Incoherent Ramblings of a VC Brian Caulfield Investment Director Trinity Venture Capital
Jan 08, 2016
Incoherent Ramblings of a VC
Brian Caulfield Investment DirectorTrinity Venture Capital
Agenda
Introductions
The post-bubble era
Building your board
Traps for the unwary…
Hope…
Q&A
My backgroundEngineering graduate (TCD) 1986ESPRIT project research 1986-1989Landis & Gyr 1989-1992Co-founded Peregrine Systems 1992
Renamed Exceptis Technologies August 2000 Sold to Trintech (Nasdaq: TTPA) November 2000
Founder director/shareholder of Prediction Dynamics 2000 Went into liquidation 2004
Co-founded Similarity Systems 2001 With CEO, Garry Moroney Sold to Informatica (Nasdaq: INFA) January 2006
Joined Trinity Venture Capital 2002Member ICT Ireland Governing Board and CTVR Advisory Board
So why VC?
The post “Post-Bubble” era…now we really are over it…
The Bubble slide…
0
20000
40000
60000
80000
100000
120000
$ m
illio
ns
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Source: Venture Ec onomics
A clear pattern…
Back to doing it the old-fashioned way…VC investment levels are now generally back to pre-bubble levelsAverage size of deals is showing an upward trendNumbers of deals are pretty stableThe IPO market is back…if not at the same level more focus on European IPOs (AIM market) and IPOs are not as attractive as they used to be
The old-fashioned way…
Capital
Risk (ß)
Idea isFeasible
TechnologyWorks
A CustomerBuys
SeedFunding
R&DCapital
Go-to-MarketCaptial
ExpansionCaptial
P(success) = 40%Req’d IRR = 70%
P(success) = 50%Req’d IRR = 50%
P(success) = 80%Req’d IRR = 30%
P(success) = 30%Req’d IRR = 100%
Importance of valuation?
Time
1970s
1980s
Early 1990s
Bubble
Company
Apple
Microsoft
Cisco
Sun
AOL
Ciena
Boo.com
Webvan
Capital raised
US$ 8.6 m
1.0 m
2.4 m
39.0 m
17.0 m
40.6 m
135.0 m
375.0 m
Value now
US$ 8 B
347 B
140 B
36 B
140 B
4 B
Bust
Bust
Building your board
Board representation, etc.
Most VC investors will want to be represented on your board
Should add value, corporate governance and discipline
Ideal board post VC investment? 2 executives 2 investor representatives (assuming you have two
investors) 2 high quality non-executives with specific know-how
driven by company’s needs Sectoral, i.e. your market Functional, e.g. sales and marketing or finance
Independent non-executive chairman
VC can help to recruit the right board
How to build the board?
Slowly!Keep it small early on
It is easy to put someone on a board and very difficult to get them off
Think about how the board should develop over time Think carefully about the value that a new board
member adds
Avoid classic mistakes… Too many executives on the board Board already “full” prior to investment Family members on the board People with “business experience” on the board
Traps for the unwary…(or, a personal view on where it all goeswrong for university spin-outs…and other
start-ups)
A personal view…1The difficulty of getting past university TTO with a fundable proposition
Take advice before you reach an agreement Everything is negotiable
Equity greed 100% of nothing is nothing…
Mis-allocating value between technology and execution The value is not all in the technology
Inadequate commitment You can’t do this and be Head of Department too…
Building the board badly It’s very easy to put someone on your board…and very difficult to get
them offOver-ambitious projections
Sales Cash receipts
A personal view…2Inadequate customer focus
You must focus on what delivers value to a customer The value delivered must be sufficient
to overcome risk concerns to be a priority for the customer…does it move the needle?
But don’t let a single customer drive your specification
Lack of clarity regarding IP ownership Institution/founder/research partner issues Beta customer issues
Not hiring (or valuing) the right expertise You are probably not the CEO (or VP of Sales, or VP of Engineering)
because you have never done it before You rarely have the time to learn on the job
Good CEOs cost money and big equity but they’ll make you rich
Fear of losing control Would you let your child drive a car in Bangalore?
