viewgraph no. 1 an introduction to venture capital andrea capitanio - alice ventures an opinionated...

Viewgraph No. 1An Introduction To Venture CapitalAndrea Capitanio - Alice Ventures

An Opinionated Introduction To Venture Capital in Europe

Andrea CapitanioAlice Ventures

E:mail [email protected]


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.>>


Early Investments Lifecycle

concept

M&S Plan V0.1

P&O Plan V0.1

Eng. Specs Prototype

Plan V1

Alfa Beta V1

Plan V1

Res. & Develop.

Marketing& Sales

Prod.& Ops

Plan V2

Plan V2

CUSTOMERS

V1.1

Seed (< € 1 mil) Early Stages (€ 1 - 10 mil) Expansion/ (€ 10+ mil)development

Angels Incubators Accelerators Venture Capital Private Equity &Merchant Banks

Start-up


• 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, ...


What Venture Capitalists do ...

• 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.: – 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, …


Venture Capital in the EU (FY2000)

• Funds raised in the EU: € 48 bil– UK 37%, Fr 16%, DE 13%, ...– High Tech early-stage: € 8.6 bil– High Tech expansion/development: € 6.6 bil

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• Investments made: € 34.9 bil (over 13000)– UK 38%, FR 15%, DE 14%, …– €11bil (31.5%) in 5448 High Tech deals

Amount I nvested RatioSeed € 0.8bil 2.3%Start-up € 5.8bil 16.7%Expansion € 12.9bil 37.1%Replacement € 0.9bil 2.7%Buy-Out € 14.3bil 41.2%

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• Average deal size € 2.7m (€ 2.2m in 1999)– € 3.4 mil per financing (€ 18.5 in the US*)

* Source: Financial Times, July 16th 2001

2000 1999Seed € 731K € 775KStart-up € 1.2mil € 770KExpansion € 2.4mil € 1.6milReplacement € 2.1milBuy-Out € 13.5mil So

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• Divestments made: € 9.1 bil – € 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

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• What does a VC asks for – VC investors’ stake

• 2% have 1 - 9%• 38% have 10 - 33%• 21% have 34 -49%• 39% have 50+ %

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Most Appreciated VCs Contributions

• 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%

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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


How to approach a venture capitalist

• The Business Plan• A Team• A Presentation and an “Elevator’s Pitch”

– be ready !!

• References• An NDA (if required)

Quick Check: Do You Need a VC ?


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


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 …


The Term Sheet• 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• ...


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


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

• 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


European Private Equity Funds Formed 1980-1998

Net IRRs to Investors Investment Horizon Return as of 31-Dec-2000

Stage 1 YR 3 YR 5 YR 10 YREarly Stage 26,0 14,5 24,0 14,3Development 31,5 21,4 19,4 11,8Balanced 40,4 56,4 45,4 20,7All Venture 35,6 36,3 33,6 17,2Buyouts 10,9 30,6 26,2 18,0Generalist 1,9 12,6 17,8 12,3All Private Equity 15,6 29,2 25,8 16,3

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”.

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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


The Wireless Market• 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.


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


M-commerceM-commerce

Smart Messaging,m-advertising

m-CRM, m-SFM, ...

Smart Messaging,m-advertising

m-CRM, m-SFM, ...Streaming & MultiMediaStreaming & MultiMedia

MobileTerminal

RadioNetwork

CoreNetwork

HomeNetwork

EnablingTechnologies

Optimization

Application

Incr

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Barrie

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Smart Antennas & Radios, …xG Stacks, ICs, ..

Smart Antennas & Radios, …xG Stacks, ICs, ..

EnterpriseNetwork

M-commerceM-commerce

Incr

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Compet

ition

Hybrid Networks & Multi Access Network Hybrid Networks & Multi Access Network

Data Compressionand Optimization

Data Compressionand Optimization

Location Based ServicesLocation Based Services

MExEsMExEs


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


Good Luck and … I hope to be hearing from you

soon !Andrea Capitanio - Alice VenturesE-mail: [email protected]

Phone: +39 02 4998 1730S-mail: Piazzale Baracca 1, Milano, 20123, Italy


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.

viewgraph no. 1 an introduction to venture capital andrea capitanio - alice ventures an opinionated...

Documents

venture capitalists

andrea capitanio infotech

opinionated introduction

bil source

coopers lybrand slide

bil uk

sales of quoted equity

eu fy2000 investments