So you always wanted to be a partner in a venture capital fund? Well, here's how it works.
The following is Part 3 of my five-part series on how to invest in early stage technology companies as an angel investor or through an investment in a venture capital fund. Privately held companies in emerging technology sectors--such as nanotech, clean tech, biotech, info tech and new media--frequently have exciting upside potential that can only be fully harnessed by investing in them when they're in their infancy.
In Part 1, I gave a general overview of the playing field and in Part 2, I examined the stages of an emerging growth company’s lifecycle and the types of investment that it hopes to obtain at each relevant stage.
Here, I'm going to explain how you can invest as a limited partner in a venture capital fund.
When you invest in a venture capital fund, your role in the early stage company will be completely “hands off.” You're investing in the vision and/or track record of the venture capitalist and will rely on the venture capitalist to make and manage your investment decisions. It's crucial that you match your investment goals with venture capitalists sharing similar goals. For example, an investor that wants to maximize exposure to nanotech and its commercialization would not want to invest with a generalist venture capitalist or a venture capitalist focused on the Web 2.0, SaaS or cloud computing sectors.
Before you invest in a venture capital fund, there are several things to consider which I detail below the fold.
1. An investment in a limited partnership in a venture capital fund is long term and illiquid. Long term in this case typically means it will be 10 years before all of the fund's investments will be liquidated, sometimes even longer. Money will only be distributed to you as the venture capital fund liquidates these individual investments. There's no easy way for you to get your money back and there's typically no market for you to sell your limited partnership interest.
2. You'll be required to qualify as an “accredited investor.” For an individual, this means you must either have a net worth (or joint net worth with your spouse) in excess of $1,000,000; or have income exceeding $200,000 in each of the two most recent years; or joint income with your spouse exceeding $300,000 for those years; and a reasonable expectation of the same income level in the current year. Some funds have even higher net worth thresholds. If you're unable to meet the fund's investment criteria, they won't accept your investment.
3. The fund will require you to make a sizable upfront investment coupled with a substantial commitment for future investment. Most funds require, at a minimum, a $100,000 up-front investment with a minimum commitment in the $500,000 to $1,000,000 range. These numbers vary greatly depending on the size of the fund and the experience of the venture capitalist, however, they very rarely fall below these thresholds. The remaining bulk of your commitment will be tapped by the venture capital fund over a period of four to six years known as the "drawdown" period.
4. Investing in emerging technology companies is exceptionally risky and there's a strong possibility that a number of the venture capital fund's investments will be worthless and that none of these investments will see significant returns. The risk of losing all of your investment is higher when investing in a venture capital fund than when investing in public equities. However, it's probably lower than if you invest directly in companies as an angel or angel syndicate. The reason for this is twofold: You'll have exposure to a larger number of potential and actual investments through a venture capital fund; and the venture capitalists are theoretically better at identifying emerging trends and companies that are good bets than angels or angel syndicates.
Now, if you meet these criteria, can afford to have your capital locked in for a long period of time, and don’t mind the risk of substantial losses, the potential benefits are substantial--annual returns can often reach up to 30 percent for successful venture capital funds.
If you decide to pursue investing in a VC fund, you'll be given a private placement memorandum that describes the fund's objectives, the experience of the venture capitalists and the terms of your investment. It also includes a comprehensive “risk factors” outline that provides extensive detail on the various risks that you'll be assuming. You're also given the subscription agreement you must complete to make your investment and a copy of the limited partnership agreement that will govern the legal terms of the fund.
Familiarize yourself with these legal terms and consult with your attorney and other professional advisors before you pull the trigger. Bear in mind, the terms of the limited partnership agreement are typically not negotiable. This makes a certain amount of sense since the venture capitalist fund will usually have 20 to 30 different investors and may talk to hundreds of potential investors. These investors commit at different times and commit different amounts of money, so it would be extremely time-consuming and arduous to negotiate separately with all of them.
Now, if you were going to commit for a substantial percentage to the fund, then you'll have more latitude on terms and conditions. However, the typical individual investor is investing a relatively small amount when compared to the public pension funds and other large institutions investing and, consequently, he/she has relatively little bargaining power.
Fortunately, the terms of venture capital funds don't vary much from “market” rates that have evolved over the last 20 to 30 years. This can make it easier for you because you can simply check to see if the terms you're being offered are in the market range.
A few of the most common economic terms are the management fee, the carry, and reinvestment rights. Typically, governance rights for limited partners in venture capital funds are minimal.
The management fee is the lifeblood of a venture capitalist. This is the money that they live off of from day to day. Usually, the management fee will be a percentage of committed capital. That is, the total capital that everyone has committed to the fund, not the capital the fund has actually drawn down.
