Qbic Fund Venture Capital Guy Huylebroeck Advanced Starters Seminar 16 October 2014
Contents I. VCs and how they work Qbic Fund Highlights Business Accelerator Sources of Capital Fund structure What does a fund offer? What does a VC Fund want in return? Investment Criteria Process Take-aways II. Investment terms
Qbic Fund - highlights Seed & Venture Capital Fund 5 to 6 year investment period (2012-2017/18) Followed by a 5 to 6 year horizon for follow-up investments Fund size: 38 M Focus on UGent, VUB, UAntwerpen, VITO & associated institutes Spin-off projects / existing spin-offs Start-ups exploiting know-how or IP under existing or future licensing agreements Seed & Early Stage Sector Agnostic Fund strategy Lead investor of a syndicate Maximum of 3,8 M per spin-off (including follow up) Equity or semi-equity (convertible loans) Maximum of 15 projects
Qbic Fund highlights (cont d) Qbic s investors Universities, Government, Institutional investors (banks and insurance companies) Qbic Venture Partners Dedicated and seasoned management team Two Managing Partners: Marc Zabeau, Martin De Prycker Three Investment Partners Els Hubloux life sciences Danny Gonnissen materials sciences Guy Huylebroeck - ICT Strong Investment committee with Captains of Industry Gerard Van Acker, Ajit Shetty, Conny Bogentoft, Frans Van Giel, Stephan Paridaen Complementary mix of experiences Senior management experience: start-ups and multinationals Investment experience in venture and corporate funds
Qbic Fund Business Accelerator Qbic offers assistance to seed and early stage startups investment memorandum (business plan, investment terms) expert reviews of specific aspects of their case sounding board Qbic business accelerator: Q Start BVBA Who? Qbic s investment managers Independent experts Terms Economic tariffs on a no cure, no pay basis (IM assistance)
Sources of Capital Business Angels Family & Friends Banks Government
Sources of Capital Cash flow
Sources of Capital ~ 10-100 M ~ 1 M ~ 100 k ~ 10 k
Where to find money? Where to find the resources you need to become a successful company?
What does a VC Fund offer? Hands-on assistance No operational interference Advice on operational issues Sounding board for strategic decisions A strong network Industrial as well as financial Qbic s investment managers Independent experts Capital Equity or (convertible) loan look for a long-term partnership iso a cash provider
What does a VC Fund want in return? A stake in the company s equity Insight in how the company s business evolves Representation in the company s board of directors A say in strategic key decisions An attractive exit horizon Most funds are closed-end (10-12 year) High investment return multiples Good spectrum of potential buyers (M&A, MBO, secondary, IPO)
Venture Capital investment criteria The OFFERING of the start up should hold enough potential: be in a sizeable market with a well-defined market pain be unique (IP) or advanced enough to beat upcoming competition address customers willing to pay for it to be addressed in the business plan
Venture Capital investment criteria The TEAM is extremely important VC Funds invest in teams not in businesses Has the team all the required skills and experience to execute the companies plan? Are team members flexible enough to change plans drastically when needed? Can teams live with the fact that investors participate in the company as an important shareholder ( Founderitis )? The team will have to convert the potential into a successful business
Venture Capital the process First contact: the company pitch Evaluation of the business plan, financial plan and investment proposal NDA (LoI) Term sheet: terms & conditions to be agreed upon Non-binding intention to continue exclusivity period advice: do not negotiate a term sheet without legal assistance Due diligence: technical, commercial, IP, legal, financial, Syndication Lead investor vs follower Subscription & Shareholders agreement (+ other contracts) Closing
Venture Capital take aways Venture Capital Funds invest in start-up companies with a promising but still uncertain business model are prepared to take a high financial risk take a stake in the company on conditions to be agreed upon are involved in the decision taking process to grow the business (via Board of Directors, not operational) try to sell their shares for an interesting exit multiple (exit proceeds / invested capital) within a limited time frame (mostly ~ 5 10 years) build a portfolio of companies within their scope aim for a good return on investment on fund level
Venture Capital investment terms Anti-dilution provision: a mechanism to protect investors against a future down-round. The most popular anti-dilution mechanisms are weighted average protection and full ratchet protection. Cap table: short for capitalization table. A company s cap table gives a complete overview of the company s investor s per share class, the number of shares they hold and their relative ownership share, including possible warrants or options. In the latter case, a cap table shows the situation with 0 options vested, and the situation with all options vested (also called fully diluted). Carried Interest: or carry. A profit share (typically 15-20%) paid to the general partner after repaiment to the limited partners of their capital and agreed upon minimum return (called the hurdle rate or preferred return). Closing: the moment that the agreements and other documents that come with an investment are signed Condition precedent: conditions that need to be fulfilled before a transaction can take place
Venture Capital investment terms Consortium: in any given investment round, a group of investors who jointly invest in a company (at the same conditions). Also called a syndicate. Convertible loan: a loan that can later be converted into equity, usually at a future investment round and at a discount (typically 20%) compared to the next round s stock price Dealflow: the entirety of business proposals that a VC firm receives Dilution: the decrease of the percentage ownership of a company experienced by existing shareholders as a result of the issuance of new shares of stock or the vesting of options or warrants Discounted cash flow or DCF analysis: the calculation of a company s current value by adding all the company s future cash flows (= the net cash generated by the company), adjusted for the depreciation of money over time. The result is called the Net Present Value (NPV). Down round: an investment round at a lower price per share than the previous investment round (adjusted for stock splits)
