An Insiders View of Venture Capital John Hall

Agenda n VC Industry Structure n VC financing +’s and –’s n How VCs

Size of Industry 1987 1997 2007 No. of VC Firms in Existence 361 549

© Copyright 2009 Dow Jones and Company 4

© Copyright 2009 Dow Jones and Company 5

© Copyright 2009 Dow Jones and Company 7

Venture Capital Isn’t Required To Build a Great Business … n Broadcom n n

VC Financing Comes with Costs…† Fund raising takes time away from the business n

… But it Sure Can Help 1. 2. 3. 4. July, 2009 Cash to

We Live in Unprecedented Times Facing the worst economy since the ’ 30 s

Good Deals are Hard to Find “We kiss a lot of frogs to find

Venture Grade Deals are 1/200 Life Style Companies AKA “Walking Dead” VC Grade Source:

It’s Hard to Spot Winners n Every deal has “hair on it” n n

Sources of Pre-VC Funding: Getting to First Milestone n Customers n n Government n

VC’s Personal Bias is a Factor n Will be working together for 6+ years

So How do Most VCs Decide? VCs “fall in love with the deal” July,

Attractive is. . n Big Market n n Customers in pain and who buy

July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 22

VC Dating is a Grueling Process 1. Requires mental toughness 2. You may have

Time Scales 1 Introduction Per VC Per Funding July, 2009 2 First Date 3

It Will Be the Best Business Advice You’ll ever Get 1. 2. 3. 4.

Step 1: Introduction n Goal: Get the first date n Strategy: Approach the right

The Right VC is critical to success VC money is not a bank loan

The Right Way “We only look at deals that are introduced to us by

The Right Way: Introduction by Referral 1. 2. 3. 4. 5. Successful entrepreneurs Lawyers

Sales Tool: The Executive Summary n n Objective: To get a meeting One pager

How VCs Vet Your Exec Summary n n Is the referral source credible? Is

Rejection “We can’t kiss all the pretty girls” -Bob Kagle, Benchmark July, 2009 Copyright

Step 2: The Pitch n Goal: Get the second date n Strategy: Sketch out

“Pitch” Advice is Abundant -- and not duplicated here n Guy Kawasaki, Garage Technology

Tell a Simple, yet Compelling Story n Your Start-Up is everything to you n

Story Telling is a Skill n July, 2009 Jerry Weissman Coach to CEOs on

The Story VCs Want to Hear n Big Market n n Customers in pain

Four Pillars to any VC Pitch Market + Team July, 2009 Technology And Product

Market Size is Every VC’s Concern VC Grade 1: 200 Source: IRS. gov July,

Market 1. Market Vetting n Competition n VC cliché: “No competition = No Market”

Market #1 Cause of Failure is the Lack of Customers Demonstrate you know your

Example: Customers Manufacturing Retail Logistics Transportation July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures

2. Team n Team Show off your leadership aptitude Personal results, personal success n

Example: Corporate Organization Disclose: Experience & Holes Bob CEO Mark CFO Joe CTO 2

Technology Product n 3. Product Test: Aspirin or Vitamin? ? The product has to

Feature or a Company? Technology Product n A Feature? n Can the incumbent add

4. Financials July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures Financials 48

Cash is King Financials n Revenue forecast will likely take longer to achieve, So

Sequoia Capital’s Directive to CEOs 10/2008 July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures

When a VC turns you down … July, 2009 Copyright 2007, 2008, 2009 Horizon

What Can You Do? n React to the business advice you received n n

What Will Most VCs Do? Best case: “Fast no, slow yes” n Typical: Innocuous

Rejection Accept rejection gracefully n There is no rational argument to bring the VC

What Might Happen? When a VC senses love, you’ll hear back n Be responsive!

Step 3: Due Diligence n Goal: Receive a term sheet n Strategy: Two way

Prepare in Advance n Executive resumes & references Line up references in advance, n

Typical Due Diligence Process 1. More information (Exec. resumes, financials, cap table, personal references,

Use Due Diligence as a Two Way Test Drive n Check references on both

Syndication: Two Parents are Better than One n For the entrepreneur Don’t want one

Entrepreneur Resources n Law firm outreach n n n DLA Piper Venture Pipeline www.

To Your New Venture Success! July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 62

Slides: 61

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Size of Industry 1987 1997 2007 No. of VC Firms in Existence 361 549 No. of VC Funds in Existence 687 903 1, 549 No. of Professionals 741 4, 368 6, 753 8, 892 VC Capital Under Management ($B) 24. 4 63. 6 257. 1 Avg VC Capital under Mgt per firm ($M) 67. 6 115. 8 347. 0 Source: Thomson Financial July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 3

Venture Capital Isn’t Required To Build a Great Business … n Broadcom n n Cisco n n > $1. 9 B in revenue, the largest private software company, no VC money Siebel n July, 2009 >$300 M in revenue, no VC money SAS Institute n n Only took $1 M VC after being profitable The Math. Works n n $4. 5 M in revenue and profitable before Benchmark invested Microsoft n n Raised money at $60 M in revenue e. Bay n n $5 M in revenue, profitable before Sequoia invested Dell n n No VC money Customers funded first product Copyright 2007, 2008, 2009 Horizon Ventures 9

