Jan 23, 2015
Understanding venture capital
Nic Brisbourne Cass Business School Lecture November 27th 2009
Agenda
• Introduction
• The four aspects of venture capital– Raising money to make investments
– Making investments
– Exiting investments (aka portfolio management)
– Managing ourselves
Nic Brisbourne
• 10 years in venture– 4 years corporate venturing with Reuters
– 6 years with DFJ Esprit
• Career VC
• 2008 Deal of the Year for Buy.at exit
• Focused on the internet
• Blogger at www.theequitykicker.com
• DFJ Esprit is a leading venture capital investor focused on five target segments: technology, media, telecoms, medtech, cleantech and healthcare.
• Esprit aims to provide superior returns for investors in its funds by investing in, and helping entrepreneurs grow world class companies.
• Esprit Capital Partners is the product of the 2006 merger between Cazenove Private Equity and Prelude Ventures.
• Prelude Ventures has been successfully making early stage investments in the UK and European technology, life-science and healthcare businesses for 21 years.
• Cazenove Private Equity has been active as a cross stage investor in the European technology market since 2000, making more than 20 investments in this time.
• Recently announced:
• A new primary fund
• The acquisition of 3i’s European IT venture portfolio
DFJ Esprit
Structure of the venture industry
Fees + Carry
Home runs – the maths demands them
• Target IRR of 30-35% and a four year average holding period implies a 3x multiple on the whole fund– Sample fund of 10 companies, average
investment of £1 per company• Two 10x returns = £20
• Three 3x returns = £9
• Two money back = £2
• Three write offs = £0
• Total = £31, or 3.1x multiple on whole fund
Different funds specialise in investing differing amounts
SeedEarly StageSeries A, (B)
Later Stage(B),C,D…
Pre-IPO / Buy-out
PrivateEquity
Investment Size
Potential Sources of Funds
0 - €1m
Grant-funding
University seed funds
Friends and family
Angel Investors
(Venture Capital)
€2m-€20m
Venture Capital
(Wealthy) Angel investors
€5m-€20m
Venture Capital
€30m+
Specialist Late stage tech investment funds
Hedge Funds
The process of making investments changes with the heat in the market
How VCs find companies
• Decide what sectors to look in– Thematic investing
– Ad hoc/reactionary investing
• The process of finding companies– Network, network, network
– Advisors
– Research
– Cold approaches
Deciding to make an investment
• Fit with fund strategy
• Multiple meetings assessing exit potential – needs to be big!– Market
– Product
– Team
– Why this business will win
• Company needs to have momentum
Investment execution• Termsheet• Formal due diligence• Legal documents
– Articles– Shareholders agreement– Reps and warranties
• Takes time – need to keep performing throughout• Two end-to-end examples
– Buyat – 500 days– Tribold – 90 days
Typical deal terms
• Target 20-35% ownership
• Board Representation• Liquidation Preference• Participation rights• Certain control and veto
rights• Option Pool• Period of exclusivity to
close legals
but that’s so
unfair…
Helping companies to help themselves
• A good board focuses on (per Patrick Dunne):– Right strategy– Right resources– Staying out of jail
• A good VC investor director (generally) focuses on– The high level– Areas where they will make a difference– A small number of issues (ideally one)
What a good VC will add
• Advice and Strategy
• Hiring– Developers– Country Managers– Sales– CEO / CFO / COO– Advisory Board
• Partnerships
• Profile and PR
• Internationalisation
• Trusted service provider relationships
• Search / recruiting• Branding / PR• Finance, etc
• Exit optimisation• Knowledge / contacts
with relevant buyers• Experience with
process
Making the fund a success
• Focus resource where it will make a difference– This is tough
• Keeping sufficient reserve capital
• Maintain decision quality– Stop partners from going native
• Ensure a steady flow of exits– Buy.at example
Internal process for a VC fund
• Typically centres around a weekly partners meeting– Ours has three sections, as above
• Key is good information and good decision making
• Challenge is making it work in a partnership where everyone operates autonomously
Recruitment into a VC fund
In private equity you have to be financially trained and to have an understanding of management, but you also have to have a strategic brain while being sensitive to tactical and people issues.
““
And a passion for your sector!!!And a passion for your sector!!!
Conclusion
To do this job is a privilege
Thank you&
Questions
Nic Brisbourne, Partner DFJ EspritTheEquityKicker