How to Build out your Management Team and Survive the Valley of Death from the Lab to the

Market

Jim Huston
2nd Annual Lab2Market September 2006

Navigating the Valley of Death

Lots of snakes and thirst along the way It takes money, a good team, strong product, and a big market How do you get there??? What IS there

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The Money Valley

Total Cash Inflow / Outflow

$
time

What shape is the curve for this venture, and where are you on it??
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About Blueprint Ventures

$200M in committed capital: 2 funds under mgt Seed- and early-stage IT Capital efficiency Early-Stage Corporate IP Spinout focus
We like CORPORATE spin outs, not UNIVERSITY spin outs

Primarily West Coast 5 investment professionals limit 5-6 board seats/partner

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Where Blueprint Invests

Focus Area Information Technology

Exceptional Mgt Teams

Capital Efficiency & Corporate IP Spinouts

Pssst:: Find this Venn for all investors

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Challenges with University Spin Outs

Founders may not want to give up their tenure track positions Culture mismatch Often VERY early stage lots of $$$ required to know if it is really a product IP may be encumbered Works in a petrie dish

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Whats Required to get Through the Valley of Death

Money Time Intestinal Fortitude Luck

Reality VC funding is on the other side of the Valley you have to survive the Valley first
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Ways to Fund the Death March

Government grants (SBIRs, STTRs, PDC, etc.) Credit cards and 2nd mortgages Bootstrapping consulting, early revenue for early product, contract development Friends and family FF&F Angels and Angel Syndicates Licenses / NRE from corporate partners Sweat equity Investment from strategic partners / customers Possibly bank debt, but usually not viable
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Clarifying some VC Misconceptions

VC Buy-out VCs are not necessarily vulture capitalists but they are capitalist animals VCs fill a key niche in economy, but dont drive R&D
Govt. spends $70B+/yr, corporations spend $140B+/yr on R&D VCs invest $10-20B/yr, with ~2/3 going to build marketing and infrastructure

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VCs Rely on Quick Filters

Time is a VCs scarcest resource
Manage portfolio companies Generate deal flow (networking, etc) Evaluate new deals Partnership overhead

20/80 Rule: Most deals quickly rejected (takes 20% of VC time) so the VC can focus on just a few hot opportunities (80% of time)

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How to Become a Fast Reject

We are sending our business plan to 500 VC firms Is Bluepreint [sic] Ventures currently reviewing business plans from start-up companies? Are you funding them? Who at Bleuprint? [sic] We are the next Google [Microsoft, Skype, eBay] Weve never done this before, but are prepared to learn as we go along
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Blueprints Evaluation Process

Personal referrals help immensely Read executive summary Invite entrepreneurs to pitch the idea Conduct due diligence
Assess market and opportunity Assess competitive landscape Delve deeper into the business model Customer checks Personal reference checks Financial assessment

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What Blueprint Looks For

Management Team
Serial vs. first-time entrepreneurs; Experience together; the hunger factor

Product is it real?
Problem it solves Vitamins (Nice to Have) vs. Pain Killer (Have to Have) Value proposition/ROI to customer 2X vs. 10X Traction to date investors, customers, partners

Market
Market size/growth >$500M, CAGR >20%

How will they win?

Sustainable advantage Unique/robust technology Competition (large and small)
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Keys to Success with VCs

Create some buzz Get an intro to a VC from a trusted source Show high commitment, but dont expect to be CEO Be able to demonstrate that customers WILL pay for <your stuff> Know the MARKET (not just technology) Only target those investors who have demonstrated interest in what you do Reasonable expectations on valuation
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What is a VC Backable Company?

In a hot MARKET with big potential usually $500M minimum with big CAGR Possibility to grow to $100M+ revenue w/in 5 years Sustainable differentiators and barriers to entry Usually technology based Scalable
Can it become a family of products / services, or will it always be a feature? Can it grow non-linearly?

Experienced management team who is willing to play ball with VCs

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What is a VC Backable Mgmt Team?

Expert in a hot area Proven track record of delivering sales and/or technical performance with a solid reputation as well Proven track record of building and leading teams Tells a good story and is presentable Hungry - Wants to get rich and be part of a successful company rather than be in control Understands the cost of capital and typical deal structures and is not offended by them
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What is The Team?

1. The CEO 2. The key technologist(s) 3. The rest of the C-level team (OK if some holes for early stage) 4. The Board of Directors (can be changed as part of new investment) 5. Any other advisors

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Hiring the Right People

Network, Network, Network Start with some advisors who know people Investors CAN help but dont always deliver It will take longer than you think it will a bad hire is far worse than no hire Integrity The Warren Buffett Rule of hiring

Pssst: intellectual honesty helps a lot

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Management Team Mistakes

Want to be in charge
Better to want to see your technology succeed in market and/or to get rich

No skin in the game Distrust everyone Too much focus on initial valuation Thinking you can take money from other people and it is still your company Make a founder your CFO because he took an accounting class 20 years ago

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What to Look for in a VC

Think PARTNER
They will be with you for a long time But remember they are investing in the COMPANY not in you personally

Experience at this investment stage and in this sector Brings much more to the table than just $
Facilitate customer and partner relationships Craft sustainable business models Recruit management Create strategic marketing plans Evaluate alternatives for developing intellectual property/licensing models

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VC: Art vs. Science

Your facts are impressive, but we need instinct to back them up.

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contact: jim@blueprintventures.com

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