Venture Capital by Jason Pinto

1. Venture Capital
Financing Innovation
Jason Pinto
Amadeus Capital Partners Ltd
CUTEC Team Meeting
30th November 2011
Slide 1 Authorised & Regulated by the Financial Services Authority

2. Outline
 Who am I and why are we here.
 What is Venture Capital? The investor’s perspective
 The Venture Capital Cycle. How do funds (money) flow in this
world?
 What is Venture Capital? The entrepreneur’s perspective
 VC in context of other types of equity investors.
 Some examples of Venture Capital and Private Equity
transactions
 The Venture Capital investment process.
 What do venture capitalists look for in an investment?
 VC and The Entrepreneur: What are you signing up for taking
money from a VC?
 Venture Backed Company Cycle: How do VCs (and others) make
money investing in technology start-ups
Slide 2

3. Amadeus Capital Partners
Building Market Leaders
 Founded in 1997 by Anne Glover and Hermann Hauser
 Backing visionary entrepreneurs to build world-class, market-leading
companies
 Using our networks and experience to help maximise the potential and the
value of those companies
 We have invested in over 60 companies
 We have 9 investment executives, based at our offices in London and
Cambridge.
1998 Amadeus I £50 million
2000 Amadeus II £235 million
2002 Amadeus Mobile Seed Fund £3 million
2006 Amadeus III £162 million
2006 Amadeus and Angels Seed Fund £10 + £10 million
2010 Amadeus EI & EII £20 + 20m
Slide 3

4. Amadeus Capital Partners
The Team
Richard Anton Anne Glover Hermann Hauser Alastair Breward
Partner CEO Partner COO
London London Cambridge London
Joined 1998 Founder 1997 Founder 1997 Joined 2005
Autonomy Corporation; Apax Past Chairman of the British Founded/Co-founded Cambridge Taylor Wessing law firm; Virtuality
Partners; Autonomy, Venture Capital Association; Network Limited, NetChannel, Group plc; Bird & Bird law firm;
Neurodynamics; Rexam; Braxton Calderstone Capital Ltd; Virtuality Virata, ETrade UK, Active Book Talman Pty Ltd; Arthur Andersen
Associates Group; Apax Partners; Bain & Co; Company and Acorn
Cummins Computers/ARM
MPPM, Yale University PhD Physics, King's College, SAB in Law, Sydney University
MBA, INSEAD MA Metallurgy & Material Science, Cambridge University BA, Economics and Philosophy,
MA Maths & Management, Christ's Clare College, Cambridge MA Physics, Vienna University Oxford University
College, Cambridge University
Jason Pinto Pat Burtis Andrea Traversone
Investment Manager Investment Manager Partner
Cambridge London Cambridge
Joined 2006 Joined 2006 Joined 1998
E Ink Corp.; AlliedSignal Inc. Bain & Co, McKinsey (Electric Executive vice president of Villa
Power Practice); H2Onsite Playa Dorada SA, a hotel,
construction and development
company
PhD Physics, Cambridge
University Masters of Environmental
MBA Cambridge University
MS Materials Science and Engineering, Yale University
BSc Economics, London School of
Engineering, Stanford University BA Economics & Writing,
Economics
BS Materials Science and Dartmouth College (USA)
Engineering, MIT
Slide 4

5. Amadeus Capital Partners
The Amadeus and Angels Seed Fund Team
Laurence John Alex van Someren
CEO AMSF & AASF Partner
Cambridge Cambridge
Joined 2001 Joined 2010
Personal Offer; Motorola; Smiths
Industries in the Aerospace
Co-founder: nCipher, ANT. Early at
Sensors division
ACORN computer. nCipher with
became world leader in IT security.
Raised a total of £14 million in
MA Marketing, Kingston University venture capital. Company listed on
MSc Optics, Imperial College the London Stock Exchange in
BSc Physics, Imperial College 2000 (LSE:NCH) at a £350 million
valuation.
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6. What Makes Amadeus Different?
 A strong team
– Substantial operational experience
– Deep understanding of technologies and markets
– Wide and strong networks
 A focus on European technology clusters combined
with a global outlook
 Long term commitment
 Vision and ambition
Slide 6