Hope…(Some personal exit stories)
Some Personal Exit StoriesExceptis Technologies
Sold to Trintech (Nasdaq: TTPA) November 2000 $26m stock Key lesson: Cash is King and timing is everything
Similarity Systems Sold to Informatica (Nasdaq: INFA) January 2006 $55m cash Key lesson: Momentum counts
SteelTrace Sold to Compuware (Nasdaq: CPWR) April 2006 $20m cash Key lesson: Importance of investor alignment
Trinity Venture Capital
Trinity Venture Capital was established in September 1997Trinity Venture Capital manages : Trinity Venture Fund 1 .. .. .. .. .. ..
€24m Trinity Venture Fund 2 .. .. .. .. .. ..
€139m
Investor in early and growth stage technology companies in Ireland
Investment Strategy
Focus on software, complex hardware and medical device companies, with their own IP, selling to corporates
Invest early stage, high growth potential
Identify the compelling reason for purchase of product offering (must have)
Help build management team
Take an active role in setting company strategy
Introduce quality partners
Product development
Reference customers
Sales momentum
What VCs want…and why(and the importance of business planning)
What VCs always wanted…
1. Market
2. People
3. Technology
Great people with great technology and a poor market?Great people in a great market with poor technology?Poor people in a great market with great technology?
And now they want more…
Strong, experienced team with very commercial focus Serial entrepreneurs reduce risk The old dog for the hard road
Product solving a critical business need Multiple customer(s) buy the product at a price that gives a
good profit Clear business case for the customer
Ideas backed by plans - clear (short) paths to revenue to cashflow breakeven
Focus on capital efficiency Doing a lot with a little Bootstrapping where possible
Risk management – “what happens if…”
Bootstrapping & 3 “F”s
Bootstrapping & 3 “F”s
Angels & seed VC investors
Angels & seed VC investors
First round venturecapital
First round venturecapital
Second roundventurecapital
Second roundventurecapital
Marketidentification
& quantification
Marketidentification
& quantification
Targeting“beta”
customers
Targeting“beta”
customers
Early adopter
sales
Early adopter
sales
“Chasm crossing”or massmarket
“Chasm crossing”or massmarket
Entrepreneur& CTO
Entrepreneur& CTO
Salesdirector
Salesdirector
Operationsteam
Operationsteam CFOCFO
Funding development
Commercial development
Team development
Proof ofconcept
Proof ofconcept
Betaproduct
Betaproduct
Productversion 1.x
Productversion 1.x
Productversion 2.x
Productversion 2.x
Product development
Bootstrapping & 3 “F”s
Bootstrapping & 3 “F”s
Angels & seed VC investors
Angels & seed VC investors
First round venturecapital
First round venturecapital
Second roundventurecapital
Second roundventurecapital
Marketidentification
& quantification
Marketidentification
& quantification
Targeting“beta”
customers
Targeting“beta”
customers
Early adopter
sales
Early adopter
sales
“Chasm crossing”or massmarket
“Chasm crossing”or massmarket
Entrepreneur& CTO
Entrepreneur& CTO
Salesdirector
Salesdirector
Operationsteam
Operationsteam CFOCFO
Funding development
Commercial development
Team development
Proof ofconcept
Proof ofconcept
Betaproduct
Betaproduct
Productversion 1.x
Productversion 1.x
Productversion 2.x
Productversion 2.x
Product development
Eliminatemarket risk
Eliminatetechnology risk
Eliminateexecution risk
Business planning
Product Development Core engine frameworkTestable prototype of core engineDemonstratable prototype of enginePilot PrototypePilot site implementation
Business/ Market DevelopmentBuild list of product requirementsMake first contact with potential pilot
customersCarry out prototype demosDevelop sales plan – start sellingDevelop marketing story
People Count
FinancingDevelop Business CasePresent to investorsClose deal
ABSOLUTE DEADLINES
Mar April May Jun July Aug Sept. Oct Nov Dec
Prototype ready to demo
First pilot site in place
Business case
completed
Financing agreed
23
4 6 7
Product roadmapModule Version 1.03 Version 1.2 Version 2
Objective Testable Prototype Demonstratable Prototype Pilot Product
CURRENT VERSION Mid / End June End July
No change Re-organise / tidy upEnable modular design
No Change
Able to define Matcher &Standardiser configurations
Add Filter & Consolidationconfigurations
VB standard function CSV adaptor Develop extra adaptors as required
