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Bernard A. Harris, Jr.President & CEO

Medical Informatics and Technology Accelerator

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Why a Venture Capital Conference?

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Founded in June 2002, Vesalius Ventures is dedicated to “accelerating the future of medicine” and

becoming the premier accelerator for Telemedicine.

Vesalius Ventures is uniquely positioned to access emerging technologies at their source and bring exciting

new opportunities to market.

Vesalius Ventures AcceleratorVesalius Ventures Accelerator

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Guidant

Medical Informatics & Technology

RMD SystemsMonebo

VanMed I & II Itasca MedTech VESALIUS

President Robert Ulrich650-321-2900

Scott Wolf612-607-2812

Bob Curtis650-286-2999www.medtechventures.com

Bernard Harris713-877-9276www.vesaliusventures.com

VenturePartners

VanguardCentennialGenesisVFW

VanguardIAI Ventures

VanguardBedrock CapitalTredegar Investments

VanguardSevin RosenFremont

Corporate Partners

J&JE. LillTredegar

Medtronic Guidant

Industry Focus

Medical DevicesBiotech

Medical Devices Health Care

Companies IndigoOvamedCardiogenesisMyelos

PercardiaTissueLink

ArtemisEunoeHemosense

TimexAir ProductsChaseCom

Clients

Venture Capital AcceleratorsVenture Capital Accelerators

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Overview of the Venture Capital Value Chain and

the Fund Raising Process

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The VC Value Chain

The Real World

What to Expect after Funding

Agenda

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Venture Capital Value ChainOthers: I-Banks, Law Others: I-Banks, Law Firms, PR FirmsFirms, PR Firms

Pension funds, Pension funds, Endowments, Endowments, CorporationsCorporations

E.g. E.g. Foundations, Foundations, State Pension State Pension Programs, Programs, University University endowmentsendowments

Early Stage, Early Stage, Late Stage, Late Stage, Mezzanine, Mezzanine, CorporateCorporate

E.g.: Traditional E.g.: Traditional and Corporate and Corporate

Either through:Either through:

• Merger or Merger or AcquisitionAcquisition

• IPOIPO

• bankruptcy bankruptcy

Limited Partner

Venture Capital

Start-up

Venture Capital Value Chain

Exit

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How are VCs paid?

Limited Partner Venture Capital

(General Ptnr)

Start-up Exit

$

Equity$$$$

Compensation• Management Fee usually 2.5%• Carried Interest (“Carry”)

• 80/20• 70/30

• GPs are always Limited Partners• Measured on IRR and compensated on ROI

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Seed Funding

Series CMezzanine

ExitSeries A Series B

2-5 yrs

ConceptValue Proposition1-2 peopleHope, smoke, fire?Biz Plan

ValueCapital StructureManagement teamMarket definitionPositioning strategyBeta customersTechnology

CustomersPublic Profile investorCross-over players

50,000 Foot Overview

CustomersStep up in valueProduct Road mapTeam inputsCustomer discussionsLess risk tolerant investorExecuting marketing plan

SustainableFinancialsPredictability6m-1yr

1-1.5yrs1.5-3yrs

2-4.5yrs

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$2-5 M$2-5 Mfor 50%-70%for 50%-70%9-12 months9-12 monthsof milestonesof milestones

$10 - 20 M$10 - 20 Mfor 50%for 50%

12-15 months12-15 monthsof operationsof operations

Product to Mkt. Full Mgmt. Team Revenue Start Distribution Business Model

“Business”

First MajorFinancing

Later StageFinancing

$20 - 100 M$20 - 100 Mfor 30%-40%for 30%-40%12-14 months12-14 months

Pre IPOPre IPO

New Investors Val. Increase Execution Expansion Prepare IPO

“Story”

Seed Stage 2Seed Stage 1Start-up

$.500-1.5 M$.500-1.5 Mfor for

9-12 months9-12 monthsof milestonesof milestones

R/D TeamProduct DevelopmentBusiness PlanCEOManagement Team

“Viable Start-up”

Financing

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Seed

• Sources – Accelerators, Angels, Friends & Family (Avoid too much of the latter)

• Deliverables:– Founders commit IP to company– Crisp, clear exec summary– Defined & executable milestones & timeline– Managed Burn rate– Product prototype– Employment agreements in place

• Do Not:– Value company at this stage preferably– Give out “%” of company - Absolute shares are preferred– Have anti-dilution clauses– Have complex cap tables

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Series A

• Deliverables/VC Process requirements– Investor Pitch– Executive summary– Business Plan– Business Model: 3-5 years max– References

• Board very important – investor collaborated– Odd # - 5 preferably at this round– Balanced: Common, investors and domain experts

• Raise as much as needed plus one more quarter to get to next best funding point

• Investors ask for 30-50%• Employee Pool – 20-25% approx• Highly capitalized companies – raise more @ first round

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Series A – cont’d.

