Venture Capital Overview – Apr 05 2014

University of Ottawa
By Antoine Paquin
Mel Roberts
About the presenter…

•  High-tech entrepreneur, past angel investor and GP at Rho

•  4 startups in semiconductors
•  Skystone Systems (sold to Cisco) – founder, Chairman and CEO (Ottawa)
•  Philsar Semiconductor (sold to Conexant Systems) – angel investor, then
CEO (Ottawa)
•  Axiom Microdevices (sold to Skyworks) - CEO (Orange County, CA)
•  Solantro Semiconductor – presently founder/CEO (San Jose and Ottawa)
•  $25M raised to date; currently raising a series B expansion round

•  1 startup in software
•  BitFlash (sold to OpenText) – angel investor, then CEO

•  Hindsight regarding these 5 companies:

•  3 clearly met the classical Vencap model (Skystone, Philsar and Solantro)
•  2 did not meet the Vencap model (Axiom, BitFlash)

•  This presentation summarizes many years of experience with a

generous dose of retrospective analysis
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A few rules of Nature…

•  Nobody, in their right mind, wishes to purchase a product

from a new, unproven vendor

•  Nobody wishes to gamble away precious resources in an

unproven model, company and/or team

•  Visionaries are either 1) crazy or 2) dreamers until proven to

be visionaries

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Intuitive statistics

•  Assume a sample of 100 people who claim to desire

becoming entrepreneurs:
•  2 are genetic mutants that will pursue their dreams no matter
what
•  8 are fence-sitters – they budge either side of the fence based
on surrounding culture
•  90 will dream their entire lives and/or support the 2-10
entrepreneurs

•  The miracle of Silicon Valley

•  CULTURE that converts the 8 fence sitters into entrepreneurs

•  The challenge outside Silicon Valley

•  Not losing the 2 freaks to Silicon Valley…
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“Raison d’être” for a startup…

•  Sole reason:
•  New problem looking for a yet non-existent solution
•  Greenfield opportunity where the rules of the game get established and
sustained (usually) by the first mover

•  Technology is only a means to an end

•  The end is to provide a solution that is at first “good-enough”

because no one else is solving the problem

•  In order for value to be created, you need to solve bigger

problems than the ones you end up creating

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 The inner workings of Venture Capital

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How traditional Vencap generates returns

•  Assume a fund with a lifetime of 10 years, with $100MM

under management and targeting the financing of 16
companies
•  All these companies must support ex-ante the potential to
return >10x the invested capital across the entire investment
life cycle of the company
•  VCs cut off companies that lose that potential and try to
invest as much as possible into the companies that maintain
that potential
•  Assuming the VC follows that discipline, on an ex-post basis:
•  2 companies with a total of $10M invested will return >10x
•  6 companies with up to $6M invested will return 1-5x
•  8 companies with up to $3M invested will return 0-1x
•  $20M will go to fund management
•  The above results in > 3x the initial size of the fund(>20% IRR
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What does traditional Vencap invest in?

•  Entrepreneurs
•  Preferably teams of entrepreneurs
•  That have a shot at a Greenfield opportunity

•  Culture
•  Single-most important asset of a company
•  Shared value relative to four pillars of a healthy culture: role,
responsibility, accountability and transparency
•  Outcome of such a culture is typically a dominant company in a
greenfield opportunity

•  Clarity of thought
•  Impossible without a healthy culture

•  Disruptive innovation*
•  Challenge is 20% technology, 80% go-to-market

•  Founders’ attitude relative to risk

•  Deliberate/thesis approach to risk taking
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•  Sharing the spoilsVC
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* Clayton Christensen
Vencap model is now compromised
•  Fundamentally sound model and success of the model has led to an asset-class
bubble
•  Managed mainly by sheep and/or lemmings
•  There remains too much capital in the asset class
•  Model needs to be rebalanced to its true roots – emergence of family offices
•  Origins of Vencap point to an industry of entrepreneurs sponsoring the next generation
•  Vencap has been over-institutionalized and bureaucratized
•  Result: Malinvestment and loss of discipline
•  Loss of clarity by many VCs
•  VCs are not entrepreneurs or managers
•  VCs invest in entrepreneurs who can deliver new value

•  Too many VCs invested in what they wanted to see

•  Too much me-too investment vs Greenfield
•  Cost of Capital affect efficiency – too much capital lowers its cost
•  We have seen a problem of standard – more capital makes the problem worse
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What to expect from Vencap in the future