7. What is Venture Capital?
The Investor Perspective
 A VC has five main characteristics
1. A VC is a financial intermediary, meaning that it takes the investors’
capital and invests it directly in portfolio companies
2. A VC invests only in private companies. This means that once the
investments are made, the companies cannot be immediately
traded on a public exchange
3. A VC takes an active role in monitoring and helping the companies
in its portfolio.
4. A VC’s primary goal is to maximize its financial return by exiting
investments through a sale or an initial public offering (IPO)
5. A VC invests to fund the growth of companies.
 A financial intermediary is similar to a bank because just as a
bank takes money from depositors and then loans it to
businesses and individuals, a VC fund takes money from its
investors and makes equity investments in companies.
“Venture Capital and the Finance of Innovation,” Andrew Metrick.
Slide 7

8. The Venture Capital Cycle
 VC firms are fund managers and raise pools of
capital (funds) from large investors acting as
Limited Partners (LPs)
– Pension funds VC funds
managed by
– Insurance companies General
– Banks Partners (GPs
of VCs)
– University endowments
Limited
– High net worth individuals Portfolio
Partners Companies
 LPs typically invest a small portion of their (investors or
capital in VC, investing the rest in stocks, LPs)
bonds and other traditional instruments.
Exits: IPO of
 Fund structure sale of portfolio
– Typically fixed lifetime of 10 years (period from companies
first fund-raising to return of LP capital)
– Range in size from $ millions to $ billions
– Both size and fund life have severe implications
for types of companies that a VC will back.
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9. What is Venture Capital?
The Entrepreneurs Perspective
Sources of funding an entrepreneur may consider to fund his/her business
 Own capital
– If you are lucky enough to be wealthy or have a business idea that requires very little
capital (bootstrapped)
 Enterprise and development agencies
– Great sources of ―free‖ money in the form of grants, but can be long process to win
 Equity Investors
– What we are here to talk about today. Provide capital in exchange for ownership in
company. Hold claims on assets and future profits of company. Greater risk to
investor than debt but greater potential gains. Have specific shareholder rights.
• Private investors
• Friends and family
• Business Angels
• Venture capital
 Debt
– Lower investor risk as debt paid back first on exit, but limited upside. Need to be
backed by some form of collateral. Requires regular repayment of interest.
• Bank loans
• Credit cards
Slide 9

10. The Equity Investor World
VC in Context
 VC is a subset of Private Equity (PE), but confusingly the term PE has other uses
 Firms focus differentiated by
– Geography e.g. Amadeus invests only Europe and Israel
– Sector e.g. Amadeus does not invest in biotechnology
– Stage of company
– Size of deal (mostly dictated by size of fund, e.g. Amadeus III investment average
$10-15m)
Stage R&D Start-up Early Accelerating Sustaining Maturity Shake Out Relaunch
Growth Growth Growth Growth
Type of Proof of Development Replacement MBO/MBI Relist or
Seed First Round Second Round Capital Capital trade sale
Funding concept Delisting
Public Sector (<$1m)
Founder, Family & Friends
Angels (< $1m)
Source of Venture Capital (<$20m)
Funding
Corporate Venturing
Public Listing/IPO
Private Equity/Buyout (<$5 bn)
Slide 10

11. The Equity Investor World
Some Specific Examples
Company Investors Amt. Invested Round Exit
s
Cambridge Amadeus, Intel Capital, 3i, SEP, $80m 4 £250m IPO on
Silicon Radio Siemens Venture Capital, ARM, LSE
Philips …
Google Kleiner Perkins, Sequoia, GE $25 – 50m 3 $1.2 bn IPO on
Capital … NASDAQ
Facebook Peter Thiel, Reid Hoffman, Accel $2.34 bn
Partners, Greylock Partners,
Meritech Capital Partners,
Founders Fund, Microsoft, Li Ka-
shing, European Founders Fund,
Digital Sky Technologies,
Elevation Partners, Goldman
Sachs
Freescale Blackstone, Carlyle, TPG, … $17.6bn 1 $4.3 bn NYSE
Semiconductor IPO
TDC Apax, Blackstone, KKR, Permira, $13.9bn 1
Providence
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12. The VC Investment Process
Stage Entrepreneur Entrepreneur & VC VC Reports
Approaching VC firm Prepare business plan Review business plan Business plan
and evaluating Contact firm
business plan
Initial enquiries and Provide supporting  Meet to discuss Conduct initial Term sheet
negotiation information business plan enquiries
 Build relationship Value the business
 Negotiate outline Consider financing
terms structure
Due diligence Liaise with external Initiate due diligence Consultant reports
consultants exercise
Final negotiation Disclose all relevant  Negotiate final terms Draw up completion  Disclosure letter
business information  Document documents  Warrants and
constitution and indemnities
voting rights  Memorandum and
articles of association
 Shareholders
agreement
Monitoring  Provide periodic  Seat on board  Management accounts
managerial accounts  Monitor investment  Minutes of board