VC Financing Comes with Costs…† Fund raising takes time away from the business n Gives you a false sense of security n Money enables costly mistakes n Money removes spending discipline n Adds additional master(s) n You give up a lot of ownership n Sets the exit strategy and timing n † Source: July, 2009 Greg Gianforte, CEO Right. Now, http: //cet. berkeley. edu/Resources/CETLectures. html Copyright 2007, 2008, 2009 Horizon Ventures 10

… But it Sure Can Help 1. 2. 3. 4. July, 2009 Cash to fuel growth Strategy / business advice Introductions: investors, customers, partners Recruiting assistance Copyright 2007, 2008, 2009 Horizon Ventures 11

We Live in Unprecedented Times Facing the worst economy since the ’ 30 s n No IPO market n Average time to M&A is 7 years, IPO is 8 years, n Deal Status n Most deals in the last 6 months were follow on with existing investors. n New investors are asking for 30 – 40% discount from prior rounds, or are waiting for prices to fall. n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 13

It’s Hard to Spot Winners n Every deal has “hair on it” n n It is not easy to discern a winner: n July, 2009 It’s easy to find many, many problems EBAY: “On-line flea market? Come on!” Google: 5 CEO candidates passed before Eric Schmidt took the job. “Too many search engines” Portfolio returns: 1 @ 10 X; 2 @ 1 X; 7@0 X Copyright 2007, 2008, 2009 Horizon Ventures 16

Sources of Pre-VC Funding: Getting to First Milestone n Customers n n Government n n July, 2009 Value-Added Reseller (VAR) agreements Divestitures – protected supplier contract with parent for a defined period Moonlighting n n Small Business Innovation Research Grants (SBIR) Big Companies n n n Consulting engagements Non-Recurring Engineering (NRE) engagements Retainer fees from customers Founders waive compensation Family, Friends and Fools Copyright 2007, 2008, 2009 Horizon Ventures 17

VC’s Personal Bias is a Factor n Will be working together for 6+ years n n n The unexpected is going to happen n July, 2009 The project must be interesting Team compatibility is critical Got to get through the hard times Copyright 2007, 2008, 2009 Horizon Ventures 18

Attractive is. . n Big Market n n Customers in pain and who buy n n Differentiated, protected Successful Team n n July, 2009 Growing order trend Strong product offering / technology n n Open to disruption “A Players” Successful Investors / Advisors / Board Members Copyright 2007, 2008, 2009 Horizon Ventures 20

VC Dating is a Grueling Process 1. Requires mental toughness 2. You may have to talk to 10 – 40 firms to find the 3. July, 2009 match. Google was turned down by 80 firms. Success demands careful planning and execution Copyright 2007, 2008, 2009 Horizon Ventures 23

The Right VC is critical to success VC money is not a bank loan n Do your homework! n Talk to start-up CEOs n Figure out who is actively investing n Right sector (life sciences vs. semiconductor) n Relevant portfolio, expertise, and synergies n Early vs. late stage n Right geography n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 27

The Right Way: Introduction by Referral 1. 2. 3. 4. 5. Successful entrepreneurs Lawyers that work with VCs and start-ups Angel investors Other VCs you know Other service providers: n bankers, accountants, head hunters, … Avoid Brokers They create a buffer between you and VCs. July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 29

Sales Tool: The Executive Summary n n Objective: To get a meeting One pager that covers: n n n n July, 2009 Contact information Customer problem Your solution (product/technology) Market size Competitors Team Customer proof points Funding status Copyright 2007, 2008, 2009 Horizon Ventures 30

How VCs Vet Your Exec Summary n n Is the referral source credible? Is this company in my geography? n n n Is this a scalable business? Is the team credible? Are the existing investors credible? Can I possibly fall in love with the: n n July, 2009 < 1 -2 hours travel time CEO Target market Problem being solved The technology being developed Copyright 2007, 2008, 2009 Horizon Ventures 32

Step 2: The Pitch n Goal: Get the second date n Strategy: Sketch out a compelling, exciting vision 1 Introduction July, 2009 2 “The Pitch” 3 Due Diligence Copyright 2007, 2008, 2009 Horizon Ventures 34

“Pitch” Advice is Abundant -- and not duplicated here n Guy Kawasaki, Garage Technology Ventures www. garage. com/resources/building. shtml n Brad Feld, Mobius Venture Capital www. feld. com/blog/archives/2004/06/the_torturous_w. html n David Cowan, Bessemer Venture Partners whohastimeforthis. blogspot. com/2005/11/how-to-not-write-businessplan. html n Sequoia Capital sequoiacap. com/ideas/ n SVASE www. svase. org/components/uploads/SVASE%2010%20 Slide%20 Template. p pt July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 35

