Elements Of Successful Emerging Tech Companies

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Elements Of Successful Emerging Tech Companies
There are plenty of big waves keep paddling fast
Presentation to Cal Poly GSB528 September 2,
2008 Christopher J. Rust rust_at_usvp.com
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Agenda

• Introduction
• Understanding Venture Capital
• Deal Flow, Diligence Process, Flaws w Diligence,
  etc.
• VC Investment Criteria
• Elements Of Successful Startups
• Hot Areas
• Group Discussion

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Investment History As Context

• Investments - 1998 to Present
• Abrizio switch fabric ICs gt PMCS
• Avanex optical modules gt AVNX
• Telera Call center software gt ALA
• Syndesis IP OSS SW gt Hamant
• Santera voice switch gt Tekelec
• Mellanox Infiniband ICs gt MLNX
• Mahi Metro core switch gt Meriton
• SwitchOn Processor gt PMCS
• Turin Metro transport switch
• VxTel VoIP ICs gt Intel
• Springbank Caching system gt CFLO
• Onetta optical amplifiers gt BKHM

• Nexsi network security gt JNPR
• Afara next gen server gt SUN
• Santur tunable lasers
• Memx optical switch gt OOB
• Commerce5 ecommerce sw gt DRIV
• LVL7 networking software gt BRCM
• Dilithium transcoding gateway
• Stratalight 40Gbps optical
• Veriwave WLAN equipment
• Akros Networking ICs
• Zannel Mobile social networking
• Clustrix Internet Infrastructure
• Dune Networking ICs

25 investments 2 IPOs, 10 acqs gt 1x, 3 acq lt1x
or TBD, 2 OOB, 8 active
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USVPs Philosophy

• Hyper-Growth Emerging Markets
• Real Businesses
• High Gross and Net Margins
• Back Leading Company In Sector
• Mkt cap of leader often more than others combined
• Obtain Significant Ownership
• Drive for Leading Market Share
• Help with Recruiting, Sales/BD, Follow-On , Exit
• Patient Long Term Investor

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USVPs Philosophy

• Small Elite Teams Intent On Changing The World
• Massive Passion
• Super Aggressive
• No Bozos - Lemons Ripen Early
• Frugality Reigns Supreme
• Low Rent District
• Plywood Tables
• Fly Coach
• Dilution Is The Common Enemy
• Eye-Popping Progress On Series A To Earn Big
  Step-Up
• Company-Wide Focus on Equity, Not Current Income
• Stand On Shoulders Of Giants Via Smart Partnering
• Patience, Perseverance To Build A True Franchise

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VC Investment Criteria

• VCs Rewarded For Finding Funding Growth Engines
• VCs Want To Invest In
• Markets with hyper-growth potential
• Companies that can create and dominate a new
  market
• Disrupting a large established market also
  interesting but harder
• Driven entrepreneurs that can build strong teams
• The best CEOs are often first time CEOs
• Viable business models. GM is a proxy for value
  of tech
• VCs (Usually) Avoid
• Customers that wont buy from small private
  companies
• Low gross margin businesses
• Long development cycles, compounded tech risks
• Unloved sectors with low exit multiples

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Typical VC Ecosystem
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Typical VC Due Diligence Process
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VC Due Diligence Checklist
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Investment Criteria A VC Survey

• Market and Team clearly dominated when evaluating
  a new investment
• Product or Technology was also very important, as
  that is the tool to address the market
  opportunity

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Causes of Failure In VC-Funded Companies

• Team did not execute cited by VCs as the top
  reason companies fail
• Picking good markets is job one, but
• Building great teams as a tangible asset is just
  as important
• Acquirors always ask Is this a team I want
  working for me?

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VCs Like Entrepreneurs With

• A track record of success, but
• The best entrepreneurs often have no prior
  successes
• The best entrepreneurs are often young, single,
  workaholic geeks
• Work experience in a (winning) small company
• If you go to a startup early on, pick one w a
  great CEO and VCs
• Expertise in the target market
• High motivation level, positive attitude, and
  personal integrity
• Mental toughness and emotional stability for
  sustained arduous effort
• Resilient and adaptable to change, hardship, and
  uncertainty
• Strong off the list references sourced without
  input from the entrepreneur

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Life In A Venture-Backed Startup
                                                
                                          
                                                
                                          
                                                
                                          

Success Is (Usually) Determined By Revenue Growth
and Profits Usually requires extreme focus on
being the best at one thing
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Steps In Successful Startup

• Total Commitment for Long Haul. 1 Inspiration
  99 Perspiration
• Define a Compelling Product or Service for a High
  Growth Market
• Create Critical Mass
• Best people first. Hiring well single greatest
  point of leverage
• Focus on Execution
• Build tools to track against a plan, development
  processes
• Stretch Goals for Talented Team w Common Vision
  Inspired Effort
• V S3 Victory Speed Stealth Sweat
• F R V2 Force Resources (Velocity)2
• Expand in Control (sort of)
• Make Every Penny Count. Raising Capital is
  Expensive At All Levels
• If Your Market Does Not Materialize, Quickly
  Adapt To Succeed/Survive
• NEVER Doubt That You Will Be Successful and Trust
  Your TeamNo Matter How Bad Things Get

