s

Launching a High Technology Venture

Patterns of Entrepreneurship

Chapter 13

       Screen Technologies for New Ideas Prepare the Strategy, Product Positioning

and Alliance Plan Determine Capital and Resources Talent and Management team Implementation

Framework for Launching a Technology

Screen TechnologiesIdentify systems and technologyInvestigate environment for technological and

market conditions Plan the technology projectPerform feasibility analysisExecute market forecasts and benchmarking

Framework for Launching a Technology

Technology Trends

• Internet is changing the model of computing

• Software architecture of the internet will become the software architecture for the enterprise

• Computing infrastructure (datacenter) will be the next surprise; fueled by “ASP Services”, outsourced “compute tone”, and internet “geoscale”

• The “real-time enterprise” will drive carrier demand at increasing rates of growth & create Oracle/SAP scale companies

• Operations systems to reduce operating cost & total cost of ownership will be a major issue/opportunity

• Evernet – everyplace, every time, every device thru “mobile IP” (but not a lot of money for new ventures)

The New IPInfrastructure

Network Issues & Trends

• Everything over IP

• Two layer network

• Value added services

• Internet based SW architecture

• Skills shortage

• Mission critical technology

• Rapid, unpredictable growth

• Legacy encapsulation

Prepare Strategy and Positioning

Prepare Pilot testing of new technology product – Beta site testing in a few selected locations

Develop a marketing plan to roll out the product– Consider how the product will be positioned and determine pricing plan

Use alliances for cost sharing and efficiency– Be proactive in locating companies to network

– Leverage resources.

Determine Sources of Financial Needs

Leverage Intellectual Properties

Develop Exit strategy

Determine Capital and Resource Requirements

Players In Private Equity

Private Equity/VC Firms

Kleiner Perkins

Oak Investment Partners

Advent International

Private Equity/VC Firms

Kleiner Perkins

Oak Investment Partners

Advent International

Buy-Out Firms

KKR

Hicks Muse

Forstmann Little

Buy-Out Firms

KKR

Hicks Muse

Forstmann Little

Captive Corporate Firms

GE Capital

Intel

Nestle Venture Capital

Captive Corporate Firms

GE Capital

Intel

Nestle Venture Capital

Capital

Risk (ß)

Valuation

Idea isFeasible

TechnologyWorks

A CustomerBuys

SeedFunding

R&DCapital

Go-to-MarketCaptial

ExpansionCaptial

P(success) = 30%Req’d IRR = 100%

P(success) = 40%Req’d IRR = 70%

P(success) = 50%Req’d IRR = 50%

P(success) = 80%Req’d IRR = 30%

Funding Milestones – The Right Way

The VC “LANDSCAPE” in 2000

# of VC Firms in Existence

# of Professionals

# of First Time VC Funds Raised

# of VC Funds Raised This Year

VC Capital Raised This Year ($B)

Avg VC Fund Size Raised This Year ($M)

Source: NVCA Yearbook 2001; Venture Economics

1980

87

1035

24

57

2.08

36.5

1990

375

3794

14

82

3.20

39.0

2000

693

8368

164

497

105.05

211.4

The Committed Capital Bubble

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001

0

1

2

3

4

5

6Uninvested VentureCapital

Years of UninvestedCapital

Years of UninvestedCapital at 1995Investment Pace

Source: VentureOne

Years

Accu

mu

late

d C

ap

ital

Over-

com

mit

men

ts (

$B

)

The Illiquid Bulge

From 1995-2000:

14,463

978

1,529

1,180

10,776

Companies funded

Went public

Were acquired

Went out of business

Remaining

Source: Venture Economics; Venture Source

--

-

A Generic Late 90’s Model

Round Type Date

Amount Raised (MM)