Traditionally, this fee has been 2 percent but anything from 1.5 to 2.5 percent is common, depending upon the size of the fund. With a larger fund, the percentage may be lower and vice versa for a smaller fund. This fee is taken annually and can add up relatively quickly. For example, if the fee is 2 percent, on a $200,000,000 venture capital fund, the venture capitalists collect $4,000,000 a year for 10 years-–or $40,000,000. And this is completely independent of whether they make good investments. Occasionally, the management fee will be capped at actual budgeted expenses or will scale downwards to reflect the fact that more work is required during the funds early years; however, a flat percentage is the norm.
The carry is the second form of compensation for venture capitalists. However, unlike the management fee, the carry is directly tied to success. The carry is the percentage of the fund's profits that the venture capitalist gets to keep, typically 20 percent. Often, the investors are guaranteed some ordinary rate of return on their investment (eg, 6 percent or 8 percent) that the fund must first deliver before the carry will kick in.
However, the latter distributions will be tiered up so that the venture capitalist ends up with 20 percent of all profits. Occasionally, there may be some deviation from the 20 percent figure, but this is rare. One thing to look for is whether the fund looks at the profits of the fund as a whole or on the profits from each individual investment. If the former, there's often a “clawback,” so that if an early portfolio company has a home run but all the rest are losers, you'll be able to take back the excess profits that are distributed to the venture capitalist.
Reinvestment rights are the right of your venture capitalist to take profits from early successes and reinvest them into new investments rather than pay them out to you and the other limited partners. This may be a good thing for you because it means you have more capital at work and, in a sense, this is free to you since the management fee doesn't apply to reinvested money. On the other hand, it may be a good idea to take some money off the table. Some form of reinvestment right, at least for the first few years, is relatively common. Just make sure you understand what it means to you.
The next part of this series will look in detail at angel investing and its important characteristics, including typical legal and business terms.
Click Here to Read More..
Thursday, July 9, 2009
Tuesday, June 23, 2009
No Appreciable Knowledge of Computers
An interesting historical artifact discovered by Steve Blank. Apparently, in 1956, Fred Terman (then Stanford's Provost) asked Bill Hewlett for help figuring out these new things called computers. Bill's response letter shows just how exotic computers were at the time
I have no personal knowledge of computers nor does anyone in our organization have any appreciable knowledge.
How times have changed. Click Here to Read More..
Tuesday, May 19, 2009
The Stages of Venture Capital Investing
The following is Part 2 of my five-part series on the roles of angel investors and venture capital investors in emerging technology sectors with explosive upside potential, such as the nanotech, cleantech, biotech, information technology and new media sectors.
In Part 1, I gave a general overview of the playing field. Below, I examine the stages of an emerging growth company’s lifecycle and the types of investment that it hopes to obtain at each relevant stage.
Introduction
Many investors are confused by the differences between angel and venture capital. This isn't surprising; the categories are overlapping and are used inconsistently.
However, there are some broad generalizations that can be drawn, typically based on the timing of the investment and the purpose of the investment in the company’s lifecycle. Depending upon the timing, you can draw some basic conclusions as to the type of investor that will be involved (e.g. single angel vs. angel consortium vs. venture capitalist).
And, in each category, you can glean the form the investment will take (e.g. common stock vs. convertible debt vs. preferred stock) and the size of the return investors can expect. That is, if there's a return--very few private emerging growth investments are actually a success. More below the fold.
Seed Round
The earliest investment stages are usually characterized as seed rounds, proof of concept investments or angel investments.
These investments usually don't occur until after the target entrepreneur has tapped out his friends and family in what's usually called a “friends and family” round.
The money you invest is intended to allow the founders of the company to do their initial research, to complete the initial programming or to apply for the initial patent(s). Companies at this stage usually don't have a saleable product and don't have very many employees, other than the founders/inventors.
Traditional venture capital funds very rarely invest in seed rounds. Rather, seed investors typically consist of angels that is, wealthy individuals or groups of individuals that are willing to invest their own money and take the extreme risk involved in making equity investments into companies that often only have a good idea.
Occasionally, a seed investor may be a publicly or privately funded incubator established to help entrepreneurs or scientists get their ideas off of the ground.
In the seed round stage, the amount of the investment is typically small, say $100,000 to $500,000, seldom more than $1,000,000. Also, the investor usually takes common stock in the company--the same stock that the founders get.
Alternatively, the investor will take a convertible note that allows him to have the protection of debt at the beginning but with the possibility of converting and receiving the upside of equity. Typically, the conversion will occur in concert with the closing of the next round of investment and will be at the same per share price used in the next round.
Often, you receive some sort of additional incentive for making a seed round investment such as a conversion discount or grant of warrants.
Investments at the seed stage are extremely risky and are subject to significant dilution when new investors come in during later stages. Consequently, angel investors look for returns of at least 10x their initial investment, and sometimes as high as 20x or 30x their initial investment.
Early Stage Venture Round
The next stage of investment is early stage venture capital. Investors usually aren't interested in making this type of investment until the company has a proven product and a business plan.
