Prerequisites for international growth investments

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Presentation held by Fergal Mullen from Highland Capital Partners, at the Nordic Seed Capital Summit 2011 in Stockholm, 16 May 2011.

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  • 1. Prerequisites For International Growth InvestmentsNORDIC SEED CAPITAL SUMMITMAY 2011

2. AGENDA HIGHLAND BACKGROUND WHAT GROWTH INVESTORS LOOK FOR? WHAT SHOULD YOU LOOK FOR? CONFIDENTIAL2 3. BACKGROUND Formed in 1988 $3 billion under management & 8 funds Backed 230 companies; over 100 IPOs and M&A Venture growth & early stage focused investment strategy tech | internet | life sciences Global presence Offices in Boston, Silicon Valley, Geneva, London & Shanghai Europe Focus & Strategy Venture Growth Internet & Digitial Media and Information & Communications TechCONFIDENTIAL3 4. GLOBAL INVESTMENT AMBITIONIn Any Geography &Regardless of Sector We look for extraordinary entrepreneurs with a burning desire to succeed who can inspire others and build their companies from the garage to the Fortune 500 reinventing themselves andtheir companies along the way CONFIDENTIAL 4 5. NOTABLE WINS CONFIDENTIAL 5 6. 6 7. Nasdaq: BFRE$567,000,000 Nasdaq: ASKJ Nasdaq: AVID $67,200,000 Nasdaq: CKFRAcquired by Cisco Systems$42,000,000$56,000,000 Performance-based online$86,4000,000 Broadband VPN solutions Online SearchVideo editing systems marketingElectronic bill pay systems$5,400,000,000 $1,100,000,000Nasdaq: CONR $78,000,000Nasdaq: LULU Acquired by Terra Acquired by AOL $355,000,000 Acquired by J&J for $1.4B $32,760,000 Networks Advanced mapping Acquired by TellabsDrug eluting stentsSpecialty apparel retailer Global internet networksolution Optical access solutions $411,100,000Nasdaq: STAR$278,000,000NYSE: QIHU Acquired by Apple $126,000,000Acquired by AppleChinese-based InternetMobile advertising Acquired by Staples Acquired by Cisco $2.9BLow power chipscompany platformSpecialty retailer Infrastructure ProductsNasdaq: SYBS $49,600,000$295,000,000 Nasdaq: VPRT Acquired by HPAcquired by AOL Relational database Acquired by Lucent $120,200,000Database engineOnline advertising management software Switching equipmentInternet-based printingtechnologyCONFIDENTIAL 7 8. LEVERAGING A GLOBAL PLATFORMHighland Capital PartnersReputation & Brand Portfolio CompaniesNetwork & Knowledge Back Office & IT CONFIDENTIAL 8 9. EUROPE STRATEGY Venture growth focus Growth capital Proven business models Attractive returns profile Focus on Internet & Technology Disruptive e-commerce Internet advertising technologies & platforms Mobile everything business models & technologies Big data, virtualization, cloud computing Geographic focus Proactive in: UK, Germany, Nordics, Israel, France, Spain Reactive in: Eastern Europe and RussiaCONFIDENTIAL 9 10. HIGHLAND EUROPE PORTFOLIO Online eyewear retailer United Kingdom Online photo sharing, storing and printingFrance Semiconductor wirelessUnited Kingdom infrastructure Online private sales club Spain Online shoe retailerFrance Social games developerGermanyCONFIDENTIAL10 11. AGENDA HIGHLAND BACKGROUND WHAT GROWTH INVESTORS LOOK FOR? WHAT SHOULD YOU LOOK FOR? CONFIDENTIAL11 12. GROWTH STAGE FILTER Team Market A Players Size, Growth, Proximity Capital efficient Competition Speed and Agility Ripe for disruption PSD How big can you be? Deal Product or Service Financial model Unique / Differentiated Price & Ownership Value Prop & Defensible Structure Customers BuyingCompelling Growth StoryCONFIDENTIAL12 13. TEAM Hire A Players and remember A players hire A players, B players hire Cs Balance culture fit and need for diversity of new backgrounds Hire resourceful problem solvers Trust your gut, you