VC Due Diligence Basics October 15, 2002 Craig Gomulka Draper Triangle Ventures [e-mail]

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VC Due Diligence BasicsOctober 15, 2002 Craig
Gomulka Draper Triangle Venturescraig_at_dtvc.com
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Todays Talk

• Who is Draper Triangle
• Our Investment Profile
• Our Investment Timeline
• Three Stages of Diligence
• Case Study Hypernex
• Questions

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Who is Draper Triangle?

• Located in Pittsburgh, Pennsylvania
• PA-based fund of Draper Fisher Jurvetson
• First-round, early stage, lead investor
• High-tech fund - Education, MEMS, Data,
  Semiconductor, Advanced Software, Medical
  Devices, Optical, Automation

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The DFJ Network
Timberline Venture Partners Vancouver, WA
Access Venture Partners Westminister, CO Austin,
TX
DFJ New England Cambridge, MA
DFJ Portage Chicago, IL
Draper Fisher Jurvetson Redwood City, CA
Draper Fisher Jurvetson Gotham New York, NY
Draper Triangle Ventures Pittsburgh, PA
Zone Ventures Los Angeles, CA
Draper Atlantic Reston, VA
Wasatch Venture Fund Salt Lake City, UT
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The Expanded Network
Late
E-Planet
Mid
Stage
Draper International
Early
National
International
Seed
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Draper Triangle Portfolio
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Investment Profile - We need to see

• Focus - Solve a specific problem or meet a
  specific need very well in a defined niche.
• Billion dollar markets
• Sustainable competitive advantage
• Well rehearsed presentations
• Realistic valuation expectations
• Strong exit strategy
• That youve done your homework on the private
  equity community, tell the VC what synergies
  exist between you and them.

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Investment Profile - We need to see

• Solid Management Team
• Should have domain experience
• Smart, driven people
• Credible references help
• We buy dreams, not resumes. Draper looks for
  people who talk about changing the world, not
  building a business. When you ask them where it
  will be in ten years, they have an answer.
• Steve Jurvetson Partner, Draper Fisher Jurvetson

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Investment Profile - We dont like to see

• Citing ghost products as competitive advantages
• Quoting your markets too far out
• Raising too much money
• Teams looking only for
• CEO and team members who dont know their
  limitations
• Poor market due diligence

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The Funding Timeline

1. Review business plan
2. Bring in management team to present
3. Evaluation of opportunity
4. Internal partners meeting
5. Term sheet
6. In-depth due diligence
7. Legal documentation
8. Funding

1 to 4 Months
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Initial level of due diligence

• Level I (after the plan and initial go/no-go)
• Meet the team
• Prior entrepreneurial experience
• Experience in the market place
• Would we enjoy working with the team?
• High level understanding of
• Product, Market size and Exit Potential
• Competition and Differentiation
• Marketing, Sales, Competitive strategy
• Go or no-go decision

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Secondary level of due diligence

• Level II (gets more interesting now)
• Market research, competitive analysis
• Marketing and sales plan validation
• Financial validation (numbers make sense?)
• Potential/existing customer/partner calls
• Independent industry insider/expert calls
• IP review, existing patent scan
• Better validation of likely exit scenarios
• Have we enjoyed working with the team?
• Go or no-go decision for term sheet

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Final level of due diligence

• Level III (after term sheet, the boring stuff)
• Management team background checks
• Corporate and organizational (books in order?)
• Capitalization structure, benefit plan
• Intellectual property (legal review)
• Financials (historical audit/review, tax returns)
• Existing contracts and obligations
• Properties, leases and insurance
• Reps and warranties in the term sheet

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Hypernex Case Study Introduction

• Location State College, PA
• History Early stage, spinout from ATMI
• Size At time of investment, 6 person team
• Technology Rapid crystalline microstructure
  analysis using X-ray diffraction
• Markets/fields of use Semi, biotech, others
• Product stage prototype completed and in use by
  first prospective customer
• Fund raise 1.75 M

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Hypernex Case Study the Product

• Is this a must-have or a nice-to-have for
  semiconductor manufacturers?
• What are the hurdles to product completion?
• Who do we need to hire to get us there?
• Third party technologies/licenses?
• Key metrics IBM will use to evaluate the
  usefulness of the product?
• Device yield
• Device performance
• Bottom line/ROI

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Hypernex Case Study the Team

• Do they know the technology?
• Do they understand the space?
• Do they have contacts they can leverage?
• Do we have contacts they can leverage?
• Who else do they need to hire?
• Team dynamics - work together well?
• Are they excited about what they are doing?
• How does their history check out/DD calls?

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Hypernex Case Study the Market

• What are the characteristics?
• Established growth, but very cyclical
• Very large, over the 1B threshold
• Do we own the whole market or a small part?
  Different market sizes acceptable
• Who is driving the sales?
• What market pain are they addressing?
• What trends are in their favor?

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Hypernex Case Study the Competition

• Who else makes XRD for the fab?
• Who else makes XRD for the lab and could cross
  over into the fab?
• How intimately is the companys competitive
  protection tied in to their IP?
• What barriers has the company created via
  technical, IP or even marketing/biz dev?
• Why has no one else approached this market?

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Hypernex Case Study the Financials

• First 12-18 months, identify each customer,
  should fit precisely with the sales plan, no
  blind projections
• What supports the assumptions?
• Industry comps
• Management/board prior experience adds
  credibility
• What are the growth drivers of the hockey stick?
• Have you become the industry leader/only solution
• Effects of competition, large or small
  implications
• Bottom line any realistic thought put into
  them? There is a difference between an educated
  guess and POMA

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Hypernex Case Study the Exit

• Which companies benefit from Hypernex
• Which companies are hurt by Hypernex
• Both are potential buyers
• What evidence supports acquisition vs IPO
• Historical instances
• Strategic fit
• Historical acquisition/IPO data very helpful
• VCs statistically can not do low multiple deals

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Thank you!

• 2 Gateway Center, Suite 2050
• Pittsburgh, Pa 15222
• Phone [phone]
• Fax [phone]
• craig_at_dtvc.com
• http//www.dtvc.com

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