USVC What is VC_Nov08

8/7/2019 USVC What is VC_Nov08

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2005 USVP. All Rights Reserved 1

Value Catalysts

Elements Of Successful Emerging Tech Companies

Presentation to Cal Poly GSB528

September 2, 2008Christopher J. Rust

[email protected]

Presentation to Cal Poly GSB528

September 2, 2008Christopher J. Rust

[email protected]

There are plenty of big waves

keep paddling fast

There are plenty of big waves

keep paddling fast


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Value CatalystsAgendaAgenda

Introduction

Understanding Venture Capital Deal Flow, Diligence Process, Flaws w Diligence, etc.

VC Investment Criteria

Elements Of Successful Startups

Hot Areas

Group Discussion


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Value CatalystsInvestment History As ContextInvestment History As Context

Investments - 1998 to Present Abrizio switch fabric ICs > PMCS

Avanex optical modules > AVNX

Telera Call center software > ALA

Syndesis IP OSS SW > Hamant

Santera voice switch > Tekelec Mellanox Infiniband ICs > MLNX

Mahi Metro core switch > Meriton

SwitchOn Processor > PMCS

Turin Metro transport switch

VxTel VoI

PI

Cs >I

ntel Springbank Caching system > CFLO

Onetta optical amplifiers > BKHM

Nexsi network security > JNPR

Afara next gen server > SUN

Santur tunable lasers

Memx optical switch > OOB

Commerce5 ecommerce sw > DRI

V LVL7 networking software > BRCM

Dilithium transcoding gateway

Stratalight 40Gbps optical

Veriwave WLAN equipment

Akros Networking ICs

Zannel Mobile social networking

Clustrix InternetInfrastructure

Dune Networking ICs

25 investments; 2 IPOs, 10 acqs > 1x, 3 acq


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Value CatalystsUSVPs PhilosophyUSVPs Philosophy

Hyper-Growth Emerging Markets Real Businesses

High Gross and Net Margins

Back Leading CompanyIn Sector Mkt cap of leader often more than others combined

Obtain Significant Ownership

Drive for Leading Market Share

Help with Recruiting, Sales/BD, Follow-On $, Exit

Patient Long Term Investor


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Value CatalystsUSVPs PhilosophyUSVPs Philosophy

Small Elite Teams Intent On Changing The World Massive Passion

Super Aggressive

No Bozos - Lemons Ripen Early

Frugality Reigns Supreme Low Rent District

Plywood Tables

Fly Coach

Dilution Is The Common Enemy

Eye-Popping Progress On Series A To Earn Big Step-Up

Company-Wide Focus on Equity, Not CurrentIncome

Stand On Shoulders Of Giants Via Smart Partnering

Patience, Perseverance To Build A True Franchise


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Value CatalystsVC Investment CriteriaVC Investment Criteria

VCs Rewarded For Finding & Funding Growth Engines

VCs Want To InvestIn Markets with hyper-growth potential

Companies that can create and dominate a new market Disrupting a large established market also interesting but harder

Driven entrepreneurs that can build strong teams The best CEOs are often first time CEOs

Viable business models. GM is a proxy for value of tech

VCs (Usually) Avoid Customers that wont buy from small private companies

Low gross margin businesses

Long development cycles, compounded tech risks

Unloved sectors with low exit multiples


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Value CatalystsTypical VC Due Diligence ProcessTypical VC Due Diligence Process

First Filter 1:1 MeetingSecond Mtg

1-2 GPs

Pass. Quick screen Pass Pass

GP All HandsPresentation

3rd Mtg

DetailedDiligence

Onsite Visit

Pass

DeliverFinal Package &

90-Day Plan

Pass Begin DueDiligence

InitialContact

Only proceed ifthere is a GP

sponsor

BeginNegotiations

Negotiate Deal &Term Sheet

Pre-close Review

PassPass. Material changes

Close$$$

DistributeInitial

Package


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Value CatalystsVC Due Diligence ChecklistVC Due Diligence Checklist