However, it isn't necessary that the target be profitable or even be producing its product. The funds invested will be used to mass manufacture the product, market the product, build a sales force and further develop the product.
Typically, these sorts of investments are made by early stage venture capitalists, larger angels or angel consortiums. Early stage venture capitalists and angel consortiums usually have smaller funds to deploy which makes them more suited to making the relatively smaller sized investments found at this stage of a company’s life.
In this stage, the amount invested is typically in the $1,000,000 to $5,000,000 range. The investors will almost always be purchasing Series A preferred stock of the target. This type of stock is superior to the common stock held by the founders and any seed round angel investors and will typically come with dividend rights, liquidation preferences, some form of anti-dilution rights and a right of first refusal on stock sales by the founders and seed round angels.
Often, the investors will also receive pre-emptive rights, redemption rights, drag along rights and other rights and preferences.
Investors at in early stage investments will typically look for returns of at least 5x their initial investment and would gladly accept higher returns.
Growth Stage Venture Round
After the Series A round, there may be multiple additional rounds of equity financing. These types of funding are often called growth capital or mezzanine financing.
Usually, the company seeking this sort of investment will either be close to profitability or will have a clear path to profitability and the funds are meant to allow the company to expand its sales force and marketing efforts and ramp up its revenue growth. The money may also be used to develop additional products or to research expansion ideas.
These investments are usually made by the larger venture capital funds and the amount invested can range from $1,000,000 to $25,000,000 or higher, depending on the company and the market opportunity.
The investor typically will receive additional rounds of preferred stock--for example, Series B or Series C preferred stock--and each successive round will generally have superior rights and preferences to the prior rounds.
Investors at this stage may still look for 5x investment returns, but depending on the opportunity and the trajectory of the company, may settle for 2x or 3x returns.
Bridge Round
Occasionally, investors will be willing to invest bridge capital into a company in the growth phase of its life cycle, or one that's on the cusp of the growth phase. This investment takes the form of debt that “bridges” the gap in funding between rounds of venture capital financing.
These investments range in size depending on the company and the market opportunity and they're made by all types of investors, depending on the size of the investment. The lender may be an existing investor in the company or it may be a new angel or venture capital fund that's contemplating making the follow on round.
Usually, the debt will be represented by a convertible note that will automatically convert into the next round of preferred stock, sometimes at a discount. Also, investors will usually want some sort of warrant coverage to provide equity upside in the deal.
Investors at this stage expect a blended return that takes into account the interest rate on the debt and the potential value of the equity. These target returns vary greatly, but often move in the 12 percent to 18 percent range.
Buyout Capital Round
The final stage is characterized as acquisition or buyout capital. This is used by the company to purchase the assets or stock of other businesses that will then be absorbed into or added onto the target company.
The investors may be the company’s existing venture capitalists or it may be a private equity fund that's building out a platform in the company’s industry.
In the latter case, the investment may come with a right to purchase the company outright in the future. This type of financing also occurs when a company’s angels and venture capitalists start planning their exit strategy.
By putting together the right pieces it may make the company more attractive as an acquisition candidate or perhaps more eligible for an IPO.
In the next three parts of this article, I'll explore angel investing, angel syndicate investing and venture capital investing, in greater detail and I'll discuss the important characteristics of each mode, including typical legal and business issues. Click Here to Read More..
In Part 1, I gave a general overview of the playing field. Below, I examine the stages of an emerging growth company’s lifecycle and the types of investment that it hopes to obtain at each relevant stage.
Introduction
Many investors are confused by the differences between angel and venture capital. This isn't surprising; the categories are overlapping and are used inconsistently.
However, there are some broad generalizations that can be drawn, typically based on the timing of the investment and the purpose of the investment in the company’s lifecycle. Depending upon the timing, you can draw some basic conclusions as to the type of investor that will be involved (e.g. single angel vs. angel consortium vs. venture capitalist).
And, in each category, you can glean the form the investment will take (e.g. common stock vs. convertible debt vs. preferred stock) and the size of the return investors can expect. That is, if there's a return--very few private emerging growth investments are actually a success. More below the fold.
Seed Round
The earliest investment stages are usually characterized as seed rounds, proof of concept investments or angel investments.
These investments usually don't occur until after the target entrepreneur has tapped out his friends and family in what's usually called a “friends and family” round.
The money you invest is intended to allow the founders of the company to do their initial research, to complete the initial programming or to apply for the initial patent(s). Companies at this stage usually don't have a saleable product and don't have very many employees, other than the founders/inventors.
Traditional venture capital funds very rarely invest in seed rounds. Rather, seed investors typically consist of angels that is, wealthy individuals or groups of individuals that are willing to invest their own money and take the extreme risk involved in making equity investments into companies that often only have a good idea.
Occasionally, a seed investor may be a publicly or privately funded incubator established to help entrepreneurs or scientists get their ideas off of the ground.
