G (1/2)
*Please refer to backup
| October 2008Page 23
Level G (2/2)
Formal Due Diligence / Final Contract Negotiation*
Level G (2/2)
1. Legal basis2. Other legal affairs of the company3. Important agreements4. Accounting and financial conditions5. Technology & products6. Market & competition7 M k ti & di t ib ti7. Marketing & distribution8. Risks9. Management & organization10. Planning11 Publications11. Publications12. References13. List of all peer companies14. Exit role models and scenarios15. VC’s active in this field
*Please refer to backup
16. Risk management17. Post closing todo’s
| October 2008Page 24
Contact DetailsContact Details
Triangle Venture Capital Group Management GmbH
Marktstrasse 65 D-68789 St. Leon-Rot Germany
Tel: +49 (0) 700 874 26 453 Fax: +49 (0) 700 874 26 329
i l www.triangle-venture.com
| October 2008Page 25