•  Return to our roots

•  It’s the returns, stup*d (>10x the investment)
•  Focus on the entrepreneurs
•  Very large emerging market enabled by new innovation
•  >$1BB/yr potential market

•  Money seeks the path of least resistance and superior return

•  More rational levels of capital in the right hands
•  private vs institutional – Vencap is NOT an industry…
•  Risk management is very different for a VC and an entrepreneurs
•  Entrepreneurs manage early discovery of unknowns and validation of assumptions
•  VCs manage their risk by investing in entrepreneurs who understand how to transparently
manage risk

•  It’s all about creating value by solving real unsolved problems

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 When to initiate a fund raising effort via VCs

•  When the opportunity is sufficiently validated and the entrepreneur is

ready to provide timely response to an intensive due diligence
process

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Natural rules regarding role, responsibility and accountability

•  VCs do not create nor build companies

•  VCs do not create market opportunities
•  VCs identify and support REAL entrepreneurs
•  VCs validate plans conceived by entrepreneurs, get
comfortable with the risk and the entrepreneurial team’s
ability to manage such risk and ultimately hold entrepreneurs
accountable for the execution of their own plans
•  Good VCs lend credibility to a team in the market with
customers and with future investors
•  Entrepreneurs go to VCs to finance a plan and the company
to its logical outcome
•  Empirical evidence supports the fact that sound VC money
•  Is more expensive in terms of dilution
•  generates superior returns for both the entrepreneur and the VC
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What makes a good VC?

•  Clarity of roles
•  VCs do not manage companies

•  Recognizing healthy cultures

•  Self measured
•  Transparent
•  Ownership of issues (accountability)

•  Recognizing true entrepreneurs

•  Strong financial network for future financing needs

•  Strong human network to validate new trends and

13 opportunities = better quality of information
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About Risk

•  Life = Risk!

•  We all navigate using a built-in MODEL of reality

•  Risk = Group of unknowns and/or assumptions made relative to

our model of reality

•  Risk Management:
•  For the entrepreneur: validation and/or invalidation of assumptions
and attempt to identify unknowns to enable new assumptions
•  For the VC:
•  Finding entrepreneurs who are deliberate in risk taking
•  Portfolio approach
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Conclusion

•  Creation of new wealth happens through entrepreneurs

•  Successful entrepreneur = unique individual who

•  Has the necessary comfort relative to ambiguity and risk to get started
AND
•  Has a measured in deliberate approach in execution

•  Typical qualities :
•  Opportunistic
•  Critical thinker
•  Humility as demonstrated by ability to surround oneself with strong,
highly motivated and incented people sharing a common end-goal
•  Very deep emotional inner-well to frequently tap into

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A few case studies I experienced first-hand
•  Skystone Systems (1994-1997)
•  Optical transport of IP and ethernet traffic / RPR networks
•  Great founder culture; Great investors
•  Only solution in the market – pure Greenfield
•  Exit outcome: acquired by Cisco Systems for US$120MM in stock – worth US$1.2BB by late 1999
•  Total capital raised: <US$3.5MM

•  Philsar Semiconductor (1998-2000)

•  RF point solutions
•  Bluetooth – greenfield
•  BiCMOS GPS – greenfield
•  Synthesizers / 2-way RF transceivers for automotive – not greenfield

•  Partially healthy culture; partially healthy VC culture

•  Partially Greenfield
•  Exit outcome: acquired by Conexant Systems for US$250MM
•  Total capital raised: ~US$25MM

•  BitFlash
•  Publishing technology using industry standard SVG targeting wireless industry
•  Unhealthy VC and founder culture – bubble logic
•  Technology looking to create a market; no real customer pull; result of bubble in VC asset class
•  Big Greenfield wet dream…
•  Exit outcome: asset sale 3 years after I left; value not worth mentioning
•  Total capital raised: ~US$20MM

•  Axiom Microdevices
•  CMOS PA for cellular & Fully integrated RF front-end for cellular
•  Healthy founder culture; unhealthy VC culture/situation
•  Too many good-enough solutions in the market
•  Not-at-all Greenfield
•  Exit outcome: bargain-basement sale to Skyworks 5 years after I left (May 2009)
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•  Total capital raised: ~US$60MM 16
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