Transcript An Opinionated Introduction To Venture Capital

An Opinionated Introduction To
Venture Capital in Europe
Andrea Capitanio
Alice Ventures
E:mail [email protected]
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 1
Private Equity & Venture Capital
<<The “Private Equity” capitals market provides
capital to enterprises not quoted on a stock
market in exchange for an equity participation.>>
<<Venture Capital (VC) is a sub-class of Private Equity
and is characterized by investments made for the
purpose of developing, launching, and expanding
the commercialization of new products or
services.>>
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 2
Early Investments Lifecycle
Start-up
V1.1
Res. &
Develop.
concept
Eng. Specs
Prototype
Alfa
Beta
V1
CUSTOMERS
Marketing
& Sales
M&S
Plan V0.1
Prod.
& Ops
P&O Plan V0.1
Seed (< € 1 mil)
Angels
Incubators
Plan V1
Plan V1
Plan V2
Plan V2
Early Stages (€ 1 - 10 mil)
Accelerators
Venture Capital
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Expansion/ (€ 10+ mil)
development
Private Equity &
Merchant Banks
Viewgraph No. 3
• Advisor to MB Venture Capital
• MB Venture Capital Fund I
– € 150 mil under management
– Focus on
• Early stages investments (start-up to first round) in the EU and Israel
• Bio-tech, Media and Info-tech
• Financing from € 1 to 10 mil (€ 3 - 5 mil operations on average)
– 12 investments in SE, BE, UK, IT, …
• The Team
– Edoardo Lecaldano (Media and Infotech), John Gonzales (Biotech),
Sergio Saibene (Infotech and Telecom), Andrea Capitanio
(Infotech and Telecom)
– the Polytechnic of Milan and the Bocconi Business School of Milan
• MB VC Fund I investors: FIAT, Pirelli, Mediobanca, Generali,
Montedison, Informatica, ...
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
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What Venture Capitalists do ...
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•
Sift through thousands of (good and bad) investment propositions
Identify a few valid initiatives and finance them
– in exchange for private equity (usually a minority stake)
– structure the deal
•
Support the entrepreneurs in succeeding. E.g.:
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–
–
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–
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providing financial advice
in headhunting and setting up advisory boards
in contacting customers, channels, …
in steering and positioning the company
in managing PRs activities
in managing IP and legal issues
Look after value creation
– further round of financing
– merger and acquisition, IPO, …
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 5
Venture Capital in the EU
(FY2000)
– UK 37%, Fr 16%, DE 13%, ...
– High Tech early-stage: € 8.6 bil
– High Tech expansion/development: € 6.6 bil
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Source: “Annual Survey of Pan European
Private Equity & Venture Capital Activity”,
European Private Equity & VC Association
• Funds raised in the EU: € 48 bil
Viewgraph No. 6
Venture Capital in the EU
(FY2000)
– UK 38%, FR 15%, DE 14%, …
– €11bil (31.5%) in 5448 High Tech deals
A m o u nt I nve ste d
R atio
S eed
€ 0 .8 b il
2 .3 %
S tart-u p
€ 5 .8 b il
16 .7 %
E x p ansio n
€ 12 .9 b il
3 7 .1%
R e p lac e m e nt
€ 0 .9 b il
2 .7 %
B u y -O ut
€ 14 .3 b il
4 1.2 %
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Source: “Annual Survey of Pan European
Private Equity & Venture Capital Activity”,
European Private Equity & VC Association
• Investments made: € 34.9 bil (over 13000)
Viewgraph No. 7
Venture Capital in the EU
(FY2000)
– € 3.4 mil per financing (€ 18.5 in the US*)
2000
19 9 9
S eed
€ 7 3 1K
€ 775K
S tart-u p
€ 1.2 m il
€ 770K
E x p ansio n
€ 2 .4 m il
€ 1.6 m il
R e p lac e m e nt
€ 2 .1m il
B u y -O ut
€ 13 .5 m il
Source: “Annual Survey of Pan European
Private Equity & Venture Capital Activity”,
European Private Equity & VC Association
• Average deal size € 2.7m (€ 2.2m in 1999)
* Source: Financial Times, July 16th 2001
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 8
Venture Capital in the EU
(FY2000)
– € 3bil in 1308 trade sale operations
– € 1.3bil in 1001 public offerings
• 249 IPO & 682 sales of quoted equity
– €689mil in 896 write-offs
– €1.4bil in 316 sales to other VCs or financial
institutions
• 37 Tech. IPOs up to June 1st., 2001
– Raised € 1253 mil + € 6255 mil of Orange IPO
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Source: “Annual Survey of Pan European
Private Equity & Venture Capital Activity”,
European Private Equity & VC Association
• Divestments made: € 9.1 bil
Viewgraph No. 9
Venture Capital in the EU
(FY2000)
• What does a VC asks for
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2% have 1 - 9%
38% have 10 - 33%
21% have 34 -49%
39% have 50+ %
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Source: “The Economic Impact of
Venture Capital in Europe”
(EVCA and Coopers & Lybrand)
– VC investors’ stake
Viewgraph No. 10
•
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Financial Advice 44%
Corporate Strategy & Direction 43%
Sounding board for ideas 41%
Challenging status quo 32%
Contacts or market information 26%
Management recruitment 10%
Marketing strategy 7%
Money only 12%
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Source: “The Economic Impact of
Venture Capital in Europe”
(EVCA and Coopers & Lybrand)
Most Appreciated VCs
Contributions
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The Financing Lifecycle
• Approach
– Elevator’s Pitch and Info Memo
• Presentation
– Placement Memo
• Business plan
– Meetings
• Negotiation
– Term Sheet (or Letter of Intent)
• Verification and Validation
– Due diligence
• Closing & Financing
• Value Creation
• Exit
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 12
How to approach a venture
capitalist
Quick Check: Do You Need a VC ?