Business Plan

Investor Presentation

Team Resumes

Founder ReferencesMarket Research

Customer Testimonials

Competitive Assessment

Operational Review

Technology Assessment

Financials Review

Case Specific Research

Business Plan

Investor Presentation

Team Resumes

Founder ReferencesMarket Research

Customer Testimonials

Competitive Assessment

Operational Review

Technology Assessment

Financials Review

Case Specific Research

Major Component Of Success

Equation, but HCA Often

Highly Subjective/Superficial

Can be pre-wired by entrepreneur

Based on incomplete data

Often relies on 3rd party SME

ePitching skills can mask flaws

Emerging sector > incomplete data

Not much to assess at seed stage


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Val e atalystsInvestment Criteria A VC SurveyInvestment Criteria A VC Survey

0-n/a

1-relevant,

unimportant

2-moderately

important

3-

important

4-very

important

5-most

important

Investment Criteria

Market 0 0 0 1 27 22

Team 0 0 0 0 23 27

Product or technology 0 0 0 12 33 5

Corporate strategy 0 0 6 30 13 1

Operating plan / financial model 0 0 13 25 10 2

Deal 0 0 3 18 29 0

Co-investors / syndicate 0 1 13 13 23 0

Market andTeamclearly dominated when evaluating a new investment

Product or Technology was also very important, as that is the tool to

address the market opportunity


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Value CatalystsVCs Like Entrepreneurs WithVCs Like Entrepreneurs With

A track record of success, but The best entrepreneurs often have no prior successes

The best entrepreneurs are often young, single, workaholic geeks

Work experience in a (winning) small company If you go to a startup early on, pick one w a great CEO and VCs

Expertise in the target market

High motivation level, positive attitude, and personal integrity

Mental toughness and emotional stability for sustainedarduous effort

Resilient and adaptable to change, hardship, and uncertainty Strong off the list references sourced without input from

the entrepreneur


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Value CatalystsLife In A Venture-Backed StartupLife In A Venture-Backed Startup

Success Is (Usually) Determined By Revenue Growth and Profits

Usually requires extreme focus on being the best at one thing


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Value CatalystsSteps In Successful StartupSteps In Successful Startup

Total Commitment for Long Haul. 1%Inspiration + 99% Perspiration

Define a Compelling Product or Service for a High Growth Market

Create Critical Mass

Best people first. Hiring well = single greatest point of leverage

Focus on Execution

Build tools to track against a plan, development processes Stretch Goals for Talented Team w Common Vision= Inspired Effort

V = S3; Victory = Speed * Stealth * Sweat

F = R * V2; Force = Resources * (Velocity)2

Expand in Control (sort of)

Make Every Penny Count. Raising Capital is Expensive At All Levels

If Your Market Does Not Materialize, Quickly Adapt To Succeed/Survive

NEVER Doubt That You Will Be Successful and Trust Your TeamNoMatter How Bad Things Get


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Value CatalystsClarity Of PurposeClarity Of Purpose

Source: Don Valentine


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Value CatalystsElements of A Fundable PlanElements of A Fundable Plan

Business - Clear. Succinct. Easy to Understand

Market - Hyper Growth (> 50% CAGR)

Team - Best-in-Field, History of Success

Product or Service - Unique. FreshIdea. HardIP Financials - >$100M revenues in 4 years, Cisco GMs

Risk Factors - Entrenched Competition = BAD, 1stMover in New Category = GOOD

Deal - Small Check for Big Ownership and Pool


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Value Catalysts

Product FocusImportant To Do One Thing Better Than Everyone Else


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Value CatalystsDisciplined PartnershipDisciplined Partnership


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Value CatalystsA Culture of SuccessA Culture of Success

Dare To e Di erent Team DNA

Responsiveness ight ard ut airly


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Value CatalystsComments On FinancialsComments On Financials

Pro it = Independence rugality = urvival

It Takes A ong Time

To uildA ranchise


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Value CatalystsAddressing Corporate ViabilityAddressing Corporate Viability

Vi a.bil i.ty n. Capable Of Living And Developing Corporate viability not determined by balance sheet, fund-

raising skills, or our product/technology leadership, but bywinning business and establishing commercial success

Factors ThatInfluence Perceived Viability Customer list A reference network sell is infinitely easier Customer satisfactionand responsiveness do matter a lot