 Communicate  Constructive input meetings
Exit regularly with  Involvement in major
investors decisions
Slide 12

13. What do VCs Look for in an Opportunity?
 Market
– Large, emerging and fast growing markets
– Does the company have potential for scale and sustained growth?
 Technology
– Is the product or service commercially viable and significantly better (10x)
than competition?
– Defensible IP that can be protected from competitive barriers over time.
 Business Model
– How will you make money, how will you sell?
 Team
– Domain expertise with core technical strength and knowledge of given
market opportunity
– History of success. Does management have the ability to exploit this
potential and control the company through the growth phases?
– A willingness to allow VCs to help build team
 Does the possible reward justify the risk? Does the potential financial
return on the investment meet their investment criteria?
Slide 13

14. VC and The Entrepreneur
What are you signing up for taking money from a VC?
 Cheque book. Capital to expand and run your business
 Experience. Can draw on many years of experience from executives at
firms who have run businesses in your area before
 Rolodex. Can draw on the connections of the whole firm built up over
many years in business.
 Long term partner. Will support company through many rounds of
investments and ups and downs.
 Potentially big payoff. Entrepreneur ends up with a smaller slice of a
much larger pie.
 Big ambitions. VCs generally want to grow big companies
 Loss of ownership. Equity investors will eventually own large part
(generally majority) of company and share in the financial windfall of
success.
 Loss of control. Equity investors as majority shareholders ultimately
control fate of the senior management team and essentially the
company
 Push to exit. Equity investors need to have company sold of go public
in order to return investment.
Slide 14

15. Venture Backed Company Cycle
How do VCs (and others) Make Money
The Cambridge Silicon Radio Story
Source: Equity Fingerprint, The Revolutionary Business Plan Resource
Slide 15

16. Entrepreneur’s Playbook
Tips on Engaging VCs
 Determine if you need VC, and  VCs will need to see
don’t approach one if you don’t. – Presentation
VC money is expensive. – Financial plan
 Figure out your stage and sector – Current ownership structure (Cap
and identify 4 – 5 firms that focus table)
on this area. – Personal references
 Identify which partner is most – Market references
relevant to your business – Market research
 Get an introduction to that partner – Competitive analysis
– Product plan
 Send the partner the 1 – 2 page
executive summary and be prepared  VCs will seek
to give 10 – 15 slide presentation if – 20 – 50% of company for their
investment
you get to meet them in person.
– Valuation that is a function of the
 Only goal of first meeting is to get a stage of the company, ultimate
second meeting. potential, targeted ownership and
 Expect a 12 – 16 week process amount of money you are
attempting to raise
– Board seat
– … and lots more
Slide 16

17. Entrepreneur’s Playbook
More Tips on Engaging VCs
 Don’t take rejection personally, the odds are against you (most
good VCs fund one out of every 100 – 200 opportunities they
see).
 Every VC is “interested” – push them to work to test their level
of interest
 Don’t waste too much time trying to change the mind of
someone who says no. Ask and accept feedback and use it to
shape your next pitch
 Don’t shop your plan to multiple partners in a firm if the first
one rejects you.
 Don’t ignore the junior team members—they can really help
and end up doing most of the work anyway
 This is a business of people and personal contacts matter—
focus on a firm that has some connections to you.
Slide 17

18. Acknowledgements & References
Where I Borrowed Most of this Material From
 Presentations from my colleagues: Simon Cornwell, Bill Earner and Roy
Merritt
 “A Guide to Private Equity,” British Venture Capital Association,
http://www.bvca.co.uk/
 “A Guide to Venture Capital,” Third Edition, Irish Venture Capital
Association in association with InterTradeIreland’s EquityNetwork
 “Equity Fingerprint, The Revolutionary Business Plan Resource,” Philip
Baddeley et al., http://www.equityfingerprint.com/
 “Introduction to Venture Capital” Will Price, Hummer Winblad Venture
Partners. http://www.slideshare.net/pricew/introduction-to-venture-
capital/
 “Venture capital and the finance of innovation,” Andrew Metrick.
Slide 18