• The Business Plan
• A Team
• A Presentation and an “Elevator’s Pitch”
– be ready !!
• References
• An NDA (if required)
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
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The Business Plan
• A Product/Service description
– Pros and cons of the solution
– Market needs it satisfies
– Barriers to Competition
• Business Model
– Market Analysis (strategic and tactical)
• Competitors
– Execution Plan
• Marketing and Sales Plan
• Research and Development Plan
• Operations Plan
• Team
• Financials
– Valuation Model & Placement Terms
– Income Statement, Balance Sheet & Cash Flow
• 3 years minimum, quarterly breakdown
• 1st year in monthly breakdown
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
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The Business Plan: Suggestions
• Be sure you sell a “need to have” not a “nice
to have” solution.
• Be Focused.
• Assess your competition
(present and future)
• Be concise and speak the truth
• Be complete and clear in your analysis
– state ALL your assumptions
– do not hide cons
• Have details ready if requested
• Validate, validate, validate …
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
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The Term Sheet
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The parties
Securities to be issued
Amount of financing & disbursement schedule
Pre-financing valuation
Option plan & earn-out
Use of proceeds
Liquidation Preference
Protective Provisions, Voting Rights and BoD participation
Anti-dilution
Lock-ups
Tag along and drag along
Exclusivity
Reporting
...
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 16
How does a VC think
• IRR (Internal Rate of Return)
– Company’s Current and Future Valuation
• Comparables (P/E,P/S,…), “Number of”, DCF, …
– What’s The Best Strategy To Create Value
• Which are the achievable milestones and what’s the
financing needed ?
• When is the break-even expected ? With which margins and
revenues.
– Exit Strategy
• Trade sale, IPO, Nth+1 round of financing, ..
• Minimizing Risks
– Diluting the investment
– Liquidation Preference rights
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 17
A possible valuation scenario
• Company X. Quoted on Stock Exchange Z.
Valuation € 100mil, Sales € 50 mil, Earnings € 5 mil.
P/E = 100/5 = 20, P/S = 100/50 = 2.
• Company Y. Acquired for € 20 mil with sales of € 10 mil. P/S = 20/10 = 2.
• Your “UnwiredCo” plan forecasts € 30 mil in sales and € 5 mil in earnings in
2006. Its buss. model is “similar” to X and Y.
– Lower Valuation of UnwiredCo in 2006 using P/S of 2 is 30*2 = € 60mil
– Higher Valuation in 2006 using P/E of 20 is 5*20 = € 100 mil
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Present Post-Money1 valuation (discount-rate2 of 50%) is between
60/(150%)5years = € 8mil and
100/(150%)5years = € 13.3mil
The “UnwiredCo” requires a € 4 mil financing round.
The Pre-Money valuation is between € 8-4=4mil and € 13.3-4= 9.3mil.
An agreement is reached at a pre-money valuation of € 6mil.
hence the Investor will obtain a 4 / (6 + 4) = 40% stake in the company.
1 Valuation
of the company after the investment.
