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601 Gateway Blvd., Ste. 1140So. San Francisco, CA 94080
(415) 901-4000
www.blueprintventures.com
CONFIDENTIAL 04/15/05
Venture Capital and IPVenture Capital and IP
Jim Huston Jim Huston Blueprint VenturesBlueprint Ventures
CONFIDENTIAL 22
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AgendaAgenda
Intro to Blueprint Ventures
Venture Capital
IP Overview
CONFIDENTIAL 33
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Blueprint VenturesBlueprint Ventures
Focus - Seed and early-stage IT infrastructure
Differentiated Investment Strategy– Capital efficiency
– Corporate IP (intellectual property) spinouts
– One foot in Silicon Valley, one foot in Oregon
Experienced investment team– Average of 15 years of operating experience, 7 years of
venture investing experience
CONFIDENTIAL 44
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Blueprint Investment Focus: IT InfrastructureBlueprint Investment Focus: IT Infrastructure““History of Consistency”History of Consistency”
Components
• Semiconductors• MEMS• Tools
Systems
• Communications• Wireless• Subsystems
Software
• Infrastructure• Networking• Applications
RepresentativeGPInvestments
Operating Experience
GlobeSpan
CONFIDENTIAL 55
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Blueprint Portfolio by Sector and StageBlueprint Portfolio by Sector and Stage
Software
Systems
Components
Product Development Customer Adoption Revenue Growth
CONFIDENTIAL 66
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AgendaAgenda
Intro to Blueprint Ventures
Venture Capital
IP Overview
CONFIDENTIAL 77
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Raising MoneyRaising Money
Start-up CEO really only has 1 job – get money
– Investors and lenders
– Customers
Sources of Non-revenue Money
– Credit cards and 2nd mortgages
– Friends and family
– Government research grants
– Licenses / NRE from corporate “partners”
– “Angels”
– Banks
– VCs
CONFIDENTIAL 88
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About VCsAbout VCs
They have a fiduciary responsibility to their limited partners – expectations of 30-40% compound annual returns
Long term horizon – historical average is 7 years from company creation to exit, and must pass through “J curve”
Returns driven by a few “home runs” – OK if most investments fail, but they need 10-20% to return 10X and 20-30% to return 3-4X
And … They are herd animals …
CONFIDENTIAL 1010
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Some Data on Venture Investing …Some Data on Venture Investing …
1111
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MoneyTree Total InvestmentsMoneyTree Total InvestmentsQ1 1997 – Q4 2004Q1 1997 – Q4 2004
$4.6$4.8
$4.3$4.3
$8.0$8.5
$11.3
$13.2
$22.6
$3.0
$3.7$3.7
$4.5 $4.1$5.8
$5.4$6.1
$6.7
$11.1$13.3
$23.6
$28.5$28.3
$26.5
$6.7$6.0
$4.5$4.4
$5.4 $6.0$5.1
$5.3
$0.0
$8.0
$16.0
$24.0
$32.0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
($ in billions)
1997 1998 1999 2000 2001
# of Deals
2002 2003 2004
1,334 1,905
2,157
1,786
1,265
991 833 710 716 754 798 7471,002917900771
927 1,447 2,153
1,977
1,321
1,042
824 683 680 697 686 645917853766 747
1212
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Investments by Industry - Investments by Industry - Annual Percent of Total U.S. InvestmentsAnnual Percent of Total U.S. Investments
(% of Total Dollars)
21.9%
4.0%
16.6%
2.4%3.2%
24.2%
7.9%
14.3%
5.0% 4.7%
23.3%
14.3%
11.7%
8.6%
5.8%
18.6%
10.1%
8.3%7.0%
24.1%
8.9% 8.7%7.8%
22.5%
18.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Software Biotechnology Telecommunications Medical Devices andEquipment
Semiconductors
2000 2001 2002 2003 2004
Top 5 Industries – 2000 to 2004
CONFIDENTIAL 1313
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First Round Deals in Startup & Early First Round Deals in Startup & Early Stage CompaniesStage Companies
542
726806
950
1,758
594 546 608
2,479
889
35% 35%
32% 32%
23%
39%39%
25%
23%23%
0
500
1,000
1,500
2,000
2,500
3,000
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
# First Sequence Deals in Startup & Early Stage Companies % of All Investee Companies
CONFIDENTIAL 1414
