Incoherent Ramblings of a VC

Incoherent Ramblings of a VC

Brian Caulfield Investment DirectorTrinity Venture Capital

Agenda

Introductions

The post-bubble era

Building your board

Traps for the unwary…

Hope…

Q&A

My backgroundEngineering graduate (TCD) 1986ESPRIT project research 1986-1989Landis & Gyr 1989-1992Co-founded Peregrine Systems 1992

Renamed Exceptis Technologies August 2000 Sold to Trintech (Nasdaq: TTPA) November 2000

Founder director/shareholder of Prediction Dynamics 2000 Went into liquidation 2004

Co-founded Similarity Systems 2001 With CEO, Garry Moroney Sold to Informatica (Nasdaq: INFA) January 2006

Joined Trinity Venture Capital 2002Member ICT Ireland Governing Board and CTVR Advisory Board

So why VC?

The post “Post-Bubble” era…now we really are over it…

The Bubble slide…

0

20000

40000

60000

80000

100000

120000

$ m

illio

ns

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Source: Venture Ec onomics

A clear pattern…

Back to doing it the old-fashioned way…VC investment levels are now generally back to pre-bubble levelsAverage size of deals is showing an upward trendNumbers of deals are pretty stableThe IPO market is back…if not at the same level more focus on European IPOs (AIM market) and IPOs are not as attractive as they used to be

The old-fashioned way…

Capital

Risk (ß)

Idea isFeasible

TechnologyWorks

A CustomerBuys

SeedFunding

R&DCapital

Go-to-MarketCaptial

ExpansionCaptial

P(success) = 40%Req’d IRR = 70%




Importance of valuation?

Time

1970s

1980s

Early 1990s

Bubble

Company

Apple

Microsoft

Cisco

Sun

AOL

Ciena

Boo.com

Webvan

Capital raised

US$ 8.6 m

1.0 m

2.4 m

39.0 m

17.0 m

40.6 m

135.0 m

375.0 m

Value now

US$ 8 B

347 B

140 B

36 B

140 B

4 B

Bust

Bust

Building your board

Board representation, etc.

Most VC investors will want to be represented on your board

Should add value, corporate governance and discipline

Ideal board post VC investment? 2 executives 2 investor representatives (assuming you have two

investors) 2 high quality non-executives with specific know-how

driven by company’s needs Sectoral, i.e. your market Functional, e.g. sales and marketing or finance

Independent non-executive chairman

VC can help to recruit the right board

How to build the board?

Slowly!Keep it small early on

It is easy to put someone on a board and very difficult to get them off

Think about how the board should develop over time Think carefully about the value that a new board

member adds

Avoid classic mistakes… Too many executives on the board Board already “full” prior to investment Family members on the board People with “business experience” on the board

Traps for the unwary…(or, a personal view on where it all goeswrong for university spin-outs…and other

start-ups)

A personal view…1The difficulty of getting past university TTO with a fundable proposition

Take advice before you reach an agreement Everything is negotiable

Equity greed 100% of nothing is nothing…

Mis-allocating value between technology and execution The value is not all in the technology

Inadequate commitment You can’t do this and be Head of Department too…

Building the board badly It’s very easy to put someone on your board…and very difficult to get

them offOver-ambitious projections

Sales Cash receipts

A personal view…2Inadequate customer focus

You must focus on what delivers value to a customer The value delivered must be sufficient

to overcome risk concerns to be a priority for the customer…does it move the needle?

But don’t let a single customer drive your specification

Lack of clarity regarding IP ownership Institution/founder/research partner issues Beta customer issues

Not hiring (or valuing) the right expertise You are probably not the CEO (or VP of Sales, or VP of Engineering)

because you have never done it before You rarely have the time to learn on the job

Good CEOs cost money and big equity but they’ll make you rich

Fear of losing control Would you let your child drive a car in Bangalore?