2Target Annualized Return of Investment
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 18
Stage
Early Stage
Development
Balanced
All Venture
Buyouts
Generalist
All Private Equity
1 YR 3 YR
26,0 14,5
31,5 21,4
40,4 56,4
35,6 36,3
10,9 30,6
1,9 12,6
15,6 29,2
5 YR 10 YR
24,0
14,3
19,4
11,8
45,4
20,7
33,6
17,2
26,2
18,0
17,8
12,3
25,8
16,3
Source: “Annual Survey of Pan European
Private Equity & Venture Capital Activity”,
European Private Equity & VC Association
European Private Equity Funds
Formed 1980-1998
Net IRRs to Investors
Investment Horizon Return as of 31-Dec-2000
IRR: Internal Rate of Return. “Rate of discount which equates the present value of the cash
outflows associated with an investment with the sum of the present value of the cash inflows
accruing from it and the present value of the valuation of the unrealized portfolio”.
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
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What to look for in a VC
• People you LIKE !
– Trustworthy & Collaborative
• Can bring value, not money only !
– Do not have to be experts in the sector but
have to understand the business.
– Good network of contacts.
• Ask for references
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 20
The Wireless Market
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UMTS
– July 2000. WestLB Panmure UMTS Report estimates German
UMTS users to pass the 2mils threshold (3% of total) in 2002
and reach 51.6mil (60%) in 2011.
– Oct 2000. UMTS Forum Report 9 estimates 32 mils Mobile
Multimedia Users in West Europe in 2005 and 90 mils in 2010
– Recent (May 01 ?). Durlacher UMTS Report - 0.3 mils in the EU
in 2003 and 32 mils in 2005.
Layoffs
– Ericsson announced 3300 layoffs and ceasing production in two
EU plants.
– Nokia has announced 3/400 layoffs.
– Motorola has announced another 4K layoffs (adding to the 18K
already announced)
Handsets
– Projections for handset sales in 2001 in the EU have came down
from 600 to 450 mil.
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 21
The Wireless Market Sectors
• Content
– Producers and Providers
• Services
– (Virtual) Mobile Network Operators
– Application providers (WASP) & Portals
• Applications
– End-user applications
– Platforms and frameworks
• Optimization Tools and Techniques
• Enabling Technologies
– Access, Core & Home Networks
– Mobile Terminals
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 22
Application
Optimization
Enabling
Technologies
M-commerce
M-commerce
Data Compression
and Optimization
Streaming & MultiMedia
Smart Messaging,
m-advertising
m-CRM, m-SFM, ...
Smart Antennas & Radios, …
xG Stacks, ICs, ..
Location Based Services
MExEs
Hybrid Networks & Multi Access Network
Mobile
Terminal
Radio
Network
Core
Network
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Home
Network
Enterprise
Network
Viewgraph No. 23
Conclusions
• Always engage your brain before doing anything
– your BP deserve more care than your best publication
• Do your homework
– assess your competition and the market
• Push the envelope but …
Be aware of your limits
– partner with others to define the BP
– do not be too greedy
• Do frequent reality checks
– talk to other experts, prospective buyers & channels, VCs
– compare to other similar initiatives
• Be committed
– the start-up must be your only thought until the IPO
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 24
Good Luck and …
I hope to be hearing from you soon !
Andrea Capitanio - Alice Ventures
E-mail: [email protected]
Phone: +39 02 4998 1730
S-mail: Piazzale Baracca 1, Milano, 20123, Italy
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 25
Abstract
Mobile communications are rapidly becoming the preferred mean of personal remote interaction in today's
society and besides the hype surrounding the quantum leaps in the cellular networks genealogy - 2G,
2.5G, 3G, 4G, .. - the continuously improving wireless infrastructure is likely to generate a ground
fertile for significant business opportunities but also clouded with aggressive competitors.
The “Private Equity” capitals market provides capital to enterprises not quoted on a stock market in
exchange for an equity participation. Venture Capital (VC) is, strictly speaking, a sub-class of Private
Equity and is characterized by investments made for the purpose of developing, launching, and
expanding the commercialization of new products or services.
Venture Capital has long been a necessary lubricant in the success stories of high-tech business initiatives
and a key ally for technologists turned entrepreneurs. The presentation will provide an introduction
to the world of Venture Capital, and will address issues related to how VC can positively impact the
lifecycle of high-tech startups and support a business initiative in its early days.
Markets statistics will be used to extrapolate what to expect from a VC and an opinionated speaker will
provide some practical suggestions on how a technologist turned entrepreneur should prepare,
present his/her plan, select the right VC and pursue his/her goals.
Some specific considerations will be made addressing the peculiarities of the capital market for business
initiatives insisting in the wireless mobile communications world.
An Introduction To Venture Capital
Andrea Capitanio - Alice Ventures
Viewgraph No. 26