ProcessingCore
Basic output CSV file User specified output fileformat
Develop advanced database
Edit / Hamming distanceroutines only
Develop menu of scoringroutines
Expand / refine menu of routinesMatch Module
Weight based analyzer Develop rule-based AnalyserDevelop basic CBR Analyser
Refine CBR analyserInvestigate Neural Net Analyser
TuningManager
None Develop basic CBR trainingsystem
StandardizationModule
Dictionary lookup / replaceonly
Develop sets of routines forparsing & standardisingAdd key dictionaries
Expand / Refine taxonomy of routines
Filter Module None Develop first version“keyletter” grouping engine
Develop advanced grouping engine
ConsolidationModule
None Develop minimal functionality Develop clustering / mergingfunctionality
User Interface VB GUI with sufficient featuresto allow testing of engine bynon-programmer (businesssetup & testing)
Enhance VB GUI for use incustomer demosDevelop demo version ofJAVA GUI
High quality Java GUI to demonstratefull capabilities & functionality ofproduct Refine GUI
Objective foreach release
Features eliminatedfrom early product
versions
GUI developmentfocused on sales
& marketing requirements
Initial developmentfocused on
core technology
GUI forprogrammer test
only
Additionalcomponent
development
Evolution of terms(from “love letters” to “revenge letters”
and
back to “term sheets”)
So what’s a term sheet?An expression of the main commercial terms on which an investor proposes to invest
Investment sum and valuation Share structure Board representation Option pool Other rights
Usually non-binding, apart from issues such as Confidentiality Exclusivity Payment of fees
Conditions precedent…investment subject to Due diligence Other conditions
What should I expect?
Financial instruments you have never heard of… Redeemable preference shares (“prefs”) Participating preferred shares Convertible redeemable preference shares (“creeps”) Cumulative redeemable preference shares
Make sure you understand the economics clearly Don’t focus on percentage…focus on the cash waterfall on
exit
Downside protections for the venture capitalist Anti-dilution, exit preference
Management and control Board composition Tag, drag and agreement to sell Transfer of shares (management vesting)
Understanding the economics
It’s not just about percentage… Think about value at exit Think about how much capital you need to get there And percentage does not equal control
What money comes out first in an exit? Debt Exit preferences Any accumulated coupon
How much comes out before the ordinary shares participate?
The so called “pref pile”
Look at what we look at…the cash waterfall on exit
Advice...
Expect it to take at least 3 months 6-12 weeks post agreed term sheet But plan conservatively
Advisors can help Peers/CEOs who have been through the process Quality non-execs Experienced legal/corporate finance advisors
…but don’t be afraid to contact VCs directlyBe cautious with milestones
You may be tying your own noose
Be openBe realistic...
Some questions to answer…What does your product do for a customer?What is your value proposition?
Why will lots of customers buy? Who are your customers?
What do you plan to use the capital for?What are the key management hires you need to make?What is your channel to market and sales strategy?How will you create barriers to entry?Who are your competitors?
Direct and indirect Don’t say “we have none”
How will you exit?
More plagiarism(With more apologies to Guy Kawasaki,
too)
Top Ten Lies of Enterpreneurs
1. “Our projections are conservative”2. “Gartner says our market will be $50 billion by
2007”3. “Boeing will sign our contract next week”4. “Key employees will join us as soon as we get
funded”5. “No one else is doing what we do”6. “Several VCs are doing due diligence”7. “Oracle is too slow to be a threat”8. “Beta sites will pay to test our software”9. “Patents make our business defensible”10. “All we have to do is get 1% of the market”
Top Ten Lies of Venture Capitalists
1. “We can make a quick decision”2. “I liked your company but my partners didn’t”3. “If you get a lead investor, we’ll follow”4. “Show us some traction and we’ll invest”5. “We have lots of dry powder”6. “We’re investing in your team”7. “We saw this coming, so we didn’t invest in B2B
or B2C”8. “This is a vanilla term sheet”9. “We can open doors for you at major companies”10. “We like early stage investing”