In the seed round stage, the amount of the investment is typically small, say $100,000 to $500,000, seldom more than $1,000,000. Also, the investor usually takes common stock in the company--the same stock that the founders get.
Alternatively, the investor will take a convertible note that allows him to have the protection of debt at the beginning but with the possibility of converting and receiving the upside of equity. Typically, the conversion will occur in concert with the closing of the next round of investment and will be at the same per share price used in the next round.
Often, you receive some sort of additional incentive for making a seed round investment such as a conversion discount or grant of warrants.
Investments at the seed stage are extremely risky and are subject to significant dilution when new investors come in during later stages. Consequently, angel investors look for returns of at least 10x their initial investment, and sometimes as high as 20x or 30x their initial investment.
Early Stage Venture Round
The next stage of investment is early stage venture capital. Investors usually aren't interested in making this type of investment until the company has a proven product and a business plan.
However, it isn't necessary that the target be profitable or even be producing its product. The funds invested will be used to mass manufacture the product, market the product, build a sales force and further develop the product.
Typically, these sorts of investments are made by early stage venture capitalists, larger angels or angel consortiums. Early stage venture capitalists and angel consortiums usually have smaller funds to deploy which makes them more suited to making the relatively smaller sized investments found at this stage of a company’s life.
In this stage, the amount invested is typically in the $1,000,000 to $5,000,000 range. The investors will almost always be purchasing Series A preferred stock of the target. This type of stock is superior to the common stock held by the founders and any seed round angel investors and will typically come with dividend rights, liquidation preferences, some form of anti-dilution rights and a right of first refusal on stock sales by the founders and seed round angels.
Often, the investors will also receive pre-emptive rights, redemption rights, drag along rights and other rights and preferences.
Investors at in early stage investments will typically look for returns of at least 5x their initial investment and would gladly accept higher returns.
Growth Stage Venture Round
After the Series A round, there may be multiple additional rounds of equity financing. These types of funding are often called growth capital or mezzanine financing.
Usually, the company seeking this sort of investment will either be close to profitability or will have a clear path to profitability and the funds are meant to allow the company to expand its sales force and marketing efforts and ramp up its revenue growth. The money may also be used to develop additional products or to research expansion ideas.
These investments are usually made by the larger venture capital funds and the amount invested can range from $1,000,000 to $25,000,000 or higher, depending on the company and the market opportunity.
The investor typically will receive additional rounds of preferred stock--for example, Series B or Series C preferred stock--and each successive round will generally have superior rights and preferences to the prior rounds.
Investors at this stage may still look for 5x investment returns, but depending on the opportunity and the trajectory of the company, may settle for 2x or 3x returns.
Bridge Round
Occasionally, investors will be willing to invest bridge capital into a company in the growth phase of its life cycle, or one that's on the cusp of the growth phase. This investment takes the form of debt that “bridges” the gap in funding between rounds of venture capital financing.
These investments range in size depending on the company and the market opportunity and they're made by all types of investors, depending on the size of the investment. The lender may be an existing investor in the company or it may be a new angel or venture capital fund that's contemplating making the follow on round.
Usually, the debt will be represented by a convertible note that will automatically convert into the next round of preferred stock, sometimes at a discount. Also, investors will usually want some sort of warrant coverage to provide equity upside in the deal.
Investors at this stage expect a blended return that takes into account the interest rate on the debt and the potential value of the equity. These target returns vary greatly, but often move in the 12 percent to 18 percent range.
Buyout Capital Round
The final stage is characterized as acquisition or buyout capital. This is used by the company to purchase the assets or stock of other businesses that will then be absorbed into or added onto the target company.
The investors may be the company’s existing venture capitalists or it may be a private equity fund that's building out a platform in the company’s industry.
In the latter case, the investment may come with a right to purchase the company outright in the future. This type of financing also occurs when a company’s angels and venture capitalists start planning their exit strategy.
By putting together the right pieces it may make the company more attractive as an acquisition candidate or perhaps more eligible for an IPO.
In the next three parts of this article, I'll explore angel investing, angel syndicate investing and venture capital investing, in greater detail and I'll discuss the important characteristics of each mode, including typical legal and business issues. Click Here to Read More..
Friday, May 1, 2009
When Venture Capital Fits - Part 1
Below the fold is Part 1 of an article I recently wrote for the New Tech Investor e-newsletter. Many thanks to the publisher, Gregg Early, for the opportunity to write a longer piece. Stay tuned for parts 2 through 5.
When Venture Capital Fits - Part 1
Nanotechnology is a catch-all term for the sciences of the super small. It's notable not just for the amazing discoveries being made in labs, but in the ways in which these “pure science” initiatives are being commercialized in the cleantech, biotech, medical device and information technology sectors.
The world of nano has crept into each of these sectors with the potential for revolutionary technical advances and explosive commercial growth.
One clear example of this is Sapphire Energy. This cleantech company is working on squeezing high-octane fuels from algae.