• At least 2 VCs at first round - preferred• Service Provider firms – 5,000-10,000 shares for

value services• Avoid funding primarily to pay old bills• Sales pipeline important

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Series B

• Transitional Funding• Proven Business Model

– Acquired customers– On path to profitability

• Management team/Board – complete• Proven Technology

– Well-defined Product Road Map– Marketing strategy set

• Market Conditions important

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Series C

• Mezzanine typically• Final private placement

– Qualified Invt. Banker involved

• $$ primarily for sales/marketing to financial community

• Profitability (at least 3Qs) • Market Conditions drive $$ raised

– Raise more if bad, less if good

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Exit: IPO

• When does a startup start preparing for an Exit? – Day One

• Pros– Continuous liquidity options– Employee incentives– Respect/reputation

• Cons– Legal/Financial constraints– Unforgiving performance – Shift to less patient investors

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Exit: Acquisition

• Retention

• Integration Issues

• Accelerated Vesting

• Lock-up Period

• Employment Agreements

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Venture Capital…..

”Real World”

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Fundamentals of the Deal

1.1. Disruptive TechnologyDisruptive Technology

2.2. Superior Management TeamSuperior Management Team

3.3. Market need Market need

4.4. ValuationValuation

5.5. Term Sheet/Capital StructureTerm Sheet/Capital Structure

6.6. FinancingFinancing

7.7. ExitExit

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Entrepreneurial “Real World”

• Great Teams Win – or at least get to play longer in the game

• Board and Management Team must be in sync• Great VC’s know lots of people• Great VC’s are tough but fair• Great VC’s usually have some operational

experience• Great VC’s are exposed to loads of new

technologies

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What Entrepreneurs Should be Demanding of Their Boards/VC’s

• Customer Contacts• Recruiting Contacts• Interviewing/Selecting Management Team• Scars, Experience

– mistakes to avoid, and why– methods that worked, and why

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VC “Real World”

• Portfolio theory is a good thing• Entrepreneurs don’t know what they don’t know• The right person is over 50% of the answer• Everybody should win financially• Life is too short for paranoid egomaniacs• You can be too early as well as too late• Keeping up with markets and technologies is

extremely difficult

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This Is A “People Game”

• Good teams turn mediocre into good or better

• Bad teams turn outstanding into poor

• Team includes management team, board, and VC’s

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What to Expect After

You Are Funded

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Its All About Execution

• You set the expectations during the funding process, it is now time to execute

• Leverage your board and their network– Advise– Connections

• Monthly board meetings

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Get To The Next Inflection Point

• Corporate and departmental goals– Annual– Quarterly– Monthly

• Progress against goals– Accomplishments– Work in progress– Concerns

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Conclusion

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Downside of working with VC’s

•High expectations to achieve liquidity (slow growth High expectations to achieve liquidity (slow growth

not an option)not an option)

•Requirement to invest large amounts of moneyRequirement to invest large amounts of money

•Greater amount of due diligenceGreater amount of due diligence

•An active partnerAn active partner

•Money is more expensive than other sourcesMoney is more expensive than other sources

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Upside of working with VC’s

•Strong domain knowledge (insight, Strong domain knowledge (insight,

contacts)contacts)

•Company building experience Company building experience

(strategic vision, recruiting, tactical (strategic vision, recruiting, tactical

execution)execution)

•Deep pockets (scale) and a network of Deep pockets (scale) and a network of

financing sourcesfinancing sources

•Validates business; gives it instant Validates business; gives it instant

credibilitycredibility

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Top Ten Reasons for Rejections

1.1. Plan #350 Plan #350

2.2. I don’t know what you do after reading the I don’t know what you do after reading the exec summaryexec summary

3.3. Small market niche that is not growingSmall market niche that is not growing

4.4. ““No competition”No competition”

5.5. Non-disruptive Technology Non-disruptive Technology

6.6. Superficial financial projectionsSuperficial financial projections

7.7. Thin marginsThin margins

8.8. Inexperience management teamInexperience management team

9.9. No referencesNo references

10.10. Messy capital structureMessy capital structure

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Thank You!

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• Great time to start a companyGreat time to start a company– Most great companies created at start of business Most great companies created at start of business

cyclescycles– Economy and stock market starting to recoverEconomy and stock market starting to recover

• Teams much more experiencedTeams much more experienced– Talent availabilityTalent availability

• Technology waves comingTechnology waves coming– Bio-sensors, Nano, RFID, WirelessBio-sensors, Nano, RFID, Wireless

For The Entrepreneur

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• Major corporations cut R&D back dramatically

– Pipelines almost empty

• Rational expectations

– No billionaires in 18 month expectations

– Creating great companies is hard work

• Great companies will be created in more locations

– Communications

– Talent

For The Entrepreneur