Ben Holmes from Index Ventures spoke about the venture business. First some stats: in the States there was $25.7bn venture money in 2006, with 1,446 transactions with an average transaction size of $10.5m. In Europe the equivalent was €4.1bn with 867 transactions with an average values of €14m. Around 55% of investments are in IT with a rapid increase in web application development.
In Index’s case the mechanics are as follows: about half of all investments lose money, a third break even and a sixth make (lots) of money.
What a good VC will add: advice and strategy, hiring, partnerships, profile and PR, internationalisation, trusted service provider relationships and exit optimisation.
He outlined the basic deal terms, which he admits many entrepreneurs find offensive:
- target 20-35% ownership (enough to make a difference)
- board representation
- liquidation preference (to make sure the exit is big enough)
- participation rights (want to be able to maintain stake)
- element of reverse vesting (owners lose equity if they bale out early)
- certain control and veto right (to stop a low-value exit)
- option pool
- period of exclusivity to close legals
He says the main reasons for not raising VC money are: it’s a feature not an application; the market size is too small; the owner’s motivation isn’t financial. “We spend out time looking for teams which have done amazing things with no money.”
The pitch to the VC, he says, should ideally be a 20 page Powerpoint presentation covering:
- business model
- product roadmap
- technology overview
- business development
- financial status
Update: there’s a great mindmap of the whole presentation uploaded to Flickr.