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Converting innovation into business opportunityBrian Caulfield
MBA Association of Ireland
January 2008
Agenda
Some background
The challenges for Ireland, Inc.
What VCs want…and why and the importance of business planning
Traps for the unwary… or where does it all go wrong?
Venture fund economics 101…and its implications
Some personal stories
Q&A
Some backgroundEngineering graduate (TCD) 1986ESPRIT project research 1986-1989Landis & Gyr 1989-1992Co-founded Peregrine Systems 1992
Renamed Exceptis Technologies August 2000 Sold to Trintech (Nasdaq: TTPA) November 2000
Founder director/shareholder of Prediction Dynamics 2000 Went into liquidation 2004
Co-founded Similarity Systems 2001 With CEO, Garry Moroney Sold to Informatica (Nasdaq: INFA) January 2006
Trinity Venture Capital 2002-2007Currently Interim CEO of AePONAMember ICT Ireland Governing Board and CTVR Advisory Board
So why VC?
The challenges for Ireland, Inc.
Enormous investment in recent years in 3rd level R&D
SFI New Enterprise Ireland €500m funding
Yet very few new start-ups generated… 3rd level lags both indigenous companies and MNCs as
source of new start-ups
And very few success stories Iona, Havok, ???
No Irish ICT start-up has achieved significant, sustained global scale
Iona ~ US$80m annual revenue Trintech ~ US$30m annual revenue Norkom ~ US$60m annual revenue
So, what are the issues?
The usual suspects… Lack of large home market, etc.
But we can’t change that…Control what we can control… Encourage start-up formation through simple,
well established models Develop company scale building skills with
high-level mentoring, skills development programmes
Create a vibrant funding environment capable of scaling companies
What VCs want…and why(and the importance of business planning)
What VCs always wanted…
1. Market
2. People
3. Technology
Great people with great technology and a poor market?Great people in a great market with poor technology?Poor people in a great market with great technology?
Bootstrapping & 3 “F”s
Bootstrapping & 3 “F”s
Angels & seed VC investors
Angels & seed VC investors
First round venturecapital
First round venturecapital
Second roundventurecapital
Second roundventurecapital
Marketidentification
& quantification
Marketidentification
& quantification
Targeting“beta”
customers
Targeting“beta”
customers
Early adopter
sales
Early adopter
sales
“Chasm crossing”or massmarket
“Chasm crossing”or massmarket
Entrepreneur& CTO
Entrepreneur& CTO
Salesdirector
Salesdirector
Operationsteam
Operationsteam CFOCFO
Funding development
Commercial development
Team development
Proof ofconcept
Proof ofconcept
Betaproduct
Betaproduct
Productversion 1.x
Productversion 1.x
Productversion 2.x
Productversion 2.x
Product development
Bootstrapping & 3 “F”s
Bootstrapping & 3 “F”s
Angels & seed VC investors
Angels & seed VC investors
First round venturecapital
First round venturecapital
Second roundventurecapital
Second roundventurecapital
Marketidentification
& quantification
Marketidentification
& quantification
Targeting“beta”
customers
Targeting“beta”
customers
Early adopter
sales
Early adopter
sales
“Chasm crossing”or massmarket
“Chasm crossing”or massmarket
Entrepreneur& CTO
Entrepreneur& CTO
Salesdirector
Salesdirector
Operationsteam
Operationsteam CFOCFO
Funding development
Commercial development
Team development
Proof ofconcept
Proof ofconcept
Betaproduct
Betaproduct
Productversion 1.x
Productversion 1.x
Productversion 2.x
Productversion 2.x
Product development
Eliminatemarket risk
Eliminatetechnology risk
Eliminateexecution risk
Business planning
Product Development Core engine frameworkTestable prototype of core engineDemonstratable prototype of enginePilot PrototypePilot site implementation
Business/ Market DevelopmentBuild list of product requirementsMake first contact with potential pilot
customersCarry out prototype demosDevelop sales plan – start sellingDevelop marketing story
People Count
FinancingDevelop Business CasePresent to investorsClose deal
ABSOLUTE DEADLINES
Mar April May Jun July Aug Sept. Oct Nov Dec
Prototype ready to demo
First pilot site in place
Business case
completed
Financing agreed
23
4 6 7
The old-fashioned way…
Capital
Risk (ß)
Idea isFeasible
TechnologyWorks
A CustomerBuys
SeedFunding
R&DCapital
Go-to-MarketCaptial
ExpansionCaptial
P(success) = 40%Req’d IRR = 70%
P(success) = 50%Req’d IRR = 50%
P(success) = 80%Req’d IRR = 30%
P(success) = 30%Req’d IRR = 100%
Traps for the unwary…(or, a personal view of where does it all
goeswrong for university spin-outs…and other
start-ups)
A personal view…1The difficulty of getting past university TTO with a fundable proposition
Take advice before you reach an agreement Everything is negotiable
Equity greed 100% of nothing is nothing…
Mis-allocating value between technology and execution The value is not all in the technology
Inadequate commitment You can’t do this and be Head of Department too…
Building the board badly It’s very easy to put someone on your board…and very difficult to get
them offOver-ambitious projections
Sales Cash receipts
A personal view…2Inadequate customer focus
You must focus on what delivers value to a customer The value delivered must be sufficient
to overcome risk concerns to be a priority for the customer…does it move the needle?
But don’t let a single customer drive your specification
Lack of clarity regarding IP ownership Institution/founder/research partner issues Beta customer issues
Not hiring (or valuing) the right expertise You are probably not the CEO (or VP of Sales, or VP of Engineering)
because you have never done it before You rarely have the time to learn on the job
Good CEOs cost money and big equity but they’ll make you rich
Fear of losing control Would you let your child drive a car in Bangalore?
Venture fund economics 101…
and its implications
The venture capital cycle
Typical venture fund economics
10 year fund life Initial investment period of 4-6 years – no new
investments after this Fund life can usually be extended by 1-2 years
Management fee of 2.5% Of committed capital during initial investment period Of invested or managed capital thereafter No management fees paid during fund extensions Drawn from committed capital
“Carry” 20% of investment returns once hurdle IRR (preferred
return) of, say, 8% is delivered to investors (Limited Partners or “LPs”)
Generally not permitted to “re-cycle” capital within the fund
Exit proceeds must be returned to LPs
So, for a €40m fund…
Management fees are €1m per year €8m over fund life as managed capital declines
Capital must be held back to support existing portfolio after initial investment period
Say 25% of committed capital or €10m
Leaving €32m to invest in total, with a maximum of €22m in the initial investment periodAbsolute maximum of 15% of fund invested in any one investmentUnlikely that the fund will ever be 100% drawn downHow many investments in the portfolio?
10-20 to achieve adequate portfolio spread
So, for an investee company…
Absolute maximum of €6m invested over life-time of investment
More likely < €4mInitial investment likely to be only €0.5-1mMedian total investment will likely be < €3m
But… Getting an enterprise software company to break-
even? €20m Getting a fabless semiconductor company to a
design win? €40m
You can’t create scale companies with sub-scale VCs
Some personal storiesExceptis Technologies
Sold to Trintech (Nasdaq: TTPA) November 2000 $26m stock Key lesson: Cash is King and timing is everything
Similarity Systems Sold to Informatica (Nasdaq: INFA) January 2006 $55m cash Key lesson: Momentum counts
SteelTrace Sold to Compuware (Nasdaq: CPWR) April 2006 $20m cash Key lesson: Importance of investor alignment