have spent 30+ years developing it Search beyond local geography CONFIDENTIAL13 14. MARKET We dont buy the theres a gap in the market line, we want to know if there is a market in the gap! Growth investors generally spend a lot of time validating market Size, Growth & Proximity (is company too early to market?) Competition Ripe for disruption How big can you be? And they will do this by talking with a lot of your customers and their own contacts Investor has to believe in market potential and that you will be among the leadersCONFIDENTIAL 14 15. PRODUCT Unique & Differentiated? IP is good but does not guarantee success Execution, execution, execution Defensible? IP or Execution play First mover Economies of scale Capital intensity Value Proposition Must be easy to understand Better stand up to scrutiny Never perfecthave to be commited to constant evolution Dont be afraid to test and get feedbackCONFIDENTIAL 15 16. FINANCIAL PLAN & DEAL 1, 3, 5 perspective is very important 1 Year budget, 3 Year Plan, 5 Year perspective Key metrics and model drivers must be realistic relative to current performance 50% Rule (combination of EBITDA & Growth NOT less than 50%) In Internet relatied businesses, customer analytics are crucial INTERNET: LTV perspective, Cohort Analysis, Contributon, etc) ICT: Bookings, Sales, Growth, Pipeline, Customer Concentration, etc. Deal Price & structure are very important to growth investors, look for win/win Valuation: Profit/Revenue dilemma Public market comps and precedent transaction multiples guide disucssions Banker or no Banker? Totally depends, a good banker can be very helpful, a bad one disasterous CONFIDENTIAL 16 17. DOs1. Know what you are talking about2. Develop a solid pitch deck3. Do you pass the elevator test?4. Do you pass the airplane test?5. Target the right audience6. Know exactly what you are asking for and why?7. Have a vision of where you are going?8. Show apetite for making money in the day-to-day business9. Articulate your apetite for making money on exit10.Demonstrate your focus on building a world class business CONFIDENTIAL 17 18. DO NOT1. Target growth investors with pre-revenue business2. Hit the road to fund raise until you are ready3. Pretend business model is de-risked when it is not4. Claim that founding team can take the company all the way5. Show a plan with steeper revenue curves than MS or Google6. Pitch a financial plan with big discontinuities7. Postpone answers to questions as you pitch8. Ask for substantially more or less capital than you really need9. Pretend you know which one or two companies will buy you10.BS: no surprises in the due diligence process, tell investor what to expectCONFIDENTIAL18 19. THE DEAL.A TYPICAL DEAL SCENARIO Deal A Deal B Raise: 10M Raise: 10M Valuation: 30M Pre-Money Valuation: 22M Pre-Money Liq Pref: 1X, Participating Liq Pref: 1X You sold 25%? You sold 31.25%? 100M Exit 100M Exit VC return: 32.5M VC return: 31.25M or 31.25% You sold 32.5% So whats the effective Pre-Money So whats the effective Pre-Money 10M / .3125 = 32.00M post 10M / .3250 = 30.76M post Effective Pre-Money: 20.76M Effective Pre-Money: 22.00M 50M Exit, effective pre is 15M 50M Exit, effective pre is 22M CONFIDENTIAL19 20. Agenda Who We Are What growth investors look for What you should look for in a growth investorCONFIDENTIAL 20 21. WHAT SHOULD YOU LOOK FOR?1. Trust2. Remember airplane test? can you hang with these people?3. Remember elevator test? ..do they really get it?4. Enthusiastic supporter5. Knowledgeable6. Balance of operating and investing experience7. Relevant network8. Relevant board experience9. A cool hand in good times & bad timesreference this10.Ability to shape or help with exit at right timeCONFIDENTIAL 21