The venture capital perspective

A venture capital firm focused on building seed and early-stage technology companies

The Venture Capital Perspective

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© Tech Capital Partners Inc. Slide 2

The venture capital perspectiveThe venture capital perspective

A VC is accountable to its Limited Partners—the institutions and people who have invested money in the VC’s funds

A VCs only responsibility is to make money for its “Limiteds”

Each fund has a specific mandate that the VC must follow in making its investments

Willing to take risks to realize high return but looking for every way possible to mitigate that risk

VCs are looking for companies that have the potential to become “home runs”

We see 2 to 3 business opportunities per weekOur goal is to fund 2 to 3 businesses per year


What we do day to day…What we do day to day…

Invest in companies that will make money for our LimitedsGenerate deal flow

Speak at eventsNetworkDevelop relationships with service providers

Evaluate opportunitiesEmail/phoneRead business plansMeet with entrepreneurs

Due diligenceNeed to understand the opportunity, the business, the teamCan take 6 months

Present, negotiate and close dealsTerm sheetsLawyers and legal fees


What we do day to day…What we do day to day…

Work with portfolio companiesInvolvement depends on stage of company and management

experienceFocused on:

Generating revenue – getting customers and salesMaking sure the company doesn’t run out of money

Budgeting – burn rateFund raising

Successful exit – this is what we are measured on and what we care about!

Fund raisingEvery four years or soMust justify mandateMust show track recordTakes about 1 ½ years to raise a fund – with a good track record!


Getting venture capital


Is venture capital appropriate?Is venture capital appropriate?

Not every technology company needs venture capital…Need to ask:

What problem does this technology solveCan I create a product out of this technology?Will anyone be willing to buy this product?Is the product idea compelling enough for people to change their

behaviour?

Make sure the problem you are solving is something that people care about– something that causes pain

Rule of thumb10x better, 10x cheaper, 10x more reliableImprove by an order of magnitude in more than one performance

indicator or metric

A word about “agents”



Unique solutions to very big problemsSimple enough for VC to understand yet unique enough that VC

thinks it is something special“Secret sauce” vs. “Marketing plays”Disruptive technology

Disrupt an existing marketCreate a new market space altogether

Solves “pain”: “Pain killer” vs. “Vitamin”



Large market sizeUnderstand the “real” market – segmentation

Potential customers identified and engagedHow are you going to make money – revenue model

Management teamDomain expertiseStage adjustedWilling to “share the wealth”

Intellectual property “IP”Clean…Protected…

Exit strategyHow will the VCs realize a return for their Limiteds?


Entrepreneurs are not all the sameEntrepreneurs are not all the same

2 types of entrepreneurial opportunitiesLifestyle entrepreneurs

The founder wants to be the majority ownerThe founder wants to be the bossGrowth funded through profits and bank debtExamples:

Consulting firms, retail, distribution, sales agencies, service firmsCan be highly profitable

VC backed entrepreneursFounder is okay with a smaller piece of a bigger pie (2% to 5% at

liquidity)Founder does not need to be the CEO but needs to see the business

succeedGrowth is funded through 3rd party capitalFounder makes money on liquidation of his ownershipExamples:

Some technology companies, some manufacturing companies


So how do you know?So how do you know?

Look for a lifestyle business if:Your aspirations are to start a business without prior experienceYou want to be running the company in 15 yearsYou want to learn by doing

Consider VC backed business if:You understand that you probably won’t be the bossYou know what you don’t knowYou want to focus on your strengths and rely on other good

people to do the rest


The venture capital processThe venture capital process

The initial pitch—Phone call/emailReferences—almost always get more attention if you are referred

by someone reputable Describe:

TechnologyMarketTeam

Preliminary evaluation of business plan (if you have one)Introductory meeting

Items required:Justification for defensibility of technologyJustification for market opportunityFinancials/projected financials—Income Statement, Cash Flow,

Balance SheetSales pipelineTeam


Questions a company will be askedQuestions a company will be asked

When are you going to be generating revenue?

Who is your first customer and what have they done to prove they will buy your technology?

What does your sales pipeline look like?Be specific and realistic

Who owns the technology?

How much do you intend to pay yourself?


Term sheets and due diligenceTerm sheets and due diligence

Due diligenceVery time consuming and can take a long time

Timing of term sheet—before or after due diligence

Make sure you understand all of the terms

Valuation“Pre-money” and “post-money”Bigger is not always betterYou need to understand the structure to be able to

negotiate


VC secretsVC secrets

Canada is very small You get one shot – with one VC (think of it from this

perspective)VCs do not like to be secondCollusion exists

Listen… get us involved and attached to your company

Before you need $Before you spend years

There is always money for good deals


Subsequent financing (VC)Subsequent financing (VC)

A VC thinks about this before investingHow much time will it take to reach the next milestone?

Product completeFirst customer – revenues!First US customer

How much will it cost to reach the next milestone?Do we have enough money to get the company there?If not, should we syndicate now?Who will be interested in this investment in the future?What value will we be able to get for the company next

round?How many rounds will we have to go through to have a

fully-funded businessPotential exit scenarios (the ultimate financing round)


Subsequent financing (company)Subsequent financing (company)

Managing shareholders is criticalNo surprisesStay off their “radar”Honesty is ALWAYS the best policyAlways follow up on their leadsTap into their contacts

Under promise and over perform

Need existing VCs to participateSelect people with deep pockets early

Customer support

Maturing the companyIs it getting ready to IPO


Questions to ask VCsQuestions to ask VCs

Are you actively investing?

