Principles of Entrepreneurship

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Principles of Entrepreneurship

• The MIT Enterprise Forum of Israel
• Leon Recanati Graduate School
• Of Business Administration
• Roni Hefetz Founder General Partner
• Walden Israel Ventures
• February 14, 2007

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Agenda

• Who We Are
• I Introduction to venture capital
• II Fund raising process
• III Human factor in success/failure
• IV Case study summary

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Who we are Walden Israel

• Leading Israeli venture capital firm
• Focus on early stage technology companies
• Started operations 1993
• Manage 185 million in 3 funds
• Top tier investor base
• All partners with entrepreneurial background and
  executive experience
• 1 performing fund in Israel (vintage 2000/2001)

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I Introduction to venture capital

• Definitions
• Role in economy
• Structure of venture capital fund
• Sources of capital
• World overview

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II Fund raising process

• Business plan
• The process milestones
• Typical deal structure
• Equity distribution
• Valuation methods
• Exit strategy

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III Human factor in success/failure

• Model of contrasts
• Constant evaluation
• Drive

IV Case study summary
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Secrets from the bedroom(or boardroom)
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Some macro economic perspectives

• Israels GDP 120 Billion
• Capital invested in venture capital 750M 1.5B
• Total venture capital under management 15B
• Number of deals being financed 400
• Amount of VC capital raised in US 2000 100B

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What is private equity

• Manage huge amounts of cash
• Diversification risk/reward/geography/stage/vinta
  ge/technology
• Main source financial institutions/
  endowments/government/corporate/individual
• Separate asset class
• Fund of Funds

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Structure of a venture capital fund
Limited Partners (investors)
General Partner
99
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Limited Partnership

Equity
Portfolio companies
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Tax Considerations

• General Partner (GP) fully involved
• Limited Partner (LP) passive investor
• LP can not participate in investment decisions
• GP pays regular income tax (30-50)
• LP pays capital gain tax (18-25)

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II Fund raising process

• Business plan
• The process milestones
• Typical deal structure
• Equity distribution
• Valuation methods
• Exit strategy

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VCs expect huge returns

• Only few companies make it.
• Need to compensate for ones who fail.

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Expect huge returns

• Expect X10 times return, not 10 gain.
• Portfolio management
• 20 investments
• 1 home run X10 or more
• 3-4 great returns x5
• 4-5 lousy returns X1
• 4-5 lower then 1X (living dead)
• 5-6 write offs

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VCs invest in Change

• Technology change (Fiber access Passave, Cable
  modem Terayon)
• Management change (Steve Jobs Apple)
• Market change (buying books Amazon)
• If successful gtgtgt huge returns
• orentire loss

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What are we looking for

• Key ingredients
• Great management
• Leading technology
• Growing market
• Reasonable valuation
• but we rarely get it all

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Management

• Experience
• Technology depth
• Big egobut not too big
• Enthusiasm
• Resourcefulness
• Leadership
• Truthfulness
• Optimism

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Technology

• Innovative
• Present some barrier of entry (time, patents etc)
• Space within Israels core (IT, Telecom etc)
• Strong team
• Example Mellanox ex Intel Gallileo

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Market

• Address a potentially large market (300-750M)
• Better small and growing then large and stagnant
• Global opportunities over the long run
• Very focused solution to a well defined problem
• Example - PassAve

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Deal flow

• Key to success of a VC
• The funnel of deals has to be huge
• Invest in 5 deals after seeing 500.

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The entrepreneur

• Born or made?
• Must bring about a change

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Believe in your gut feel

• Do the analysis
• Consult experts
• Call customers
• Read, read, talk, talk, listen, listenbut in the
  end
• Never make an investment if everything checks out
  fine except your gut feel

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Emotional attachment

• Should we continue to back a company in next
  round?
• Must make a totally new evaluation preferably
  by another partner

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Entrepreneur personality traits

• The earth versus sky model
• Practical vs. dreamer
• Creative, out of box, vs. organization,
  discipline
• Individualism vs. team work
• Risk taking vs. responsibility
• Model developed by Dr. Eyal Goshen, former Chief
  Psychologist of Israel Air Force

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More on psychology emotions

• VC may fall in love with the company in
  particular early stage.
• Strong emotional identification between VC to
  company can be disastrous. VC fails in his role
  to be critical
• Advise dont get too friendly with the VC could
  impair clarity of judgment

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The Edder
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Failure

• Almost all failures (or success) of a start up
  are due to human aspects not technology not
  market
• The biggest issue and most challenging to
  evaluate is people
• We ask for 30 personal references not 3.
• and we still make mistakes in judgment

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What should entrepreneur look for

• Experienced VC
• Lots of contacts
• Deep pockets
• Consortia of VCs, not a single investor
• Balanced board
• Respect and trust to the VC he/she is your long
  term partner

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Control (or lack of )

• VC is in the hand of the entrepreneur
• Changing CEO is traumatic for all

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Thank You! www.walden.co.il