Raising Venture Capital

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• Raising Venture Capital
• July 2008
• William Quigley
• Managing Director
• Clearstone Venture Partners

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Type A
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Type B

• I dont know
• I dont care
• And It doesnt make any difference

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Only One Quadrant Makes Serious Money

Non Consensus View
Consensus View
Incorrect Prediction
Correct Prediction
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• Why is this so difficult?

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Need To Be Right Twice

• Prediction
• Time Frame

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When Heresy Becomes Orthodoxy

• A Brief History of Consumer Internet
• 1995-1998 Free is silly, but fun!
• 1999-2000 Free is smart!
• 2001-2004 Free is stupid! Paid is smart
• 2005 Free is brilliant! Paid is dumb!
• Present Free is the way things
  workpaid is passé

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When is Venture Capital Useful?
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Clearstone Screening Criteria

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• 8 Important Traits

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Important Deal Characteristics

• No suitable alternative exists

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Important Deal Characteristics

• Substantial know-how component to the business

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Important Deal Characteristics

• Means to achieve a distribution edge

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Important Deal Characteristics

• Revenue predictability (eventually)

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Important Deal Characteristics

• Benefiting from a large scale trend

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Important Deal Characteristics

• Recruiting advantage

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Important Deal Characteristics

• Data/information heavy

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Important Deal Characteristics

• Potential acquirers can be identified

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• Anything Else?

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What Matters Most?

• Culture is the distinguishing factor for
  success

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What Matters Second.

• Brilliant insight

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Most Common Mistake

• Focusing on a near term problem.

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How Do You Demonstrate Insight?

• An understanding of where the market is going

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• ....and finally.

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The Ten Commandments

• Do you know the ten commandments of your
  industry

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• Trends in Venture Capital Investing

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Building a Widget..

• The self funding myth.

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Becoming More Selective
A general raising of standards
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Emphasis on Sector Expertise
More specializing
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Strong Sector Bias

• Venture capital is a fashion business

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Wheres The Biggest Investment Opportunity Today?

• Greentech
• Internet B2B
• Mobile/Wireless
• Media Entertainment
• Security

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Poll conducted at AlwaysOn Conference Summer 2007
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Importance of Potential

• Investors are increasingly sophisticated about
  what a company can become.

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More Value Accruing to Venture Investors at IPO
- Billions -
Earlier Tech Cycles
New Tech Cycle
Facebook Pre-Money IPO valuation rumored to be
greater than 50B
Confidential
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Why Are Early Stage Companies Capturing More
Value?

• Companies are able to hit critical mass faster
• Impact of Internet, new communication
  technologies, leveraging managed services
• Addressing global opportunities earlier in their
  life cycle
• From 300M to 2.5 billion consumers
• Capital markets much better informed
• More willing to factor in growth potential

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Issues VCs and Founders - Must Contend With

• Traditional tech sectors maturing (and slowing)
• 4 year vesting cycle obsolete
• Longer path to liquidity
• Shrinking base of buyers.

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Time Money

• Building a sustainable company does not come
  cheap or quickly..

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A Shrinking Buyer Base

• 1640 public tech companies today
• Down 35 from Peak in 2000
• 7 straight years of fewer public tech companies

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VC Exits above 50M
MA
IPO
60
1990s
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Past 4 years
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90
Paul Denniger, Jeffries Co 2003-2007
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• What Investment Themes Look Attractive?

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Themes of Interest to Clearstone

• Improving prediction capabilities

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Themes of Interest to Clearstone

• Capturing and managing the growing body of
  digital information

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Themes of Interest to Clearstone

• Linking location information to commerce

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Themes of Interest to Clearstone

• Increasing mobility of enterprise workers

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Themes of Interest to Clearstone

• Proliferation of managed services

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Themes of Interest to Clearstone

• Enormous increase in video

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Perseverance Pays.
Note As of Aug. 22. Sources Investment Company
Institute Journal of the Academy of Finance
Morningstar.
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Following The Crowd Doesnt
Note As of Aug. 22. Sources Investment Company
Institute Journal of the Academy of Finance
Morningstar.
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Some Specific Thoughts on Raising Money
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• What VCs should you approach?

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Screening VCs

• Stage
• Sector
• Geography
• Portfolio
• Partner capacity
• Firm temperament..

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Firm Temperament Will Drive..

• Lead or follower
• Syndication preference
• Ownership
• Follow-on reserve

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• Anything else to focus on.?

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What is Smart Money

• Characteristics of a valuable VC..
• Informed and excited
• Great spokesperson for the business
• Adaptive
• Capable of dealing with set backs
• Shared goals

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• How to know if you are getting traction or not
  with a VC.

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How Do I Know if the Meeting Went Well?

• Comments that might spell trouble.
• We want to see more traction/customers
• We dont really understand this space
• We dont see how this gets to 100M
• Its a little early for us

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How Do I Know if the Meeting Went Well?

• Signs of a productive meeting..
• Id like to drill down on the market sizing
• Id like to understand the sales pipeline
• Id like to meet more of the team
• So who else are you talking to?
• How close are you to term sheets?

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The Term Sheet

• 7 terms to pay attention to
• Valuation
• Stock option pool
• Founder shares vesting
• Liquidation preference
• Board make-up
• Redemption right
• Expiration date

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• What to expect post funding?

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Board Matters

• Focus will be on
• Management team additions
• Perfecting repeatability
• Quarterly performance objectives
• Value created from an extra ____ spent on
  mrkting, eng, etc
• Hitting milestones..

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• And.raising the next round

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• Raising Venture Capital
• July 2008
• William Quigley
• Managing Director
• Clearstone Venture Partners

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• How do you meet VCs connect DLP Piper Venture
  Pipeline
• First time pitching
• Crafting the pitch to make it stand out
• Entrepreneur game to paint a picture
• VCs expect the company to be far beyond where it
  is today
• What is the tease to get the VC excited
• First 3 slides

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• It is who you know that matters for meeting VCs
• Lots of angels to go after and who should you use
• Who are the guys you should not waste time with.
• Esoteric deals are hard to pitch
• Decide whether you are going VC or not (set the
  course)

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• Pre revenue or modest revenue
• How do you build a big company if starting with a
  million dollar angel