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Clarity Of Purpose
Source Don Valentine
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Elements of A Fundable Plan

• Business - Clear. Succinct. Easy to Understand
• Market - Hyper Growth (gt 50 CAGR)
• Team - Best-in-Field, History of Success
• Product or Service - Unique. Fresh Idea. Hard
  IP
• Financials - gt100M revenues in 4 years, Cisco
  GMs
• Risk Factors - Entrenched Competition BAD, 1st
  Mover in New Category GOOD
• Deal - Small Check for Big Ownership and Pool

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Product FocusImportant To Do One Thing Better
Than Everyone Else
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Disciplined Partnership
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A Model for Partnering
Strategic partner
Alliance partner
tactical
Teaming cooperation
COMPLEXITY
VALUE
Value shipper, exclusive supplier
Preferred Supplier
Commodity Supplier
MATURITY
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A Culture of Success
Dare To Be Different
Team DNA
Responsiveness
Fight Hard But Fairly
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Comments On Financials
Profit Independence
Frugality Survival
It Takes A Long Time To Build A Franchise
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Addressing Corporate Viability

• Vi a.bil i.ty n. Capable Of Living And
  Developing
• Corporate viability not determined by balance
  sheet, fund-raising skills, or our
  product/technology leadership, but by winning
  business and establishing commercial success
• Factors That Influence Perceived Viability
• Customer list A reference network sell is
  infinitely easier
• Customer satisfaction and responsiveness do
  matter a lot
• Clear technology leadership is table stakes
• Caliber and commitment level of all shareholders
• Critical mass to support the product
• Sales Teams Ability To Close Repeat Business Is
  Key
• Build customer base, make sure they keep buying

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Recipe for Winning Acquisitions

• Minimum Overlap in Products
• Complementary Skills, Assets, Customer Base
• Common Vision and Culture
• Near-Term Wins -gt Validates the Decision
• Long-Term Wins -gt Retains Key Talent
• Clear definition of which culture and product(s)
  survives
• Respect on Both Sides of Deal
• Geographic Proximity is often a plus
• Wealth Creation Potential for All Stakeholders
• Well thought out common retention plan
• Well thought out integration plan

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The Deal

• If Seeking Funding
• Amount needed
• Valuation looking for - justify with comparables
• Use of proceeds - be as specific as possible
• Support requirements beyond money
• Be careful of the detailed Ts Cs. Ratchet
  clauses, participating preferred liquidation
  preferences, drag-along rights to force
  acquisitions, many other terms can gut the upside
  for common
• If Seeking Employment
• Opportunity to build valuable, marketable skills
• Match to lifestyle preferences
• Comp package salary and benefits, equity
  participation
• Runway, staying power of investor base, mgmt
  team, vision

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Recruiting

• MAKE WORLD-CLASS RECRUITING A HIGEST PRIORITY
• Map out a recruiting plan with goals and metrics
  and stick to it
• Screening/qualifying candidates takes time. Spend
  the time
• Use right resources to get to qualified
  candidates at all levels
• Attracting top executives individual
  contributors to startups
• Was always hard
• Will always be hard
• Hire for intellect drive culture fit over
  specific skills
• Compensation negotiations
• Staying close between start date and signed offer
• Post interview assessment

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A Personal Decision-Making Filter

• Do You Believe In The Founders Mgmt Team?
• Does Anyone Need The Product or Service?
• Is There A Quantifiable Competitive Advantage?
• Is There a Realistic Business Model?
• Can The Opportunity Attract Talent and Capital?
• Will You Develop Marketable Skills?
• Can You Have Fun In the Process?

If Yes, Go For It!
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Comparing VC vs. Organic Model

• Self-Funded/Angel Funded
• Set modest, achievable goals
• Focus on one customer
• Incrementally raise
• Incrementally build skills
• Relatively low risk
• Live within means

• (Tier One) VC Funded
• Set AGGRESSIVE goals
• Change markets
• Focus on Market Share
• Raise big
• Give up big ownership
• Suffer big liquidation pref overhang
• Buy experience to move fast
• High risk. Big programs
• Cut losses early
• Lemons ripen early

Select Investors With Common Goals Perhaps More
Important Than Picking Co-Founders (Are Stuck
With Investors)
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Comparing OUS Tech Hubs
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Some Hot Topics

• The Broadband Mobile Internet
• The Rich Media Internet (HD video-capable)
• The Energy Efficient Data Center
• Infrastructure-As-A-Service, Cloud Computing,
  Virtualization
• Next Generation Search (GOOGs results less
  useful w time)
• Software-As-A-Service
• All Things Cleantech The Current Bubble
• Energy generation (clean coal, solar, wind, wave,
  nuclear, fuel cells)
• Energy storage transport (batteries,
  hydrowind, smart grid)
• Energy conservation (building automation, smart
  meters)
• Clean water (desalination, purification,
  reclamation)
• Green construction (low embodied energy
  materials, green cement)
• Medical devices and bio-pharma

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One Key Take-Away
Adapt Succeed
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Thoughts?Group Discussion