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Post-Money Valuations – Early Stage CompaniesPost-Money Valuations – Early Stage Companies1995 – 2004 (12-month average)1995 – 2004 (12-month average)
$15.9 $15.3$13.2
$17.7 $17.8
$26.4
$20.1
$11.5$7.9 $9.3
$4.5$4.8
$6.9 $7.9
$10.3
$9.0
$5.9
$4.4$4.6
$4.3
$0
$5
$10
$15
$20
$25
$30
$35
$40
Q4 '95 Q4 '96 Q4 '97 Q4 '98 Q4 '99 Q4 '00 Q4 '01 Q4 '02 Q4 '03 Q3 '04
Pre-Money Valuation Investment Amount
$20.28 $19.74
$24. 59
$17.96
$25.69
$36.69
$29.08
$17.41
$13.88$12.26
CONFIDENTIAL 1515
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Post-Money Valuations – Later Stage CompaniesPost-Money Valuations – Later Stage Companies1995 – 2004 (12-month average)1995 – 2004 (12-month average)
$43.4 $36.8
$61.8 $54.3
$104.4
$129.0
$77.4
$48.4 $54.3 $54.0
$8.0$8.0
$9.8$11.6
$20.0
$28.4
$19.5
$15.9$13.4 $16.2
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
Q4 '95 Q4 '96 Q4 '97 Q4 '98 Q4 '99 Q4 '00 Q4 '01 Q4 '02 Q4 '03 Q3 '04
Pre-Money Valuation Investment Amount
$51.35$44.81
$65.91$71.68
$124.37
$157.43
$96.86
$67.73 $70.23$64.25
CONFIDENTIAL 1616
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What it all means …What it all means …
Capital In-Flows Up Significantly
– $17.5B In New Commitments in 2004 (98’ Levels)
– $10.8B in 2003 -- $3.7B in 2002
Capital Out-Flows Grow and Moderate
– $20.9B in New Investments ($18.1B in 2003)
– 110% of 03’ -- 97% of 02’ -- 51% of 01’ -- 20% of 00’
– At 97’ to 98’ Levels
– Approx $40B Still in the Funnel
CONFIDENTIAL 1717
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The Case for Capital EfficiencyThe Case for Capital Efficiency
VC Exits: Predominantly M&A
Source: Dow Jones / VentureOne
Best VC Exits Raised Less Money
Expected exit range for VC-backed companies: $100-$200M
Seek venture-style returns (5-10X) based on $100M exit
Invest in deals requiring ≤ $25M in total equity investment
$40
$17
0 10 20 30 40 50
Bottom 50% M&AExits by Return
Multiple
Top 50% M&AExits by Return
Multiple
Median Equity Raised Prior to M&A in 1H04 ($M)
VC Cash-on-Cash Returns Squeezed
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
M&A IPO
$6 $5 $6 $6$11
$24
$7 $10$17 $19 $22$15
$60
$18 $23$26
$40
$22$25
$40$33 $31
$55
$100
$0
$20
$40
$60
$80
$100
$120
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05
Median Equity Raised Prior to M&A ($M)
Median Amount Paid ($M)
CONFIDENTIAL 1818
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Successful Exits Remain ConstrainedSuccessful Exits Remain Constrained
Date Company Name $ Invested M&A Price
2/04 RAIDCore $5M $16.5M
4/04 Widcomm $58M $49M
4/04 Sand Video $9M $77.5M
6/04 M-Stream $1.5M $10M
9/04 AlphaMosaic $30M $123M
3/05 Zeevo $89M $32M
MEDIAN $20M $41M
Date Company Name $ Invested
M&A Price
1/03 Okena $16.7M $154M
11/03 Latitude Comm. $18.5M $80M
3/04 Riverhead Networks $14.8M $39M
6/04 Actona Technologies $25M $82M
6/04 Procket Networks $272M $89M
7/04 Parc Technologies $26.5M $9M
8/04 P-Cube $70.2M $200M
9/04 DynamicSoft $74.5M $55M
10/04 Perfigo $2.8M $74M
12/04 Protego Networks $6.3M $65M
1/05 Airespace $58M $450M
4/05 Topspin $68M $250M
MEDIAN $25.8M $81M
Source: Blueprint research, VentureSource, Capital IQ(only includes transactions where acquisition price was disclosed)
Date Company Name $ Invested M&A Price
4/03 BoldFish $18.3M $5M
10/03 UpShot $76M $55.4M
1/04 Ineto Services $42M $4.8M
4/04 Eontec $35.4M $70M
12/04 eDocs $85M $115M
MEDIAN $42M $55.4M
Venture-Backed High-Tech Acquisitions, 1/2003—4/2005
CONFIDENTIAL 1919
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Wise VC Investment StrategyWise VC Investment Strategy
Seed and early-stage lead investors
– Lead majority of investments
– True early-stage valuations (single digits)
– Syndicate all deals: in and across rounds
Capital efficiency focus
– $15-25M lifetime cash requirements
– $500K-$3M initial investments (2-3X reserves)
Corporate IP Spinouts
– Seek corporate Intellectual Property
– Leverage $$M in prior development expense
– Achieve capital efficiency
Liquidity Event
Series A
Series B
Later Rounds$10M
$15M
$20M
Bubble Deals Smart Deals
Total Syndicate Investment
$10M
$7M
$5M
CONFIDENTIAL 2020
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Lessons Blueprint Has LearnedLessons Blueprint Has Learned