They're doing this by using mesoporous nanoparticles to extract crude oil from living algae without harming the plants in the process. These sponge-like materials are capable of collecting only small amounts of oil, but they're deployed in very large numbers.
Once the collection process is completed, a catalyst will be used to produce biodiesel and bio jet fuel. Sapphire already has tested its bio jet fuel with Continental and JAL.
According to Sapphire, it's ramping up production estimates to 1 million gallons of algae-based diesel and jet fuel per year by 2011. By 2018, Sapphire is expecting to produce 100 million gallons per year.
By 2025, that number could reach 1 billion gallons per year, which would represent approximately 3 percent of the US renewable fuel standard. That's an exciting emerging growth prospect.
But how do individual investors get involved in pools of innovation such as Sapphire? You could turn to public equities. However, you may find that public companies aren't ideal for investing in innovation, especially as pure nano plays.
This is not to say that public tech companies aren't doing some important work; they are. But for more stable, mid and large cap public companies, diversification tends to dilute pure tech returns.
It makes a lot of sense from a risk management perspective for the public company to have its eggs in more than one basket. If any one product or product line is a failure, the others can make up for it. But, the flip side is that if one product or product line has an explosive success (for example, because of the successful implementation of a nanotech) this success will be muted by the other product lines.
If you're looking for pure exposure to nanotech, this isn't an ideal situation. If you're looking to invest in pure nanotech plays and then hedge against any nanotech exposure risk by owning companies in other industries or by making investments in other asset classes, a large public technology company isn't your best choice.
Another problem with investing in a public nanotech company is that often the explosive run up in equity valuation has already occurred. Typically, exponential valuation increases happen between the founding of a company and its various private equity rounds and then again during and immediately following the company’s initial public offering.
When investing in a private early stage company, it's possible to invest at a much lower equity price, albeit with much higher risk. As an aside, this concept is essentially the backbone of the traditional venture capital industry business model: Invest in a relatively large number of early stage companies and let the small number of explosive successes balance out the large number of failures. To put it very generally, 1/3 will fail, 1/3 will break even and 1/3 will generate returns orders of magnitude beyond your initial investment. In the aggregate, your investments are a success.
It's factors like these that drive many investors seeking exposure to nanotech and other emerging technologies to invest in private emerging growth companies.
For example, Sapphire was founded in 2007 and is already one of the most well funded companies in the sector, having raised more than $100 million from Bill Gates’ investment firm Cascade Investment, as well as ARCH Venture Partners, Wellcome Trust and Venrock.
Ways To Play Private Equity
Generally, there are three ways to get into the private equity market:
1) invest in seed stage or early stage companies as an individual angel;
2) invest in early stage companies as part of either a formal or informal syndicate with other angels/early stage venture capitalists;
3) invest as a limited partner in a venture capital fund that will then invest in several early stage or growth stage companies.
There are distinct differences between these three strategies. The first mode, investing as an angel, is a solo activity. It's up to you to identify the opportunity, negotiate the terms of the investment and bear the entire amount of the investment.
Since angel investments are usually made very early in the company life cycle, the associated risk is very high. That is, most angel investments don't pay off, but the rewards can be huge.
The second mode, investing as part of an early stage syndicate, is a group activity. No particular investor is in charge and democracy is usually the rule of thumb.
Using syndicates allows an individual investor to take a smaller piece of a larger number of companies, but it also carries with it loss of control and oversight over the investments. Syndicates can also be a great source of deal flow and a ready advisory panel that can be a sanity check to the investments.
The third mode, investing as a limited partner in a venture capital fund, is completely hands off. The investor is investing in the vision and/or track record of the venture capitalist and will depend on the venture capitalist to make and manage all investment decisions.
It's crucial that you match your investment goals with VCs sharing similar goals. For example, an investor that wants to maximize exposure to nanotech and its commercialization wouldn't want to invest with a generalist VC or a VC focused on Web 2.0, SaaS or cloud computing sectors.
The next part of this series will explore the various stages in a private company’s life cycle and the related forms of investment a company will hope to receive at each relevant stage.
In particular, I'll examine the differences between seed stage, early stage and growth stage and what types of money is being invested during each phase.
Parts three, four and five will take a closer look at the three modes of investment discussed above, angel investing, syndicate investing and venture capital investing, and each will look in detail at the important characteristics of the mode, including typical legal and business terms.
Click Here to Read More..
When Venture Capital Fits - Part 1
Nanotechnology is a catch-all term for the sciences of the super small. It's notable not just for the amazing discoveries being made in labs, but in the ways in which these “pure science” initiatives are being commercialized in the cleantech, biotech, medical device and information technology sectors.
The world of nano has crept into each of these sectors with the potential for revolutionary technical advances and explosive commercial growth.
One clear example of this is Sapphire Energy. This cleantech company is working on squeezing high-octane fuels from algae.
