Converting innovation into business opportunity Brian Caulfield MBA Association of Ireland January 2008

Agenda Some background The challenges for Ireland, Inc. What VCs want…and why and the importance of business planning Traps for the unwary… or where does it all go wrong? Venture fund economics 101…and its implications Some personal stories Q&A

Some background Engineering graduate (TCD) 1986 ESPRIT project research Landis & Gyr Co-founded Peregrine Systems 1992 Renamed Exceptis Technologies August 2000 Sold to Trintech (Nasdaq: TTPA) November 2000 Founder director/shareholder of Prediction Dynamics 2000 Went into liquidation 2004 Co-founded Similarity Systems 2001 With CEO, Garry Moroney Sold to Informatica (Nasdaq: INFA) January 2006 Trinity Venture Capital Currently Interim CEO of AePONA Member ICT Ireland Governing Board and CTVR Advisory Board

So why VC?

The challenges for Ireland, Inc. Enormous investment in recent years in 3 rd level R&D SFI New Enterprise Ireland 500m funding Yet very few new start-ups generated… 3 rd level lags both indigenous companies and MNCs as source of new start-ups And very few success stories Iona, Havok, ??? No Irish ICT start-up has achieved significant, sustained global scale Iona ~ US$80m annual revenue Trintech ~ US$30m annual revenue Norkom ~ US$60m annual revenue

So, what are the issues? The usual suspects… Lack of large home market, etc. But we cant change that… Control what we can control… Encourage start-up formation through simple, well established models Develop company scale building skills with high- level mentoring, skills development programmes Create a vibrant funding environment capable of scaling companies

What VCs want…and why (and the importance of business planning)

What VCs always wanted… 1. Market 2. People 3. Technology Great people with great technology and a poor market? Great people in a great market with poor technology? Poor people in a great market with great technology?

Bootstrapping & 3 Fs Bootstrapping & 3 Fs Angels & seed VC investors Angels & seed VC investors First round venture capital First round venture capital Second round venture capital Second round venture capital Market identification & quantification Market identification & quantification Targeting beta customers Targeting beta customers Early adopter sales Early adopter sales Chasm crossing or mass market Chasm crossing or mass market Entrepreneur & CTO Entrepreneur & CTO Sales director Sales director Operations team Operations team CFO Funding development Commercial development Team development Proof of concept Proof of concept Beta product Beta product Product version 1.x Product version 1.x Product version 2.x Product version 2.x Product development

Bootstrapping & 3 Fs Bootstrapping & 3 Fs Angels & seed VC investors Angels & seed VC investors First round venture capital First round venture capital Second round venture capital Second round venture capital Market identification & quantification Market identification & quantification Targeting beta customers Targeting beta customers Early adopter sales Early adopter sales Chasm crossing or mass market Chasm crossing or mass market Entrepreneur & CTO Entrepreneur & CTO Sales director Sales director Operations team Operations team CFO Funding development Commercial development Team development Proof of concept Proof of concept Beta product Beta product Product version 1.x Product version 1.x Product version 2.x Product version 2.x Product development Eliminate market risk Eliminate technology risk Eliminate execution risk

Business planning Product Development Core engine framework Testable prototype of core engine Demonstratable prototype of engine Pilot Prototype Pilot site implementation Business/ Market Development Build list of product requirements Make first contact with potential pilot customers Carry out prototype demos Develop sales plan – start selling Develop marketing story People Count Financing Develop Business Case Present to investors Close deal ABSOLUTE DEADLINES MarAprilMayJunJulyAugSept.OctNovDec Prototype ready to demo First pilot site in place Business case completed Financing agreed

The old-fashioned way… Capital Risk (ß) Idea is Feasible Technology Works A Customer Buys Seed Funding R&D Capital Go-to-Market Captial Expansion Captial P(success) = 40% Reqd IRR = 70% P(success) = 50% Reqd IRR = 50% P(success) = 80% Reqd IRR = 30% P(success) = 30% Reqd IRR = 100%

Traps for the unwary… (or, a personal view of where does it all goes wrong for university spin-outs…and other start- ups)

A personal view…1 The difficulty of getting past university TTO with a fundable proposition Take advice before you reach an agreement Everything is negotiable Equity greed 100% of nothing is nothing… Mis-allocating value between technology and execution The value is not all in the technology Inadequate commitment You cant do this and be Head of Department too… Building the board badly Its very easy to put someone on your board…and very difficult to get them off Over-ambitious projections Sales Cash receipts

A personal view…2 Inadequate customer focus You must focus on what delivers value to a customer The value delivered must be sufficient to overcome risk concerns to be a priority for the customer…does it move the needle? But dont let a single customer drive your specification Lack of clarity regarding IP ownership Institution/founder/research partner issues Beta customer issues Not hiring (or valuing) the right expertise You are probably not the CEO (or VP of Sales, or VP of Engineering) because you have never done it before You rarely have the time to learn on the job Good CEOs cost money and big equity but theyll make you rich Fear of losing control Would you let your child drive a car in Bangalore?

Venture fund economics 101… and its implications

The venture capital cycle

Typical venture fund economics 10 year fund life Initial investment period of 4-6 years – no new investments after this Fund life can usually be extended by 1-2 years Management fee of 2.5% Of committed capital during initial investment period Of invested or managed capital thereafter No management fees paid during fund extensions Drawn from committed capital Carry 20% of investment returns once hurdle IRR (preferred return) of, say, 8% is delivered to investors (Limited Partners or LPs) Generally not permitted to re-cycle capital within the fund Exit proceeds must be returned to LPs

So, for a 40m fund… Management fees are 1m per year 8m over fund life as managed capital declines Capital must be held back to support existing portfolio after initial investment period Say 25% of committed capital or 10m Leaving 32m to invest in total, with a maximum of 22m in the initial investment period Absolute maximum of 15% of fund invested in any one investment Unlikely that the fund will ever be 100% drawn down How many investments in the portfolio? to achieve adequate portfolio spread

So, for an investee company… Absolute maximum of 6m invested over life-time of investment More likely < 4m Initial investment likely to be only 0.5-1m Median total investment will likely be < 3m But… Getting an enterprise software company to break-even? 20m Getting a fabless semiconductor company to a design win? 40m You cant create scale companies with sub-scale VCs

Some personal stories Exceptis Technologies Sold to Trintech (Nasdaq: TTPA) November 2000 $26m stock Key lesson: Cash is King and timing is everything Similarity Systems Sold to Informatica (Nasdaq: INFA) January 2006 $55m cash Key lesson: Momentum counts SteelTrace Sold to Compuware (Nasdaq: CPWR) April 2006 $20m cash Key lesson: Importance of investor alignment

Thank you. Questions? Contact information