Venture Capital

1
Venture Capital

• Adrian Beecroft
• 21 November 2005

2
How It Should Work

• Autonomy approaches Apax, looking for
• 2m for 49 of business
• Advice and guidance, especially re marketing
• Detailed Business Plan
• Five year projections
• Strong technology, uncertain markets
• Apax does due diligence
• Interviews customers, suppliers, industry experts
• Detailed management references
• Accounting review

3
How It Should Work (cont.)

• Invests four months after first meeting
• Detailed shareholder agreement one month to
  negotiate
• Appoints two non-executive directors
• Company grows
• New product based on core technology, highly
  successful
• Management changes
• More capital 10m for 10 from new investor
• Goes public value rises to 1billion plus
• Everybody happy

4
How It Often Works

• New product for construction machinery
  (joy-stick)
• Apax invests 5m for 30 (1998)
• Endless customer trials, no orders
• High sensitivity pressure sensor not available
  (2000)
• Fund sensor factory (5m) or lose money
• Sensor plant costs 10m (2001)
• Sales of sensors start slowly (2002)
• No sales of joy-stick
• But more trials
• 5m more needed (2003)

5
How It Often Works (cont.)

• Cash break-even predicted
• End 2003
• Mid 2005
• End 2004
• Joy-stick business sold (2004)
• Cheaply
• Sensor sales ramp slowly
• Cash running out (again)

6
How It Sometimes Works

• Healthcare at Home (H_at_H)
• Reduce hospital stays through skilled nursing at
  home
• Huge business in the US
• Target customer NHS
• Apax invests in 1995
• 800k for 30
• Founding partners fall out
• NHS refuses to buy
• Company runs out of money

7
How It Sometimes Works (cont.)

• New Business Plan
• Apax invests another 500k stake now 49 (1998)
• Target private health insurers and pharmaceutical
  companies
• Grows slowly
• Wins one big contract becomes profitable (2000)
• Contract taken in-house becomes loss making
  (2001)

8
How It Sometimes Works (cont.)

• Nearly out of cash (2002)
• Grows, discovers invoice discounting (2003)
• Profitable (2004)
• Wins back big contract (2005)
• Makes 3m PBT, leveraged recap releases 10m for
  shareholders (2005)
• IPO targeted for 2006/7

9
Venture Capital How It Works

• Its like cricket
• A few ducks
• Some 10s and 20s
• Occasionally a 50
• Maybe a century every few years

10
Venture Capital How It Works

• Returns
• 20 lose all the investment
• Another 40 fail to return capital
• 20 make 1 to 3x return
• 10 make 3 to 5x return
• 8 make 5 to 10x return
• 2 make 10 to 100x return
• Average
• Roughly 3x
• But depends hugely on a few winners

11
Venture Capital How It Works

• Hence venture capitalists
• Are very cautious
• Are very cynical
• Are very thorough in due diligence
• Look for low valuations
• Primary objective is to make decent return for
  our investors
• Mostly pension funds

12
Venture Capital How It Works

• Entrepreneurs sell equity
• Venture capitalists buy equity
• They have a lot of money
• They focus on niches
• Stage of development of company
• Type of business
• Entrepreneurs need to understand the market/
  customers for their equity