At what stage do you typically invest? (the answer here is often misleading…)

How much will you typically invest and how much of the company will you typically take?

How long does it typically take you to conduct due diligence? What can we expect?

How active are you post-investment?

What can you bring to the table?

What experience do you have in this industry?


Some examples


PixStream Example - HistoryPixStream Example - History

Founded in 1996 by three entrepreneursDuring 1997 secured a contract and hired 4 engineers

Dec 1997 start receiving venture capital funding

Sept 1998 secure first telco customer

July 1999 spun out non-core division

August 2000 announce sale to Cisco $550MM

Fifth highest price paid for a private Canadian technology

company

April 2001 Cisco announces closure


Revenue and headcountRevenue and headcount

Revenue1998 - $0.4MM1999 - $7.3MM

Headcount1996 - 41997 - 71998 - 351999 - 912000 - 200


Financing rounds - pre money valuesFinancing rounds - pre money values

Venture CapitalDec 1997 - $6MM (raised $3MM)March 1999 - $22MM (raised $7MM)Nov 1999 - $65MM (raised $12MM)

Special warrantsFeb 2000 - $200MM (raised $35MM)

Sale Aug 2000 - $550MM


Raising money at PixStreamRaising money at PixStream

Under promise and over perform No surprisesCommunicate goals

At PixStream everyone knew external commitments

Share the wealthOptions for everyoneOpportunity to purchase shares

Every decision was done to be ready to be publicSelection of VC’sCorporate governanceExpectation setting


XYZ Inc.XYZ Inc.

Fall 2000Had term sheet at US$20+ valuationCompany wanted an elaborate cross border share structure for

tax purposesInvestors wanted simple share structureNegotiations over share structure took so long that

Other companies entered the spaceStrategic partners aligned with competitors Investors walked

12 months ago were trying to raise money at sub US$5MM Unsuccessful and the company closed


VideoLocus Inc. – Case StudyVideoLocus Inc. – Case Study

Founded June 2001 Four members of the advanced engineering group at PixStream Tech Capital invested $600,000 of seed capitalVery strong technically needed help with commercialization processTo address this they:

Took investment from an industry angel alongside TCP Secured an ACTIVE advisory board Hired two senior employees who were made quasi-founders

VP engineering with product development and employee supervision experience VP sales and marketing with industry experience

Focused on establishing themselves as world leaders Active with standard setting committees Became known to industry players Hit development milestones Strategic financing round lead to acquisition Based on relationships and track record


Some thoughts on markets and customers


You need to figure out…You need to figure out…

1. Who is the customer? Do they have a problem/pain that needs to be fixed? Do they care?

(vitamin vs. pain killer)

2. Is the market big enough to support a business? How much will customers pay? How much of this will you get to keep?

(Channel partners) How many customers are there? How many of these customers will buy your offering? Will this generate enough $ to cover your costs and make a profit?

3. Is the market too early? Newly emerging markets take time to develop When will the customer be willing to buy? How will you finance the company until then? Are there enough customers in the market TODAY to finance your

company until the market matures?



4. Is the market too competitive? Will you be the first to market? (lots of educating) Is your product different enough to make people change their

behaviour? (10x the performance, 1/10th the cost) Look at direct and indirect competition Map the competitive landscape based on key criteria (that

customers care about)

Inexpensive Expensive

High Quality

Low Quality

Competitor A

Competitor C

You

Competitor B



5. What challenges will you face in getting this product to market? Customer perception challenges Sales channel challenges Distribution challenges Regulatory challenges Etc.

Make sure you know what you’re up against!


What if a market doesn’t exist yetWhat if a market doesn’t exist yet

Brand new markets are rare – can usually find a way to estimate approximate size

Should be close enough to the market that you can research it – if not, too far out (unless you are independently wealthy or have big amounts of govt. financing)

Identify gaps in the marketWhat needs to happen in the market for this product to be

successfully commercialized?Customers need the whole solution, not just a piece

Conduct potential customer/partner callsWhat do people think of the idea?


Tips for getting a first customerTips for getting a first customer

1. Know and build relationships with your prospective customers Easier to sell if you know what they want and they trust you

2. Potential customer calls Pick up the phone – Don’t sell… Ask questions… Identify why this product is important to them (and if it isn’t, pick

something else) – what is the value? Do they have $ to spend on this type of product? Who does? Who makes the decisions? Map it out… Org chart / messages

and timing

3. Partner to get a first customer Develop the product with their input Commitment – home phone number, do what it takes Be careful not to customize the product too much…


Tips for getting a first customerTips for getting a first customer

4. Use your business associates/friends/relatives References Who can they introduce you to? – LinkedIn (www.linkedin.com)

5. Don’t assume “no” Assume everyone loves you until they tell you they don’t Persistence will pay off…

If you have developed a solution to a very big, very painful, difficult problem, and you let people know about it, they will buy it – if the price is right (don’t forget to ask this question)


Tech Capital


Tech Capital IITech Capital II

OverviewSecond fund for Tech Capital PartnersFund size $60 million – closed July 2005Two investments to date

Fund MandateTypical seed round investment: $1.5 to $2 millionWaterloo and surrounding areaStart-up and early-stage technology companies


Tech Capital Portfolio CompaniesTech Capital Portfolio Companies


Tech Capital Partners Inc.www.techcapital.com

[email protected] [email protected]

519-883-8255

The venture capital perspective

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