Pre-Money Valuation

(MM) IRR Multiple

1 Seed Jan-97 $ 5 $ 35 79% 18.37

2 1st Jan-98 $ 10 $ 100 65% 7.35

3 2nd Jan-99 $ 25 $ 200 59% 4.04

4 3rd Jan-00 $ 60 $ 600 52% 1.52

5 IPO Jan-01 $ 1000

$ 100 Million

A Generic Early 90’s Model

Round Type Date

Amount Raised (MM)

Pre-Money Valuation

(MM) IRR Multiple

1 Seed Jan-90 $ 0.50 $ 2 101% 32.53

2 1st Jan-91 $ 3.00 $ 10 70% 8.13

3 2nd Jan-92 $ 8.00 $ 32 50% 3.30

4 3rd Jan-94 $ 13.50 $ 100 32% 1.32

5 IPO Jan-95 $ 150

$ 25 Million

Why It’s Great To Be An Entrepreneur - TODAYUS Venture Capital Partnership ReturnsVersus Public Market Returns

Funds Formed 1969-1999 (quarterly returns)

-30

-20

-10

0

10

20

30

40

50

60

Quarter

Qu

arte

rly

Ret

urn

VC Partnerships

Nasdaq

Source: Venture Economics/NVCA

The HALF-EMPTY view

• Technology led slowdown• Consumer Reaction pile-on• Sept 11 • The WAR• 2002 is history!• Financings Unavailable• Stay afloat, tread water, hunker down

The HALF-FULL view

• Less competition• Time to develop technology• Focus: sustainable advantage,

value-add• Better critique, Better ventures,

Higher Bar• Longer Term View/Horizon• Lower Funding => Lower Risk

Market Exists today, high growth, addressable

Management Industry experience, operating track record, vision and guts, trust/ethics

Business Case Convincing value proposition, product vs. service, strategy (chasm!), profitability “in

sight”

Technology Defensible, scalable, open, “breeder vs. broker”

Liquidity Cash management & fund raising

Clear Exit Based on market share not “raw” technology value

Self Discipline Don’t get creative; expectation pact and process

Venture Investment Criteria

Investment Process

FirstMeeting

FirstMeeting

InitialInformationPack Sent

InitialInformationPack Sent

ConfidentialityAgreement

ConfidentialityAgreement

2nd Info Pack/More Meetings2nd Info Pack/More Meetings

IndicationOf InterestIndicationOf Interest

InitialDue Diligence

InitialDue Diligence

EarlyReadEarlyRead

ProposedTermsheetProposedTermsheet

Full DueDiligenceFull DueDiligence

ClosingClosing

Carry out Recruitment and Selection Build the Best Team Consider Outsourcing

Attract Talent and Build the Management team

Technology - Transfer Partnerships– A computer hardware company and software

company can combine to benefit each other

– Setting up joint licensing arrangements

Equity Investment Partnerships

Global Partnerships

– A technology company received needed cash, and a European company received stock and access to cutting-edge software

The New World of Partnerships - Building Strategic Alliances

Consider Minority Equity As Strategic AlternativeConsider Minority Equity As Strategic AlternativeConsider Minority Equity As Strategic AlternativeConsider Minority Equity As Strategic Alternative

AcquisitionAcquisitionAcquisitionAcquisition Joint VentureJoint VentureJoint VentureJoint Venture Minority EquityMinority EquityMinority EquityMinority Equity

Control

Synergy

Goodwill

Capital

Starting Point

Complex

Short-Term

Simple

Committed

Insider

Pre-Acquisition

A+A+A+A+ CCCC

AAAA AAAABBBB BBBB AAAA BBBB

Marketing Partnerships

– Combining value added services between two companies.

Supplier Partnerships

– Customer-vendor relationships where one can perform a specialized service more effectively than its partner.

The New World of Partnerships - Building Strategic Alliances

Evaluate potential partners carefully

– Most partnerships fail

– Perform due diligence– Select number 2 or 3 in the market as a partner

Assess possible mutual benefits critically

Strengthen the partnership through “skin in the game”

Strive for open communication

Partnership Criteria Evaluation