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3-5-7 Rule meets Racing to 100 - SURGE Accelerator 2013 Presentation

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Alexander Tang
Alexander Tang

Presentation for SURGE Accelerator Class 2 describing how Venture Capitalists evaluate opportunities.

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3-5-7 RULE MEETS RACING TO 100 A Back of the Envelope Calculation on Whether a VC Invests or NotAnd Other Tidbits Alex Tang SURGE Accelerator Mentor March 7, 2013
QUICK SNAPSHOT 1 Hi! JUST A QUICK FEW THINGS ABOUT ME Former Vice President of Programs and Finance at Clean Energy Trust More than 10 years commercialization and venture capital experience Co-Founder of Invention Bridge a technology commercialization company MBA (University of Chicago); M.S., B.S. Mechanical Engineering (University of Illinois at Urbana- Champaign) Some other career highlights: Argonne Venture Accelerator Consortium Department of Energy EIR2 Grant Private equity experience with McNally Capital and MVC Capital Senior Manager at STAX, a consulting firm performing due diligence on private equity and venture capital deals in North America and China. Early Stage Venture Capital experience with Open Prairie Ventures where we spun out technologies from University of Illinois at Urbana-Champaign, University of Illinois at Chicago, and University of Wisconsin Madison Other info: Mentor at SURGE Accelerator Catalyst Cleantech Advisor to Wisconsin Alumni Research Foundation (WARF) Serves on the Entrepreneurial Committee of the Association for Corporate Growth Chicago and former Board of Director and Co-Chair of the Venture Capital/Cleantech Committee Serves on the Advisory Council on Job Creation for the Treasurers Office of the State of Illinois Member of the Asian American Alternative Investment Managers Association Former IT/Cleantech Kauffman Fellows Finalist
HOW DOES A VC EVALUATE ME? 2 MANAGEMENT TEAM Credibility What is Needed to be Successful? WHAT PROBLEM ARE YOU SOLVING THAT PEOPLE ARE WILLING TO PAY FOR COMPETITIVE LANDSCAPE 800 lb gorillas Partnership Opportunities BUSINESS MODEL Go to Market Approach Unit Economics Recurring Revenue Streams EXIT STRATEGY IPO vs. M&A IP PROTECTION Each VC evaluates investment opportunities their own way, but there are some common themes.
RISK IS THE NAME OF THE GAME 3 Technology Concept Execution Policy Field Data/Pilot Testing and Signed Customers Reduces Risk For All.
THE VENTURE CAPITAL ECOSYSTEM 4 LIMITED PARTNERS (LPs) Typically Pension Funds, Endowments, High Net Worth Investors Return on Investment metric are Internal Rate of Return (IRR) and Cash on Cash Return (CoC) GENERAL PARTNERS (GPs) Partners who are entrusted to invest LPs money and to return capital at a future point in time. Manage investment pool called Fund I, Fund II, Fund III, etc. PORTFOLIO COMPANIES Entrepreneurs you back
3-5-7 RULE FOR LIMITED PARTNERS 5 RISK REWARD VENTURE CAPITAL 7x GROWTH EQUITY 5x BUYOUTS 3x Today, if a venture capital firm or buyout shop can consistently return 3x CoC or more to pension funds, they will continue to re-up every time. - Dan Howell, Senior Managing Director, Mesirow Financial
RACE TO 100 6 WHAT IS IT? It is a phrase I mention often when mentoring entrepreneurs based on prior VC investment experiences. Gauge the difficulty and time needed for a startup company to generate $100M in sales. WHY? Number where companies become attractive to larger corporations as an acquisition target. Size to go public.Sarbanes-Oxley is a $2M annual expense (and growing) for reporting. Wait.I thought venture guys want to see billion dollar ideas and 20x exits????
$100 M IN 5 YEARS? NO PROBLEM! 7 SOFTWARE ON MY MIND Source: http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a-technology-empire/ Based on 100 top public Software companies Q1 2009 VCs like to exit in this rangeif not sooner
WHAT ARE THE PUBLIC MARKET COMPS? 8 Source: Bairds Energy Technology Monthly, February 2013.
3-5-7 RULE MEETS RACE TO 100 9 KEY TAKEAWAY: If I am only going to get $33M back, the most I can invest is $4.75M in order to achieve a 7x CoC exit. FOLLOW ON QUESTIONS: What is the company peak cash need? $5M, $10M, $100M? Peak cash need is the total amount of cash needed to generate a self sustaining business. What is considered a show stopper? What is the financing strategy and number of rounds of funding is needed? Tranche Multi-round
Alex Tang alex.d.tang@gmail.com @alexdtang QUESTIONS?