Venture Capital investment terms Due diligence: an in-depth investigation of an investment proposal prior to the investment. Important aspects of a due diligence are market demand, perception in the market of a company s offerings, technical, legal and financial ESOP or Employee Stock Option Plan: an incentive method for a start-up s senior management whereby a percentage of the company s shares (typically 5-10% in the case of a start-up) are reserved for management. These shares are not immediately awarded, but are offered as options or warrants, that can be vested (= exercised) after a certain minimum period (the vesting period), sometimes when certain target milestones have been reached. Exit: the possibility for an investor to sell his shares in a company, preferably with a profit. The most common ways to exit are an IPO (Initial Public Offering) or an acquisition (also called trade sale). Other possibilities exist (MBO or Management Buy-Out, sale to other investors, ) but are much less likely and usually less interesting for an investor. Exit preference: determines how and in which order the proceeds of an exit are distributed among the different shareholders. Two important categories exist: participating preferred (also called double dip) and non-participating preferred.
Venture Capital investment terms FFF: stands for Friends, Family and Fools. These are the traditional pre-seed capital providers. Full ratchet protection: an anti-dilution protection mechanism that allows an existing investor to receive extra shares at no cost to the investor to fully compensate the investor for the lower price per share, prior to the new investment. Fully diluted: see cap table General partner: under common law, a partnership in which all partners manage the business jointly and are personally liable for its debts. In venture capital, the general partner is the legal entity that manages the fund (e.g. Qbic Venture Partners). Also called VC firm. Hurdle rate: see carried interest Investment committee: the group of people who decide whether or not a VC fund should make an investment, based on an investment recommendation prepared by an investment partner or a principal. An investment committee may be solely composed of the general partner s professionals, but can also contain external specialists.
Venture Capital investment terms Investment partner: a partner of a VC firm responsible for sourcing and analyzing dealflow, making investment recommendations and taking up board positions in portfolio companies. Also called principal. IPO or Initial Public Offering: see exit Limited partner: under common law, a partner who relinquishes his ability to manage the business in exchange for limited liability for the partnership s debt. In venture capital, the limited partners are the fund s investors. Liquidation preference: similar to an exit preference, but valid in case of a liquidation of the company s assets, typically after a bancruptcy. Management fee: a fee paid to the General Partner to cover the costs of investing and managing the fund, usually expressed as a percentage of the commitment (typically 2-3%) Managing partner: a partner responsible for managing a venture capital firm. Managing partners tend to focus on fund raising and highlevel follow-up of the deal-flow and investments. Also called managing director.
Venture Capital investment terms Non-dilutive money: sources of cash that do not dilute the existing shareholders, for example research grants and loans NPV or Net Present Value: see Discounted Cash Flow analysis Partnership: a business arrangement in which parties (partners) agree to cooperate to advance their mutual interests Post-money [value]: the valuation of a company after an investment. Post-money value = pre-money value + investment Preferred return: see carried interest Preferred shares: shares granted to new investors, giving them preferential rights (vs. existing shares), in order to mitigate the financial risk and to control critical decisions and transactions. Pre-money [value]: the valuation of a company prior to an investment. Post-money value = pre-money value + investment
Venture Capital investment terms Pre-seed funding: very early stage private equity funding, typically used for PoC (Proof of Concept) or for developing a business plan. Typical pre-seed funding providers are FFF, small business angels or specialized government programs (e.g. Innoviris Launch, istart, ). The investments are in the order of magnitude of 10k. Principal: see investment partner Private equity: refers to equity (and loans) granted to non publicly traded companies Pro rata: Latin for proportional Seed funding: (very) early stage private equity funding, usually prerevenue but past PoC (Proof of Concept). Typical seed funding providers are FFF, business angels or early stage venture capital providers, and the investments are in the order of magnitude of 100k. Syndicate: in any given investment round, a group of investors who jointly invest in a company (at the same conditions). Also called consortium.
Venture Capital investment terms Term sheet: a non-binding document between the company and at least one investor that contains the most important terms of a future shareholder agreement. Its main purpose is twofold: a framework for negotiations, and a document that can be presented to new investors. A term sheet also lays out the conditions that have to be fulfilled before moving to final negotiations. Valuation: the act of determining the value of a company (also used for the value itself) Venture Capital or VC: financial capital provided to early-stage, high-potential, growth start-up companies Vesting period: see ESOP Weighted average anti-dilution: an anti-dilution protection mechanism that allows an existing investor to receive extra shares at no cost to the investor to partially compensate for the lower price per share, prior to the new investment.