They're doing this by using mesoporous nanoparticles to extract crude oil from living algae without harming the plants in the process. These sponge-like materials are capable of collecting only small amounts of oil, but they're deployed in very large numbers.
Once the collection process is completed, a catalyst will be used to produce biodiesel and bio jet fuel. Sapphire already has tested its bio jet fuel with Continental and JAL.
According to Sapphire, it's ramping up production estimates to 1 million gallons of algae-based diesel and jet fuel per year by 2011. By 2018, Sapphire is expecting to produce 100 million gallons per year.
By 2025, that number could reach 1 billion gallons per year, which would represent approximately 3 percent of the US renewable fuel standard. That's an exciting emerging growth prospect.
But how do individual investors get involved in pools of innovation such as Sapphire? You could turn to public equities. However, you may find that public companies aren't ideal for investing in innovation, especially as pure nano plays.
This is not to say that public tech companies aren't doing some important work; they are. But for more stable, mid and large cap public companies, diversification tends to dilute pure tech returns.
It makes a lot of sense from a risk management perspective for the public company to have its eggs in more than one basket. If any one product or product line is a failure, the others can make up for it. But, the flip side is that if one product or product line has an explosive success (for example, because of the successful implementation of a nanotech) this success will be muted by the other product lines.
If you're looking for pure exposure to nanotech, this isn't an ideal situation. If you're looking to invest in pure nanotech plays and then hedge against any nanotech exposure risk by owning companies in other industries or by making investments in other asset classes, a large public technology company isn't your best choice.
Another problem with investing in a public nanotech company is that often the explosive run up in equity valuation has already occurred. Typically, exponential valuation increases happen between the founding of a company and its various private equity rounds and then again during and immediately following the company’s initial public offering.
When investing in a private early stage company, it's possible to invest at a much lower equity price, albeit with much higher risk. As an aside, this concept is essentially the backbone of the traditional venture capital industry business model: Invest in a relatively large number of early stage companies and let the small number of explosive successes balance out the large number of failures. To put it very generally, 1/3 will fail, 1/3 will break even and 1/3 will generate returns orders of magnitude beyond your initial investment. In the aggregate, your investments are a success.
It's factors like these that drive many investors seeking exposure to nanotech and other emerging technologies to invest in private emerging growth companies.
For example, Sapphire was founded in 2007 and is already one of the most well funded companies in the sector, having raised more than $100 million from Bill Gates’ investment firm Cascade Investment, as well as ARCH Venture Partners, Wellcome Trust and Venrock.
Ways To Play Private Equity
Generally, there are three ways to get into the private equity market:
1) invest in seed stage or early stage companies as an individual angel;
2) invest in early stage companies as part of either a formal or informal syndicate with other angels/early stage venture capitalists;
3) invest as a limited partner in a venture capital fund that will then invest in several early stage or growth stage companies.
There are distinct differences between these three strategies. The first mode, investing as an angel, is a solo activity. It's up to you to identify the opportunity, negotiate the terms of the investment and bear the entire amount of the investment.
Since angel investments are usually made very early in the company life cycle, the associated risk is very high. That is, most angel investments don't pay off, but the rewards can be huge.
The second mode, investing as part of an early stage syndicate, is a group activity. No particular investor is in charge and democracy is usually the rule of thumb.
Using syndicates allows an individual investor to take a smaller piece of a larger number of companies, but it also carries with it loss of control and oversight over the investments. Syndicates can also be a great source of deal flow and a ready advisory panel that can be a sanity check to the investments.
The third mode, investing as a limited partner in a venture capital fund, is completely hands off. The investor is investing in the vision and/or track record of the venture capitalist and will depend on the venture capitalist to make and manage all investment decisions.
It's crucial that you match your investment goals with VCs sharing similar goals. For example, an investor that wants to maximize exposure to nanotech and its commercialization wouldn't want to invest with a generalist VC or a VC focused on Web 2.0, SaaS or cloud computing sectors.
The next part of this series will explore the various stages in a private company’s life cycle and the related forms of investment a company will hope to receive at each relevant stage.
In particular, I'll examine the differences between seed stage, early stage and growth stage and what types of money is being invested during each phase.
Parts three, four and five will take a closer look at the three modes of investment discussed above, angel investing, syndicate investing and venture capital investing, and each will look in detail at the important characteristics of the mode, including typical legal and business terms.
Click Here to Read More..
Thursday, April 23, 2009
Tuesday, April 21, 2009
Both You And Your Job Have Been Moved to India
A few weeks ago, I noted in a quick blog post that IBM has a new method of outsourcing -- not only are they moving the job overseas, they are also moving the people.
That is, IBM is apparently accepting volunteers to move to India and other emerging growth countries. But (as always) there are catches: 1) if you do not volunteer there is a decent chance your job will be outsourced anyway (but without you); and 2) you will be paid the prevailing local wages (although IBM is apparently offering "financial assistance to offset moving costs, ... immigration support, such as visa assistance, and other support to help ease the transition of an international move.")