Hope…(Some personal exit stories)

Some Personal Exit StoriesExceptis Technologies

Sold to Trintech (Nasdaq: TTPA) November 2000 $26m stock Key lesson: Cash is King and timing is everything

Similarity Systems Sold to Informatica (Nasdaq: INFA) January 2006 $55m cash Key lesson: Momentum counts

SteelTrace Sold to Compuware (Nasdaq: CPWR) April 2006 $20m cash Key lesson: Importance of investor alignment

Thank you.

Questions?

Contact informationT: +353-1-205 7700E: [email protected]: www.tvc.com

mailto:[email protected]

Trinity Venture Capital

Trinity Venture Capital was established in September 1997Trinity Venture Capital manages : Trinity Venture Fund 1 .. .. .. .. .. ..

€24m Trinity Venture Fund 2 .. .. .. .. .. ..

€139m

Investor in early and growth stage technology companies in Ireland

Investment Strategy

Focus on software, complex hardware and medical device companies, with their own IP, selling to corporates

Invest early stage, high growth potential

Identify the compelling reason for purchase of product offering (must have)

Help build management team

Take an active role in setting company strategy

Introduce quality partners

Product development

Reference customers

Sales momentum

What VCs want…and why(and the importance of business planning)

What VCs always wanted…

1. Market

2. People

3. Technology

Great people with great technology and a poor market?Great people in a great market with poor technology?Poor people in a great market with great technology?

And now they want more…

Strong, experienced team with very commercial focus Serial entrepreneurs reduce risk The old dog for the hard road

Product solving a critical business need Multiple customer(s) buy the product at a price that gives a

good profit Clear business case for the customer

Ideas backed by plans - clear (short) paths to revenue to cashflow breakeven

Focus on capital efficiency Doing a lot with a little Bootstrapping where possible

Risk management – “what happens if…”

Bootstrapping & 3 “F”s


Angels & seed VC investors


First round venturecapital


Second roundventurecapital


Marketidentification

& quantification


& quantification

Targeting“beta”

customers

Targeting“beta”

customers

Early adopter

sales

Early adopter

sales

“Chasm crossing”or massmarket


Entrepreneur& CTO

Entrepreneur& CTO

Salesdirector

Salesdirector

Operationsteam

Operationsteam CFOCFO

Funding development

Commercial development

Team development

Proof ofconcept

Proof ofconcept

Betaproduct

Betaproduct

Productversion 1.x

Productversion 1.x

Productversion 2.x

Productversion 2.x

Product development










& quantification


& quantification

Targeting“beta”

customers

Targeting“beta”

customers

Early adopter

sales

Early adopter

sales



Entrepreneur& CTO

Entrepreneur& CTO

Salesdirector

Salesdirector

Operationsteam

Operationsteam CFOCFO

Funding development

Commercial development

Team development

Proof ofconcept

Proof ofconcept

Betaproduct

Betaproduct

Productversion 1.x

Productversion 1.x

Productversion 2.x

Productversion 2.x

Product development

Eliminatemarket risk

Eliminatetechnology risk

Eliminateexecution risk

Business planning

Product Development Core engine frameworkTestable prototype of core engineDemonstratable prototype of enginePilot PrototypePilot site implementation

Business/ Market DevelopmentBuild list of product requirementsMake first contact with potential pilot

customersCarry out prototype demosDevelop sales plan – start sellingDevelop marketing story