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3-5-7 Rule meets Racing to 100 - SURGE Accelerator 2013 Presentation

  • 1. 3-5-7 RULE MEETS RACING TO 100 A Back of the Envelope Calculation on Whether a VC Invests or NotAnd Other Tidbits Alex Tang SURGE Accelerator Mentor March 7, 2013
  • 2. QUICK SNAPSHOT 1 Hi! JUST A QUICK FEW THINGS ABOUT ME Former Vice President of Programs and Finance at Clean Energy Trust More than 10 years commercialization and venture capital experience Co-Founder of Invention Bridge a technology commercialization company MBA (University of Chicago); M.S., B.S. Mechanical Engineering (University of Illinois at Urbana- Champaign) Some other career highlights: Argonne Venture Accelerator Consortium Department of Energy EIR2 Grant Private equity experience with McNally Capital and MVC Capital Senior Manager at STAX, a consulting firm performing due diligence on private equity and venture capital deals in North America and China. Early Stage Venture Capital experience with Open Prairie Ventures where we spun out technologies from University of Illinois at Urbana-Champaign, University of Illinois at Chicago, and University of Wisconsin Madison Other info: Mentor at SURGE Accelerator Catalyst Cleantech Advisor to Wisconsin Alumni Research Foundation (WARF) Serves on the Entrepreneurial Committee of the Association for Corporate Growth Chicago and former Board of Director and Co-Chair of the Venture Capital/Cleantech Committee Serves on the Advisory Council on Job Creation for the Treasurers Office of the State of Illinois Member of the Asian American Alternative Investment Managers Association Former IT/Cleantech Kauffman Fellows Finalist
  • 3. HOW DOES A VC EVALUATE ME? 2 MANAGEMENT TEAM Credibility What is Needed to be Successful? WHAT PROBLEM ARE YOU SOLVING THAT PEOPLE ARE WILLING TO PAY FOR COMPETITIVE LANDSCAPE 800 lb gorillas Partnership Opportunities BUSINESS MODEL Go to Market Approach Unit Economics Recurring Revenue Streams EXIT STRATEGY IPO vs. M&A IP PROTECTION Each VC evaluates investment opportunities their own way, but there are some common themes.
  • 4. RISK IS THE NAME OF THE GAME 3 Technology Concept Execution Policy Field Data/Pilot Testing and Signed Customers Reduces Risk For All.
  • 5. THE VENTURE CAPITAL ECOSYSTEM 4 LIMITED PARTNERS (LPs) Typically Pension Funds, Endowments, High Net Worth Investors Return on Investment metric are Internal Rate of Return (IRR) and Cash on Cash Return (CoC) GENERAL PARTNERS (GPs) Partners who are entrusted to invest LPs money and to return capital at a future point in time. Manage investment pool called Fund I, Fund II, Fund III, etc. PORTFOLIO COMPANIES Entrepreneurs you back
  • 6. 3-5-7 RULE FOR LIMITED PARTNERS 5 RISK REWARD VENTURE CAPITAL 7x GROWTH EQUITY 5x BUYOUTS 3x Today, if a venture capital firm or buyout shop can consistently return 3x CoC or more to pension funds, they will continue to re-up every time. - Dan Howell, Senior Managing Director, Mesirow Financial
  • 7. RACE TO 100 6 WHAT IS IT? It is a phrase I mention often when mentoring entrepreneurs based on prior VC investment experiences. Gauge the difficulty and time needed for a startup company to generate $100M in sales. WHY? Number where companies become attractive to larger corporations as an acquisition target. Size to go public.Sarbanes-Oxley is a $2M annual expense (and growing) for reporting. Wait.I thought venture guys want to see billion dollar ideas and 20x exits????
  • 8. $100 M IN 5 YEARS? NO PROBLEM! 7 SOFTWARE ON MY MIND Source: http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a-technology-empire/ Based on 100 top public Software companies Q1 2009 VCs like to exit in this rangeif not sooner
  • 9. WHAT ARE THE PUBLIC MARKET COMPS? 8 Source: Bairds Energy Technology Monthly, February 2013.
  • 10. 3-5-7 RULE MEETS RACE TO 100 9 KEY TAKEAWAY: If I am only going to get $33M back, the most I can invest is $4.75M in order to achieve a 7x CoC exit. FOLLOW ON QUESTIONS: What is the company peak cash need? $5M, $10M, $100M? Peak cash need is the total amount of cash needed to generate a self sustaining business. What is considered a show stopper? What is the financing strategy and number of rounds of funding is needed? Tranche Multi-round