When I initially heard about the program, I have to admit I was skeptical as to whether it would appeal to IBM employees. However, the other day I had coffee with an ex-IBM guy that still has many friends at big blue. His (admittedly anecdotally based) opinion is that many of the eligible IBM employees look at this offer as a great opportunity. Typically, the employees interested in accepting this offer are natives of the countries that they would return to -- and they still have extensive family and business networks in place. Further, I am told that the "prevailing local wage" is actually quite comfortable and often provides for a superior standard of living to that affordable in the States (assuming standard of living is measured in things like having a gated building, a driver and a housekeeper. Having been to India multiple times, I might have different personal benchmarks.) So I guess my skepticism is unwarranted -- and honestly, the more I think about it, the more I can see the appeal.
The only remaining question is what to call this program -- outsourcing squared? Reverse outsourcing? I'm open to suggestions.
सौभाग्य Click Here to Read More..
That is, IBM is apparently accepting volunteers to move to India and other emerging growth countries. But (as always) there are catches: 1) if you do not volunteer there is a decent chance your job will be outsourced anyway (but without you); and 2) you will be paid the prevailing local wages (although IBM is apparently offering "financial assistance to offset moving costs, ... immigration support, such as visa assistance, and other support to help ease the transition of an international move.")
When I initially heard about the program, I have to admit I was skeptical as to whether it would appeal to IBM employees. However, the other day I had coffee with an ex-IBM guy that still has many friends at big blue. His (admittedly anecdotally based) opinion is that many of the eligible IBM employees look at this offer as a great opportunity. Typically, the employees interested in accepting this offer are natives of the countries that they would return to -- and they still have extensive family and business networks in place. Further, I am told that the "prevailing local wage" is actually quite comfortable and often provides for a superior standard of living to that affordable in the States (assuming standard of living is measured in things like having a gated building, a driver and a housekeeper. Having been to India multiple times, I might have different personal benchmarks.) So I guess my skepticism is unwarranted -- and honestly, the more I think about it, the more I can see the appeal.
The only remaining question is what to call this program -- outsourcing squared? Reverse outsourcing? I'm open to suggestions.
सौभाग्य Click Here to Read More..
Monday, April 20, 2009
Homeless Guy Says, "I'm a PC"
Unless you have been living in a box, you have probably come across Microsoft's new "Laptop Hunters" ads -- where Microsoft gives folks cash and tells them to go find a computer they like. And, coincidentally, they always pick a PC. These ads, along with Apple's "I'm a Mac" ads have been especially prevalent during this weekend's NBA playoff games.
Anyway, I got a kick out of this send up of the Laptop Hunter ads which features a homeless guy. My favorite line is when he says about the PC: "I'm poor, but I'm not retarded. These computers suck." Enjoy!
(More original blog postings coming soon).
Click Here to Read More..
Anyway, I got a kick out of this send up of the Laptop Hunter ads which features a homeless guy. My favorite line is when he says about the PC: "I'm poor, but I'm not retarded. These computers suck." Enjoy!
(More original blog postings coming soon).
Click Here to Read More..
Tuesday, April 7, 2009
4 Bits of Advice for a Biotech Start-Up
The biotech industry is not for the faint of heart -- especially in an early stage or start-up company. Time frames are long, costs are extraordinarily high and there is no guaranty of success. All of these risks are magnified in today's rarefied air of non-existent IPO markets and schizophrenic M&A exit opportunities.
Dow Jones recently hosted a webinar advising small biotech companies on how to navigate these treacherous waters. In his recent blog post on the WSJ Venture Dispatch, Jonathan Matsey mentions four nuggets of advice from this webinar and gives some good additional gloss. Below are summaries of the 4 points and some of my own thoughts -- please see Jonathan's original blog for his full color.
1. Think globally. It is often possible to generate revenues internationally long before the United States FDA has approved your drug/device. I have seen clients find additional revenues in the more traditional European markets as well as the emerging Asian markets.
2. Partner up -- but make sure you don't give away the keys to the car. Depending on the strength of your vision and the potential of your product, carefully consider the terms of your out licenses and any associated rights of first offer or first refusal you give to your partners. This is a tightrope that can be tricky to walk -- the immediate fix of revenues versus the long term potential of your product -- and negotiating a partnership with the big boys will require some thorough introspection.
3. Nurture your champions. Once you have a partnership with big pharma/big device/VCs make sure you develop and nurture internal champions that understand your research/product and are willing to go to bat for you. Keep them in the loop. If it makes sense, get them involved in your advisory board or even your actual board. Let them carry the ball for you by making them feel like part of your team -- that means they need to know the play call!