Capital efficiency– Small A rounds ($ and
valuation)
– Follow winners
Like-minded co-investors
Activist mentality– CEO replacement
– Cash management
– Corporate governance
Exit focus
Average Initial RoundInvestment Amount ($M)
Average Blueprint Initial RoundPre-Money Valuation ($M)
CONFIDENTIAL 2121
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VC SummaryVC Summary
2004 – The Fundamentals “Restored”– Capital Flows into VC Fund approaching $20B
– VC Investments stabilize around $20B
– IPO Window and Increased M & A activity renews cycle of positive returns
The Venture Community– Consolidation continues – still adopting to the new
“Reality”
– Venture Firms still at the low-end of the historical “experience curve”
– Syndication – rediscovery of the lost art
CONFIDENTIAL 2222
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AgendaAgenda
Intro to Blueprint Ventures
Venture Capital
IP Overview
CONFIDENTIAL 2323
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Intellectual Property RightsIntellectual Property Rights
Patents
– Protect against unauthorized use of invention
Trade Secrets
– Protect against unauthorized disclosure of confidential information
Copyright
– Protect against unauthorized copying of expression of idea
Trademark
– Protect against unauthorized use of logo or other product identifier
What is Technology?
– Technology is the “thing” itself
CONFIDENTIAL 2424
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Trade SecretsTrade Secrets
If it’s really important to keep secret, don’t tell anyone!
State law rather than Federal
Can be very effective:
– No expiration date
– No need to ever disclose your secrets
But …
– Knowledge workers are mobile
– If not properly protected, all rights can be gone
– Does not protect against reverse engineering or independent development
CONFIDENTIAL 2525
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CopyrightsCopyrights
Protects works of authorship (software, documentation etc....)
Protects the expression, not the idea
Exclusive rights of copyright owner:– Reproduce, Prepare Derivative Works, Perform, Display,
Distribute
CONFIDENTIAL 2626
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Some Software Licensing BasicsSome Software Licensing BasicsBuyer / Seller ContrastsBuyer / Seller Contrasts
Buyer Term - Perpetual
New Releases
Source Code
Right to Modify
Licensee owns derivatives
No Use Restrictions
Licensor cannot cancel for convenience,
Royalty Cap (dollar, time based, annual cap, buyout)
Seller Short Term - 1-3 years
Maintenance Releases Only
Object Only
No Right to Modify
Licensor owns derivatives
Narrow Use Restrictions
Licensor can cancel for convenience
No Royalty Cap or Buyout
CONFIDENTIAL 2727
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Who Gets The White Space ?Who Gets The White Space ?
Today,the Licensor is willing toallow thiswith the
technology.
Today,the Licensee
wants to do thiswith the
technology
The White Space
CONFIDENTIAL 2828
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Who Gets the White Space ?Who Gets the White Space ?
Use Restrictions– You can do only this, or
– You can do anything except this
Ownership of derivatives
Ownership of the White Space is important because you always end up in it !
CONFIDENTIAL 2929
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What IS a Patent?What IS a Patent?
A legal monopoly to EXCLUDE others from making, having made, using, importing, or selling a claimed “invention”
A “negative” asset– Does not give someone the right to practice the
invention – just exclude others
Generally considered the broadest IP protection
– Protects an IDEA – copyrights and trademarks cover expressions and generally easier to circumvent
CONFIDENTIAL 3030
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Basic Patent StructureBasic Patent Structure
Cover page – Abstract, Prior Art, Assignee, Inventor, File Date, Issue Date
Description of an invention and how to make and/or use it
– Drawings and Specifications
Claims – the “metes and bounds” of a protectable invention
The real value of a patent is in the claims
CONFIDENTIAL 3131
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What is a “Good Patent”?What is a “Good Patent”?
