Venture Capital Investing

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Venture Capital Investing
Tongji Universty, Shanghai April 6, 2004
Michael W. Kelly Managing Partner First Ventury
Equity GmbH Heidelberg, Germany mkelly_at_firstventur
y.com
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• Summary
• Private Equity as an Asset Class
• What is Venture Capital
• Venture Capital Enviornment
• Venture Capital Structure
• Venture Capital Investing
• Additional Sources of Information

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• Private Equity/Alternative Assets
• Seperate "asset class"
• Corporate financing chain
• Seed Venture/equity Debt Public equity
  buy-out
• Venture Capital
• Early stages or financing rounds
• 500 thousand to 50 million
• Buy-outs
• Mature companies
• 100 million to billions
• Usually leveraged

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• Is Venture Capital High Risk?
• Definition
• "Risk capital in many languages
• "venture capital where used
• Why higher risk?
• New company, management, technology, markets
• But ... VC has some active risk controls
• Risks can be managed
• Board seat, veto powers
• VCs need a few big hits to make up for losses

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Venture Capial Environment

• Cultural attitude towards risk
• US ("Silicon Valley"), Europe, Asia
• Entrepreneurs
• Many entrepreneurs, but few qualify for VC
  financing
• Investors
• Rule of law
• Laws governing contracts, IP, other business
  arrangements
• Impartial enforcement

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Venture Capital Investors

• Institutions (pension funds, insurance companies,
  companies)
• Foundations (universities, private)
• Wealthy investors (including successful
  entrepreneurs and VC partners)
• Fund of funds
• Government institutions
• Fund investment committed, not paid in
• Drawn down over an investment period

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VC Financing Who Gets It?

• VCs and their investors want returns
• Measured in IRR and investment multiple
• "Exit potential or "liquidity event
• Can the investment be sold
• Always a major factor in any investment decision
• "The next big thing"
• New or disruptive technologies, processes
• Scalability potential for 100 million sales
  within 5 years
• Breakeven within 3 years
• Most excellent business ideas must go elsewhere
  for funding

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VC Financing is Not For Everyone

• VCs take equity
• 20 to 40 or more
• Serious dilution for original team
• VCs exercise some control
• VCs want exits
• Original entrepreneur/management rarely survives

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VC Financing How to Get It

• "The next big thing"
• Management team
• More important than the technology
• VC does not want to run the business
• Business plan
• Executive summary (2 page elavator pitch)
• Technology, management, market environment,
  projections, potential exit possibilities
• Get to VC through personal recommendation
• 5 or less looked at
• 1 or less funded

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Exits A VCs Only Goal

• .

• IPO
• Dream, rarely a reality
• Trade sale" to another company
• Sale to a financial investor
• Other VC or buy-out group
• Bankruptcy
• Exit nobody wants

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Venture Capital Investing Structure

• Venture capital company
• Usual structure
• Partners (2 to 6)
• Investment managers
• Active, value added investing
• "Fund" is investment vehicle
• Fund is defined
• Private Placement Memorandum (PPM)
• Information Memorandum
• Legal definitions and restrictions

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• Venture Capital PPM
• Investment focus
• Early, expansion, late stage
• Sector focus
• Technology
• IT, life sciences/biotechnology, energy, etc.
• Geographic
• China, USA, emerging markets, etc.
• Management
• Risks
• Legal and tax environment
• A legal document

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Types of Venture Capital Firms

• Independent
• Raise their own funds
• Corporate captive
• Access corporate parent funds
• Restricted to parent technology/business focus
• Intel, Siemens, Daimler Crysler, Legend
• Government sponsored
• Promote enterprise growth
• Co-invest with other VCs
• Finance defence oriented technologies
• CIA

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Venture Capital Fund

• Target Volume 100 million
• Legal Structure Limited liability partnership
  (LLP)
• Term 10 years (with option for an additional
  2)
• Investment Strategy Early stage venture
  capital
• Investment Focus Life Sciences, IT
• General Partner Tongji Student Holding Ltd.
• Manager/Advisor Tongji Student Equity Partners
• Management Fee 2.5 p.a. of committed
  capital Reduction after investment phase
• Carried Interest 20

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Making an Investment

• Valuation
• Work with other VCs, outside consultants/advisors
• Market and potential cash flows be realistic
• Time to market
• Investment to market
• Exit potential
• But an art not a science
• Due diligence
• Internal and external advisers and professionals
• IP important "freedom to operate and creating
  competitive barriers to entry
• Management
• Commitment, credibility, character, fitness
• Competitive environment
• Always do your own

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Venture Capitalists Daily Life

• Raise money from investors
• Help from placement agents
• On-going activity for the next fund!
• Develop investment "deal flow"
• Own networks, business professionals, other VCs,
  bankers, formal/informal advisors, universities
• Initial investment screening
• Investment "due diligence"
• Make the investment
• Management portfolio company risks
• Exit strategies

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Managing Risk

• Value added (hands-on) assistance
• Active board representation
• Deal structuring
• Milestone distributions, positive/negative
  controls
• Corporate infrastructure preparation for scale
  in advance
• Financial controls
• Management
• Commercial cooperation (customers, suppliers)
• Technology strategy
• Active monitoring, controlling, and other
  information systems
• On-going exit analysis

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Additional Information Sources

• Venture capital associations
• National Venture Capital Association (US)
• European Venture Capital Association
• Venture capital firm websites
• ChinaVest, W.I. Harper Group, Walden
  International, Doll Capital Management, Softbank,
  Draper Fisher Jurvetson, Sequoia, Mayfield, etc.

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• Thank You !