Venture Capital Valuations Ollie Curme General Partner, Battery Ventures 781 577.1240 olliebattery.c

1
Venture Capital ValuationsOllie
CurmeGeneral Partner Battery Ventures(781)
577.1240ollie_at_battery.com
BV
Mass Software Internet Council
January 25 2002
2
A venture capital partnership focusing on
investments in communications software and
internet/e-commerce.
20 William Street Wellesley MA 02481 Tel.
[phone] Fax [phone]
901 Mariners Island Blvd. San Mateo CA
94404 Tel. [phone] Fax [phone]
3
Battery Ventures

• Battery Ventures
• 6 Funds With Committed Capital of Approximately
  1.8 Billion
• Information Technology Focus Communications
  Software and Internet/e-commerce
• Diversified Approach With Start-up and Early
  Stage Emphasis
• Major Institutional Investors
• Offices in Wellesley (MA) and San Mateo (CA)

4
Recent Software Investments

• ProfitLogic Cambridge MA
• Revenue Optimization Software for Retaillers
• Decision Point Applications Portland OR
• Analytical Applications for ERP Systems
• Crystallize Ann Arbor MI
• Expert System for ERP Change Management
• BladeLogic Cambridge MA
• Server/Application Management Utilities
• IBEX Process Technology Lowell MA
• Advanced Process Control Software for
  Semiconductor Manufacturers

5
Public Software Company Valuations
Public Software Valuations
Market Cap to Revenue Ratio
Net Profitability
Annual Growth Rate
6
Guess the Valuation Early Stage
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


NA 0 2500 10000 NA
(1500) (2000) (2000)

• New Unproven but big potential vertical market
• Great Scientists with deep patent protection
• Just finishing very successful Beta Tests
• New CEO Recruited but need Sales and Marketing

7
Early Stage
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


NA 0 2500 10000 NA
(1500) (2000) (2000)

• New Unproven but big potential vertical market
• Great Scientists with deep patent protection
• Just finishing very successful Beta Tests
• New CEO Recruited but need Sales and Marketing
• 7.5MM pre 12.5MM post raising 5MM
• No Step up from seed round

8
Series C Expansion Round
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


171 3800 7500
15000 (10000) (8000) (3000)
2000

• Successful initial Product Launch
• Company Successfully cut Burn Rate
• Good Team Little Competition
• Huge Market in Financial Services

9
Series C Expansion Round
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


171 3800 7500
15000 (10000) (8000) (3000)
2000

• Successful initial Product Launch
• Company Successfully cut Burn Rate
• Good Team Little Competition
• Huge Market in Financial Services
• Company Shut Down! Investors Scared of Recession.

10
Real Company Real Issues
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


6000 7500 10000
20000 (10000) (8000) (5000)
0

• Company performance good not great Team
  Replaced
• ½ of team in place halfway through expense cuts
• Product excellent but needs additional work
  before it really takes off
• Potential Category Leader in Very large and
  interesting category

11
Real Company Real Issues
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


6000 7500 10000
20000 (10000) (8000) (5000)
0

• Company performance good not great Team
  Replaced
• ½ of team in place halfway through expense cuts
• Product excellent but needs additional work
  before it really takes off
• Potential Category Leader in Very large and
  interesting category
• Restructuring round. 0 pre raising 12MM

12
Consulting Company Transitioning 1
2003
( In Millions)
2000
2001
2002
7000 15000 30000 60000 (2000)
(12000) (4000) 10000
Revenues Pre-Tax

• Company Transitioning from Consulting to Products
• 2001 License Revenue only 1MM
• Deep industry vertical knowledge but need
  complete business team
• Good near term potential for product uncertain
  ultimate market size

13
Consulting Company Transitioning 1
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


7000 15000 30000 60000 (2000)
(12000) (4000) 10000

• Company Transitioning from Consulting to Products
• 2001 License Revenue only 1MM
• Deep industry vertical knowledge but need
  complete business team
• Good near term potential for product uncertain
  ultimate market size
• 35MM pre raising 15MM.

14
Consulting Company Transitioning 2
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


5000 6000 15000 30000 (5000)
(12000) (10000) 0

• Company Transitioning from Consulting to Products
• 2001 License Revenue 3MM One big customer
  several pilots
• Good Team but only half built
• Attractive near term vertical market but lots of
  potential competition

15
Consulting Company Transitioning 2
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


5000 6000 15000 30000 (5000)
(12000) (10000) 0

• Company Transitioning from Consulting to Products
• 2001 License Revenue 3MM One big customer
  several pilots
• Good Team but only half built
• Attractive near term vertical market but lots of
  potential competition
• 15MM pre raising 20MM.

16
Big Burn Rocket
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


0 30000 75000 150000 (40000)
(30000) 0 25000

• Huge Product Development Project
• Very Successful First Year of Sales
• Great Team
• Big Broad Horizontal Market but lots of
  competition

17
Big Burn Rocket
2003
( In Millions)
2000
2001
2002
Revenues Pre-Tax


0 30000 75000 150000 (40000)
(30000) 0 25000

• Huge Product Development Project
• Very Successful First Year of Sales
• Great Team
• Big Broad Horizontal Market but lots of
  competition
• 250MM pre raising 25MM.

18
Conclusions

• Lots of out there but it is nervous money
• Great Deals get Great Valuations lots of money
• Good Deals get Low Valuations
• OK deals or problem deals dont get funded
• Existing Companies get recapitalized if
  existing investors arent all very supportive

19
Conclusions

• Valuation prediction requires a complex highly
  nonlinear model incorporating the following
  factors
• 1) Management Amazing Track Records is key
• 2) Potential Revenue Growth How fast can you
  get to 100MM in revenues
• 3) Capital Efficiency Get there with as little
  cash as possible
• 4) Market Can it be huge How much
  competition What are the odds of this company
  being the category leader
• 5) Risk of Loss What is the chance the company
  will go under OR need more money in another
  round which could lead to a wipeout