Broad claims
Easy to detect
Hard to design around or design out
Evidence of usage – standards, competitors, other “parties of interest” (IF you want to assert these are good)
Clear title / ownership
Minimal encumbrances (licenses, CNTS, standards body affiliations, etc.)
Early filing dates
CONFIDENTIAL 3232
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Good Patents ≠ Good TechnologyGood Patents ≠ Good Technology
Common Complaint: “The technology is fantastic – what do you mean the patents are worthless?”
Explanation: Claim Coverage is weak
Patents typically a feature – not the product
CONFIDENTIAL 3333
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Most patents are worthless …Most patents are worthless …
Study of 741 licensed patents from 6 universities (AUTM, 2001) – Lifetime royalties:
– 50% less than $10K lifetime
– 71% less than $50K lifetime
– 83% less than $100K lifetime
– Only 1.5% over $1 million
10% of US/German patents accounted for ~90% of value Scherer, Harhoff, Kukies, 1998
5% of electronics patents accounted for 55% of value Schankerman, 1998
CONFIDENTIAL 3434
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Value of a Patent to a Start-upValue of a Patent to a Start-up
Protects their invention … maybe
A fund raising tool … maybe
A marketing tool … maybe
A recruiting tool … maybe
Why all the “Maybes”?
CONFIDENTIAL 3535
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Costs of Patents to a Start-upCosts of Patents to a Start-up Expensive
– ~$15-50k per patent in US
– Perhaps 3-5x that for foreigns
Time consuming
Many start-ups only patent narrow claims – which typically result in worthless patents
Unless you intend to USE (assert) them, they may be worthless
Discloses your secrets
Good VCs now more savvy – Patent counts not an IPO ticket
CONFIDENTIAL 3636
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Patent Licenses & StrategiesPatent Licenses & Strategies
“Carrot” licensing – Offers value added business case to licensee
“Stick” licensing – Offers the opportunity to stop infringing and incurring further damages. Also known as “the tax man” approach.
Different industries / companies have different patent strategies. E.g. Semiconductors:– Micron / AMD – Patents as a marketing tool
– IBM / TI – Multi $B patent license program
– Intel – Patent cross licenses; primarily “freedom to operate”
– Many consumer electronics companies – Patent pools
– Qualcomm – Patents used to drive standards (e.g. CDMA)
– Rambus / Immersion – IP shops (aka Patent “trolls”)
CONFIDENTIAL 3838
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Effect of Participating PreferredEffect of Participating Preferred
Example 1– Assumptions
o VC invests $5M at a $50M post-money valuationo The Company is later sold for $60M casho VC is the only investor
– ResultsTotal proceeds $60.0M $60.0MLess: Participation $5.0M $0.0MNet to common $55.0M $60.0MVCs common ownership 10.0% 10.0%Proceeds from common $5.5M $6.0MTotal Proceeds to VC $10.5M $6.0M% of Proceeds 17.5% 10.0%
With Without
CONFIDENTIAL 3939
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Effect of Participating PreferredEffect of Participating Preferred
With Without
Example 2– Assumptions
o VC invests $5M at a $50M post-money valuationo The Company is later sold for $10M casho VC is the only investor
– ResultsTotal proceeds $10.0M $10.0MLess: Participation $5.0M $0.0MNet to common $5.0M $10.0MVC common ownership 10.0% 10.0%Proceeds from common $0.5M $1.0MTotal Proceeds to VC $5.5M $1.0M% of Proceeds 55.0% 10.0%
CONFIDENTIAL 4040
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““Typical” Cap StructureTypical” Cap Structure
Company Common Options Warrants Series A Series B Total Shares F/D OwnershipShare Price $0.20 $0.50 $2.25Employees 500,000 4,000,000 4,500,000 17.6%
Unexercized Options 2,500,000 2,500,000 9.8%Exercized Options 500,000 500,000 2.0%Options Available for Grant 1,500,000 1,500,000 5.9%
Founders 5,000,000 1,000,000 6,000,000 23.5%Angels 500,000 25,000 525,000 2.1%VC 1 - Series A Lead 500,000 5,000,000 2,000,000 7,500,000 29.4%VC 2 2,000,000 1,000,000 3,000,000 11.8%VC 3 - Series B Lead 4,000,000 4,000,000 15.7%Total Shares 6,000,000 5,000,000 500,000 7,025,000 7,000,000 25,525,000 100.0%
Invested Dollars $100,000 $3,512,500 $15,750,000
Post Money Valuation $9,262,500 $57,431,250
• Company raises angel round and 2 rounds of VC money