Clear technology leadership is table stakes

Caliber and commitment level of all shareholders

Critical mass to support the product

Sales Teams Ability To Close Repeat Business Is Key Build customer base, make sure they keep buying


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Value CatalystsRecipe for Winning AcquisitionsRecipe for Winning Acquisitions

Minimum Overlap in Products Complementary Skills, Assets, Customer Base

Common Vision and Culture

Near-Term Wins -> Validates the Decision

Long-Term Wins -> Retains Key Talent Clear definition of which culture and product(s) survives

Respect on Both Sides of Deal

Geographic Proximity is often a plus

Wealth Creation Potential for All Stakeholders Well thought out common retention plan

Well thought out integration plan


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Value CatalystsThe Deal

If Seeking Funding Amount needed

Valuation looking for - justify with comparables

Use of proceeds - be as specific as possible

Support requirements beyond money Be careful of the detailed Ts & Cs. Ratchet clauses, participating

preferred liquidation preferences, drag-along rights to forceacquisitions, many other terms can gut the upside for common

If Seeking Employment

Opportunity to build valuable, marketable skills Match to lifestyle preferences

Comp package: salary and benefits, equity participation

Runway, staying power of investor base, mgmt team, vision


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Value CatalystsRecruitingRecruiting

MAKE WORLD-CLASS RECRUITING A HIGEST PRIORITY Map out a recruiting plan with goals and metrics and stick to it

Screening/qualifying candidates takes time. Spend the time

Use right resources to get to qualified candidates at all levels

Attracting top executives & individual contributors to startups Was always hard

Will always be hard

Hire for intellect + drive + culture fit over specific skills

Compensation negotiations

Staying close between start date and signed offer

Post interview assessment


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Value CatalystsA Personal Decision-Making FilterA Personal Decision-Making Filter

Do You Believe In The Founders & Mgmt Team?

Does Anyone Need The Product or Service?

Is There A Quantifiable Competitive Advantage?

Is There a Realistic Business Model? Can The Opportunity Attract Talent and Capital?

Will You Develop Marketable Skills?

Can You Have Fun In the Process?

If Y s, G r It!


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Value CatalystsComparing VC vs. Organic ModelComparing VC vs. Organic Model

Self-Funded/Angel Funded Set modest, achievable goals

Focus on one customer

Incrementally raise $

Incrementally build skills

Relatively low risk

Live within means

(Tier One) VC Funded Set AGGRESSIVE goals

Change markets

Focus on Market Share

Raise big $

Give up big ownership Suffer big liquidation pref overhang

Buy experience to move fast

High risk. Big programs

Cut losses early

Lemons ripen early

Select I est rs Wit G ls

erps re I port t T icki o-Founders

( reStuck Wit Investors)


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Value CatalystsComparing OUS Tech HubsComparing OUS Tech Hubs

China Israel India

Market Huge, Fractured Not meaningful. Tiny Huge, Fractured

SkilledWorkforce

Growing Small, but elite 1.4m in IT w 450k in top 3BPOs. ~45m pay taxes

Innovation Growing High Growing

Multinationalpresence

High, growing Highest, growing High, growing

Government Single party Democracy Democracy, ethnic politics

Corruption

Literacy,English skills

90%, Englishmandated inschools since 2000

100%, high


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Value CatalystsSome Hot TopicsSome Hot Topics

The Broadband MobileInternet

The Rich Media Internet (HD video-capable)

The Energy Efficient Data Center Infrastructure-As-A-Service, Cloud Computing, Virtualization

Next Generation Search (GOOGs results less useful w time) Software-As-A-Service

All Things Cleantech The Current Bubble

Energy generation (clean coal, solar, wind, wave, nuclear, fuel cells)

Energy storage & transport (batteries, hydro+wind, smart grid)

Energy conservation (building automation, smart meters)

Clean water (desalination, purification, reclamation)

Green construction (low embodied energy materials, green cement)

Medical devices and bio-pharma


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Value CatalystsOne Key Take-AwayOne Key Take-Away

Adapt & SucceedAdapt & Succeed


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Value Catalysts

Thoughts?

GroupDiscussion

USVC What is VC_Nov08

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