Copacetic

I attended a seminar on how to raise venture capital yesterday. It was pretty useful because we had four real VCs in the room giving presentations, Brian Caulfield from TVC, John O’Sullivan from ACT, Shay Garvey from Delta and Micheal Donnelly from Growcorp.

My notes are below. Some of the key points that stayed with me were,

• Irish VCs are all locked into the same ten year cycle so they all raise and run out of cash at the same time. They were all cashed out last year so it was a really bad year to try and raise VC in ireland.
• VC’s regularily break their own investment rules, so its always worth meeting them even if your idea is not something that looks like it fits their current portfolio
• There is no point in emailing or colding calling, an introduction via a third party is much more likely to engage them
• Focus on building a great powerpoint presentation rather than a great business plan
• Irish VC’s will sign NDAs especially if you use the standard IVCA one.

The subheadding of the whole talk was "How to make your story investor intelligent".

Regina Breheny: DG IVCA

Venture Capital funds have a ten year life.

IRR is the key measure. Internal Rate of Return.

Only 16m in funds raised in 2006. How much in 2007?

Aldiscon spawned at least 14 startups (How many has Iona spawned?)

IVCA NDA is available on IVCA web site. Recognised by Law Society.

Irish VCs tend to be locked together in a similar ten year cycle.

EI 175m stalled investment in 2006.

Joe Tynan - Price Waterhouse Coopers

1 in 6,000,000 high-tech business ideas end up in an IPO

Less than 1% of business plans recieved by VC’s get funded

Founder CEO’s of high-tech companies typically own less than 4% of their companies after an IPO

60% of VC funded high-tech companies go bust

Most high tech companies that succeed in having a IPO take 5-7 years to do so

What point are you at in the VC’s ten cycle.

Plan to buy in management expertise.

BC : 1 minute pitch, value proposition and market opportunity

Shay: Proposition, Complication, Solution

John O’Sullivan - ACT Venture capital

VC’s continuously demonstrate exceptions

VC’s is not the only answer

VC’s are curious, positive and entrepreneurial

VC partners invest their own money in the deals

VC money is somebody’s pension fund

Risk: VC is here to reduce risk

Capital efficiency (How much will it take to exit?)

VC’s have to convince their colleagues

What do really want when you ask "What is your added value?"

What are you like to work with?

VC’s are always concerned when companies start taking their advice pre-investment

Financial’s -

• Focus on cash
• Gross margins after startup phase

When did you last meet the competition?

Competition : Anything that is an alternative for your customers.

One alternative is "do nothing"

Is the maximum valuation the optimum deal?

Asset strategy is the focus of many companies. They also need a liability strategy.

Michael Donnelly - Growcorp

Michael Donnelly - Growcorp

Deal Timings - 1m - 12 months, typically 3-6m

Does your investment preferences match the stage of the business

What is the sector track record

Is the fund compatible with your business

Does the investor have conflicts of interest

"Freedom to Operate" - Limits liability in the case of patent contention

JOS: Outside life-sciences patents rarely impact valuations at exit

Make sure you look for enough money to accommodate delays and problems

Offer letter is usually bound by exclusivity (for some period of time)

No skeletons in the cupboard, they will come out and warrants will hold you liable in the worst case

You should have invested if you expect a VC to invest, team investment should be "material"

"Material" is subjective

Due Diligence is need to support or contradict initial business plan impression

Is the venture dependent on IP for its success

Syndication limits control from any one investor

Costs grow by themselves, sales do not

Shay Garvey: Term Sheets

Irish VC’s front load the due diligence so that term sheets are close to complete

Unlikely to get two term sheets that are directly comparable

The term sheet gives clues as to what the investor wants to achieve

• Valuation
• People
• Timing
• Risk Management

How will you manage a sale and continue to run your business?

Brian Caulfield - Trinity Venture capital

Companies being acquired are much more mature

Companies going IPO are much more mature

Not looking for the perfect team, but need market opportunity

Avoid being a feature company (rating companies, OS feature companies e.g. DoubleSpace)

Price your technology sale on future potential sales if haggling over current sales is happening

Companies are bought not sold

Engage early with advisors so they are prepared for an out of the blue M&A request

Are there multiple potential acquirers?

Is there a deal on the table? If so negotiate for a % of the amount over the desired valuation

M&A advisor fees 2 to 5% of the transaction value

(see slide for other stats)

For stock deals, how long will it take to sell the stock, i.e. what is the amount of trading each day? 1m shares but 20,000 sold a day.