Qbic Requirements Technology link with VUB, UGent, UAntwerp or VITO Official spin-off No spin-offs of spin-off (Option on) technology license Syndicated with at least one other VC Strong preference for equity If convertible loan: conversion at our choice Board seat Term sheet: Exit/liquidation preference: at least 1x non-participating Anti-dilution protection: at least weighted average Drag/tag along: at least one VC has to agree ESOP Pre-emptive rights Protective provisions Registration rights Covenants and warranties Conditions precedent
Venture Capital valuation Economic theory says: Problem: in a pre-revenue situation there is no way to know the future free cashflows other than through MWTMU You would have to risk-adjust the DCF value anyhow A 4 year business plan for a pre-revenue company still makes sense, but mainly to get a grasp on burn rate and strategy This means that alternative valuation methods such as multiples are also problematic Comparables are not available, and would be difficult to use anyhow What we do: estimate the exit potential and the required investments, and calculate a possible IRR In order to reach our fund s target and compensating for failures in our portfolio, we are looking for an IRR of at least 30% for any individual investment
Cap Table - example Total Investment Dollars Raised $ 3.400.000 Series A INPUTS Cap Table Pre-Investment & Post-Series A Date of Funding 1-9-2014 Summary Option Pool Expansion Pre-Money Valuation $ 4.000.000 Fully Diluted FD % Fully Diluted FD % Option Pool Expansion (added prior to Series A share price calculation) 120.000 Founders 1.250.000 66,5% 1.250.000 32,7% Shares Prior to A Round 2.000.000 Employees 530.000 28,2% 530.000 13,9% Share Price $ 2,00 Option Pool 100.000 5,3% 220.000 5,8% Angel Investors 514.164 13,5% Investor Conv. Note New $ Total Texas ETF 303.137 7,9% Angel Investor #1 $ 292.778 $ 50.000 $ 342.778 Srs A Investors 1.000.000 26,2% Angel Investor #2 $ 292.778 $ 50.000 $ 342.778 TOTAL 1.880.000 100,0% 3.817.301 100% Angel Investor #3 $ 292.778 $ 50.000 $ 342.778 Texas ETF $ 606.275 $ 606.275 Series A Investor #1 $ 1.000.000 $ 1.000.000 Series A Investor #2 $ 500.000 $ 500.000 Series A Investor #3 $ 500.000 $ 500.000 Total Series A Value $ 1.484.608 $ 2.150.000 $ 3.634.608 Post Money Valuation $ 7.634.602 Series A value includes interest & share price discount in convertible notes Total Series A Cash $ 1.250.000 $ 2.150.000 $ 3.400.000 Series A cash excludes interest & share price discount in convertible notes Includes the effects of Series A Option Pool Increases: PRE-INVESTMENT CAP TABLE SERIES A CAP TABLE Common Common Total % Common Actual $ Preferred % of Total % Fully Shareholder Stock Options Outstanding Fully Diluted Invested Shares Series A Oustanding Diluted Founder #1 750.000-750.000 37,5% 0,0% 750.000 19,6% Founder #2 500.000-500.000 25,0% 0,0% 500.000 13,1% Employee #1 200.000-200.000 10,0% 0,0% 200.000 5,2% Employee #2 85.000 5.000 90.000 4,5% 0,0% 90.000 2,4% Employee #3 75.000 5.000 80.000 4,0% 0,0% 80.000 2,1% Employee #4 75.000 5.000 80.000 4,0% 0,0% 80.000 2,1% Employee #5 (All others) 75.000 5.000 80.000 4,0% 0,0% 80.000 2,1% Pre-Investment Option Pool - 100.000 100.000 5,0% 0,0% 100.000 2,6% Srs A Option Pool Expansion 120.000 120.000 6,0% 0,0% 120.000 3,1% Angel Investor #1-0,0% $ 300.000 171.388 9,4% 171.388 4,5% Angel Investor #2-0,0% $ 300.000 171.388 9,4% 171.388 4,5% Angel Investor #3-0,0% $ 300.000 171.388 9,4% 171.388 4,5% Texas ETF - 0,0% $ 500.000 303.137 16,7% 303.137 7,9% Series A Investor #1-0,0% $ 1.000.000 500.000 27,5% 500.000 13,1% Series A Investor #2-0,0% $ 500.000 250.000 13,8% 250.000 6,5% Series A Investor #3-0,0% $ 500.000 250.000 13,8% 250.000 6,5% Total 1.760.000 240.000 2.000.000 100% $ 3.400.000 1.817.301 100% 3.817.301 100%
Exit/liquidation preference
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