People Count

FinancingDevelop Business CasePresent to investorsClose deal

ABSOLUTE DEADLINES

Mar April May Jun July Aug Sept. Oct Nov Dec

Prototype ready to demo

First pilot site in place

Business case

completed

Financing agreed

23

4 6 7

Product roadmapModule Version 1.03 Version 1.2 Version 2

Objective Testable Prototype Demonstratable Prototype Pilot Product

CURRENT VERSION Mid / End June End July

No change Re-organise / tidy upEnable modular design

No Change

Able to define Matcher &Standardiser configurations

Add Filter & Consolidationconfigurations

VB standard function CSV adaptor Develop extra adaptors as required

ProcessingCore

Basic output CSV file User specified output fileformat

Develop advanced database

Edit / Hamming distanceroutines only

Develop menu of scoringroutines

Expand / refine menu of routinesMatch Module

Weight based analyzer Develop rule-based AnalyserDevelop basic CBR Analyser

Refine CBR analyserInvestigate Neural Net Analyser

TuningManager

None Develop basic CBR trainingsystem

StandardizationModule

Dictionary lookup / replaceonly

Develop sets of routines forparsing & standardisingAdd key dictionaries

Expand / Refine taxonomy of routines

Filter Module None Develop first version“keyletter” grouping engine

Develop advanced grouping engine

ConsolidationModule

None Develop minimal functionality Develop clustering / mergingfunctionality

User Interface VB GUI with sufficient featuresto allow testing of engine bynon-programmer (businesssetup & testing)

Enhance VB GUI for use incustomer demosDevelop demo version ofJAVA GUI

High quality Java GUI to demonstratefull capabilities & functionality ofproduct Refine GUI

Objective foreach release

Features eliminatedfrom early product

versions

GUI developmentfocused on sales

& marketing requirements

Initial developmentfocused on

core technology

GUI forprogrammer test

only

Additionalcomponent

development

Evolution of terms(from “love letters” to “revenge letters”

and

back to “term sheets”)

So what’s a term sheet?An expression of the main commercial terms on which an investor proposes to invest

Investment sum and valuation Share structure Board representation Option pool Other rights

Usually non-binding, apart from issues such as Confidentiality Exclusivity Payment of fees

Conditions precedent…investment subject to Due diligence Other conditions

What should I expect?

Financial instruments you have never heard of… Redeemable preference shares (“prefs”) Participating preferred shares Convertible redeemable preference shares (“creeps”) Cumulative redeemable preference shares

Make sure you understand the economics clearly Don’t focus on percentage…focus on the cash waterfall on

exit

Downside protections for the venture capitalist Anti-dilution, exit preference

Management and control Board composition Tag, drag and agreement to sell Transfer of shares (management vesting)

Understanding the economics

It’s not just about percentage… Think about value at exit Think about how much capital you need to get there And percentage does not equal control

What money comes out first in an exit? Debt Exit preferences Any accumulated coupon

How much comes out before the ordinary shares participate?

The so called “pref pile”

Look at what we look at…the cash waterfall on exit

Advice...

Expect it to take at least 3 months 6-12 weeks post agreed term sheet But plan conservatively

Advisors can help Peers/CEOs who have been through the process Quality non-execs Experienced legal/corporate finance advisors

…but don’t be afraid to contact VCs directlyBe cautious with milestones

You may be tying your own noose

Be openBe realistic...

Some questions to answer…What does your product do for a customer?What is your value proposition?

Why will lots of customers buy? Who are your customers?

What do you plan to use the capital for?What are the key management hires you need to make?What is your channel to market and sales strategy?How will you create barriers to entry?Who are your competitors?

Direct and indirect Don’t say “we have none”

How will you exit?

More plagiarism(With more apologies to Guy Kawasaki,

too)

Top Ten Lies of Enterpreneurs

1. “Our projections are conservative”2. “Gartner says our market will be $50 billion by

2007”3. “Boeing will sign our contract next week”4. “Key employees will join us as soon as we get

funded”5. “No one else is doing what we do”6. “Several VCs are doing due diligence”7. “Oracle is too slow to be a threat”8. “Beta sites will pay to test our software”9. “Patents make our business defensible”10. “All we have to do is get 1% of the market”

Top Ten Lies of Venture Capitalists

1. “We can make a quick decision”2. “I liked your company but my partners didn’t”3. “If you get a lead investor, we’ll follow”4. “Show us some traction and we’ll invest”5. “We have lots of dry powder”6. “We’re investing in your team”7. “We saw this coming, so we didn’t invest in B2B

or B2C”8. “This is a vanilla term sheet”9. “We can open doors for you at major companies”10. “We like early stage investing”

Incoherent Ramblings of a VC

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