Tell a Simple, yet Compelling Story n Your Start-Up is everything to you n n VCs easily drown in details Boredom sets in Your goal is simple: n July, 2009 But just another pretty face to the VC Get the next date Copyright 2007, 2008, 2009 Horizon Ventures 36

The Story VCs Want to Hear n Big Market n n Customers in pain and who buy n n Differentiated, protected Successful Team n n July, 2009 Growing order trend Strong product offering / technology n n Open to disruption “A Players” Successful Investors / Advisors / Board Members Copyright 2007, 2008, 2009 Horizon Ventures 38

Market 1. Market Vetting n Competition n VC cliché: “No competition = No Market” n Is there room for this start-up? n Is there any potential to grow fast? n Is the market big enough to maneuver if the first niche doesn’t work out? July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 41

Market #1 Cause of Failure is the Lack of Customers Demonstrate you know your customer cold n There’s a logical reason behind the customer list n Articulated customer segmentation n Strategic approach n List your marquee customers n Show that customers are helping n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 42

2. Team n Team Show off your leadership aptitude Personal results, personal success n Start-up mentality vs. Big company mentality n Company pedigree – worked at market leaders n n Backed by blue ribbon advisors n n July, 2009 Key: people investors trust Expect your backgrounds to be rigorously checked. Copyright 2007, 2008, 2009 Horizon Ventures 44

Example: Corporate Organization Disclose: Experience & Holes Bob CEO Mark CFO Joe CTO 2 Application Engineers David Engineering Doug Sales TBH Marketing Cory 2 Salespeople 1 Marketing Rob July, 2009 11 Engineers Copyright 2007, 2008, 2009 Horizon Ventures 45

Technology Product n 3. Product Test: Aspirin or Vitamin? ? The product has to be compelling Customer inertia is huge n Customers change only when they have to n “Don’t fix what isn’t broken. ” n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 46

Feature or a Company? Technology Product n A Feature? n Can the incumbent add this feature to an existing product easily? n A Product? n Part of a full-product portfolio? n A Company? n Can the value prop create a substantial business? July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 47

Cash is King Financials n Revenue forecast will likely take longer to achieve, So n Is there enough cash to support misses? n Revenue must not be too big, but not too small n Spending plan will be scrutinized. n Net cash burn must go down over time n Successful CEOs are frugal July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 49

What Can You Do? n React to the business advice you received n n Adjust your business strategy if necessary Polish your pitch for the next VC Incorporate learning from each interaction n Simplify, Simplify n n Clarify confusing points n Address objection items n Rearrange the slide order July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 52

What Will Most VCs Do? Best case: “Fast no, slow yes” n Typical: Innocuous turn down, if at all n n n They don’t want to burn any bridges Typical: No urgency Risk is reduced as time passes n Wait for a milestone n n quarter results n prototype works July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 53

What Might Happen? When a VC senses love, you’ll hear back n Be responsive! n VC’s like working with responsive people n You’re building a relationship n Respond to requests < 24 hours n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 55

Prepare in Advance n Executive resumes & references Line up references in advance, n Contact people VCs will find n Financial Quarterlies n Capitalization table n Customer / technology references n Keep them updated on your progress, n Use them judiciously n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 57

Typical Due Diligence Process 1. More information (Exec. resumes, financials, cap table, personal references, etc. ) 2. Present to all the partners at the VC firm 3. Meet with the VC’s “expert(s)” n 4. 5. 6. July, 2009 Portfolio companies, friends, paid consultants Follow up meeting(s) at your office Calls to customers and personal references Calls to back-channel references Copyright 2007, 2008, 2009 Horizon Ventures 58

Use Due Diligence as a Two Way Test Drive n Check references on both the partner and the firm n n n July, 2009 Call other portfolio CEOs Call other VCs they have worked with Can I work with this VC partner (and firm) for the next 6 years? Is this a quality firm who will stick by me through dark days? Does the VC listen and engage in discussion? How do they react under fire? Copyright 2007, 2008, 2009 Horizon Ventures 59

Syndication: Two Parents are Better than One n For the entrepreneur Don’t want one VC with all the power n More strategic minds around the table n Hedge against one VC walking out n n For the VC Validates that the start up has legs n More future support ($$) available n July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 60

Entrepreneur Resources n Law firm outreach n n n DLA Piper Venture Pipeline www. venturepipeline. com Fenwick & West LLP “Darrell Kong” <dkong@fenwick. com> Orrick, Herrington & Sutcliffe LLP’s “Total Access” "Chad Lynch" <clynch@orrick. com> Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass” kiran. kamboj@pillsburylaw. com Wilson, Sonsini, Goodrich, and Rosati wsgr. com/WSGR/Display. aspx? Section. Name=practice/venturecapital. htm n SDForum n n Silicon Valley Bank’s Venture Exchange n n n www. sdforum. org Shai Goldman, Director, sgoldman@svb. com SVASE, Silicon Valley Association of Startup Entrepreneurs. www. svase. org The Enterprise Network of Silicon Valley Tensv. org n Women’s Technology Cluster www. wtc-sf. org July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 61