4. Get your name out there. The only way you will find partners and capital is for them to know who you are. In complex fields such as biotech, where sometimes even your own employees don't entirely understand what you do (other than the lead scientists and/or founders, of course), you have to self promote. Go to the important trade fairs. Present where possible. Have a presence at forums/symposiums. Get involved in your local bio group. No one can invest in you or partner with you if they don't know who you are.
Come to think of it -- these bits of advice are equally valid to any start-up company, no matter the sector. Click Here to Read More..
Dow Jones recently hosted a webinar advising small biotech companies on how to navigate these treacherous waters. In his recent blog post on the WSJ Venture Dispatch, Jonathan Matsey mentions four nuggets of advice from this webinar and gives some good additional gloss. Below are summaries of the 4 points and some of my own thoughts -- please see Jonathan's original blog for his full color.
1. Think globally. It is often possible to generate revenues internationally long before the United States FDA has approved your drug/device. I have seen clients find additional revenues in the more traditional European markets as well as the emerging Asian markets.
2. Partner up -- but make sure you don't give away the keys to the car. Depending on the strength of your vision and the potential of your product, carefully consider the terms of your out licenses and any associated rights of first offer or first refusal you give to your partners. This is a tightrope that can be tricky to walk -- the immediate fix of revenues versus the long term potential of your product -- and negotiating a partnership with the big boys will require some thorough introspection.
3. Nurture your champions. Once you have a partnership with big pharma/big device/VCs make sure you develop and nurture internal champions that understand your research/product and are willing to go to bat for you. Keep them in the loop. If it makes sense, get them involved in your advisory board or even your actual board. Let them carry the ball for you by making them feel like part of your team -- that means they need to know the play call!
4. Get your name out there. The only way you will find partners and capital is for them to know who you are. In complex fields such as biotech, where sometimes even your own employees don't entirely understand what you do (other than the lead scientists and/or founders, of course), you have to self promote. Go to the important trade fairs. Present where possible. Have a presence at forums/symposiums. Get involved in your local bio group. No one can invest in you or partner with you if they don't know who you are.
Come to think of it -- these bits of advice are equally valid to any start-up company, no matter the sector. Click Here to Read More..
Thursday, April 2, 2009
How to Fail: 25 Secrets Learned Through Failure
I recently came across this fantastic post by Taylor Davidson on his blog, Unstructured Ventures. In it he lists 25 different mistakes he has made, the lesson that can be learned from each and an illumination of each lesson based on context and examples. It is a great read full of intelligent advice.
Note: if the text in the slide presentation below is too small -- try either clicking on the link at the top of the presentation or click here to view it in pdf format.
Click Here to Read More..
Note: if the text in the slide presentation below is too small -- try either clicking on the link at the top of the presentation or click here to view it in pdf format.
Click Here to Read More..
Wednesday, April 1, 2009
Angel Investing in 2008: Numbers Even/Dollars Down
Everyone knows that 2008 was a bad year for public equities and for most sectors of venture capital investment (see my earlier blog post here). But how was 2008 for angel financing?
According to this report from the Center for Venture Research, while the dollar value of angel investments contracted 26.2% in 2008, the total number of investments remained relatively stable with only a 2.9% decrease from 2007.
The net effect of these two trends is that the average deal size for angel investments fell by 24%. Angels were still doing deals in 2008, but they were committing smaller amounts of capital.
The report breaks out angel investments by sector and notes that healthcare/medical devices represented 16% of angel investments in 2008, followed by software at 13%, retail at 12% (including web retail), biotech at 11%, industrial/energy at 8% (including cleantech) and media at 7% (including social media).
The report has lots of other interesting statistics, but one final one that jumped out at me is the following -- angel investors invested in only 10% of all investment opportunities brought to their attention in 2008. This is down from 23% in 2005. Clearly, not only are angels investing less, but they are being more picky. A possible positive spin on this statistic is that, since the number of investments has remained constant, this must mean that many more people are looking for angel capital -- a sure sign that we are experiencing an innovation renaissance. Click Here to Read More..
According to this report from the Center for Venture Research, while the dollar value of angel investments contracted 26.2% in 2008, the total number of investments remained relatively stable with only a 2.9% decrease from 2007.
The net effect of these two trends is that the average deal size for angel investments fell by 24%. Angels were still doing deals in 2008, but they were committing smaller amounts of capital.
The report breaks out angel investments by sector and notes that healthcare/medical devices represented 16% of angel investments in 2008, followed by software at 13%, retail at 12% (including web retail), biotech at 11%, industrial/energy at 8% (including cleantech) and media at 7% (including social media).
The report has lots of other interesting statistics, but one final one that jumped out at me is the following -- angel investors invested in only 10% of all investment opportunities brought to their attention in 2008. This is down from 23% in 2005. Clearly, not only are angels investing less, but they are being more picky. A possible positive spin on this statistic is that, since the number of investments has remained constant, this must mean that many more people are looking for angel capital -- a sure sign that we are experiencing an innovation renaissance. Click Here to Read More..
Subscribe to:
Posts (Atom)