Tactics : We are note for sale

Deadlines drive the process

Colm Rafferty: Legal and Administration Process

Put a health warning in your business plan. Nothing contained is warranted.

Use the standard IVCA NDA/Confidentiality agreement

Take your legal advice at Term sheet stage

Test their eagerness for the deal by seeing what you can challenge/change in the term sheet

Ask for a set of warranties when presented with a due diligence questionnaire

Distinguish between what actions are controlled by VC vs what is controlled by the Board

From Ireland.com,

Dublin-based Trinity Venture Capital is considering listing on
secondary stock markets in Dublin and London.

It is understood that the company has engaged Davy to advise it on the
move, and is considering floating on the IEX in Dublin and the
Alternative Investment Market in London.

The move is designed at raising funds to expand its investment
activities. Sources say the company could raise up to €50 million from
the move.

An investor roadshow is believed to be under way, and the listings are
expected to happen by the end of the summer.

When contacted, a spokeswoman for the group said: “Trinity Venture
Capital is currently in discussions with institutional investors
reviewing the many options available to them to raise new capital to
grow their existing portfolio of companies over the next number of
years.”

The listed company manages Trinity’s portfolio of investments. These
include: Norkom, a listed financial software company worth €166
million; Havok, a maker of games software and special effects for
films; Aepona, which supplies network solutions to the telecoms
industry; and CR2, a banking software provider.

A decision by Trinity to float would follow a similar move by Boundary
Capital, a Dublin-based investment group headed by financier Niall
McFadden. Boundary listed on the IEX and AIM on May 15th. Its shares,
which listed at €1 each, rose sharply in the first few days of trading
but have since fallen back to €1.09.

Trinity is one of Ireland’s biggest venture capital groups. Founded in
September 1997, it is led by chairman Shane Reihill and chief
executive John Tracey.

It has raised €163 million to date for two funds that have invested
primarily in early-stage technology companies in Ireland and the UK.

Trinity had two high-profile exits from investee companies in 2006 -
Similarity Systems, in which it owned about 27 per cent, was sold for
€45.4 million, while software group Steeltrace was bought for $20
million by US firm Compuware.

It is understood that Trinity has decided to refocus its strategy and
move into the private equity space.

This would see it participate in larger transactions, including
buy-outs, buy-ins, restructurings and public-to-private deals.

Mr Reihill is a former joint chief executive of fuel importers and
distributors Tedcastle Holdings, which he left in 2001. He has also
worked for Dillon Read Investment Bank in New York. He is currently
chairman of Norkom, which this week announced a 38 per cent increase
in its revenues to €25 million.

Mr Tracey is an engineer and initially worked in the semiconductor
industry before joining Deloitte & Touche as a management consultant.

In 1989 he moved into venture capital, and spent eight years with ICC
Venture Capital, which is now owned by Bank of Scotland. He has led
Trinity since its inception.

Brian Caulfield of Trinity Venture Capital visited the HotHouse Program today to do a two hour presentation on Investor Documentation. The subtitle of the talk was From Term Sheets to Sale and Purchase Agreements and everything in Between. Brian was a co-founder of two succesful Irish software companies Exceptis and Similiarity Systems.
He kindly provided a copy of the slides after the talk, but the slides don’t communicate the wealth of personal knowledge Brian has in this area. He made a number of key points that stayed with me,

• Don’t obsess about the percentage of the company you will retain after investment. Instead focus on the “cash waterfall”, e.g. what is likely to be left after the preferences pile has been discharged and any interest or other exit options have been exercised. He worked through three examples of investment and three exit scenarios where the share spilt on investment and exit was radically different.
• People confuse good leaver/bad leaver. If you leave the company as a founder and the VC doens’t want you to go, that that is considered a bad leaver e.g. you leaving will impact the valuation of the company. If you leave the company and the VC can’t wait to see the back of you, then that is a good leaver. Bad leaver is likely to feel the full weight of any penalties because of their impact on company valuation, good leaver is likely to get a pretty reasonable goodbye package just to get him out the door.
• A Well Thumbed bible is a problem. If you are spending a lot of time consulting the investor documentation then you are probably in trouble. These documents are not instruments that should be used to run a company.
• Multiple Exit prefs and ratchets are less common. The penal terms circa 2001 are less common this days. Exit multiples proved to be a complete turn off to subsequent investors and ratchets encourage very short term thinking.

An excellent talk all round for anybody starting a company who is planning to raise VC money.