Twoeyes Insight-34VCI

2008
Twoeyes Insight:
Report & Reflections
from the 34th Venture
Capital Institute
Atlanta Georgia, USA
15-18 September

Conor McKenna
Managing Director
Twoeyes Venture & Advisory

PO BOX 1133

NORTH ADELAIDE SA 5006

AUSTRALIA
25/10/2008

Twoeyes Insight – VCI 2008

TWOEYES INSIGHT 34th VCI Report October 2008

By Conor McKenna, Managing Director, Twoeyes Venture & Advisory
PO Box 1133, North Adelaide SA 5006, Australia. conor@twoeyes.com Mobile: +61402 264670

THIS VCI REPORT LOOKS AT:
Vive La Venturepreneur! Vive La Venturepreneur! 1
By Conor McKenna, Graduate, 34th VCI
Venture Capital SA Scholarship 2
“I am still learning” was a famous remark by an elderly 34th Venture Capital Institute (VCI) 2
Michelangelo. While I am no Michelangelo – nor his „David‟ for
VCI Curriculum & Remarks 3
that matter – I am a life-long student of the Art & Science of
Golden Nuggets 6
Venture Investing.
Linking SA VC Globally 11
Like Mike, I‟m still learning. I was therefore most fortunate to
Bridging SA‟s Valley of Death 12
be one of three applicants to receive the Venture Capital SA
From Little Things 15
Scholarship to attend the 34th Venture Capital Institute in
About Conor McKenna 16
Atlanta, Georgia USA in September this year.
About Twoeyes 17
Attending VCI 2008 has greatly extended my knowledge and
appreciation of the venture capital industry outside of
The most memorable VCI 2008 take-away for me was during the
Australia. Just one month on, the experience has also proven
session entitled “Being an Effective VC Director – Coach,
beneficial in my everyday venture development & advisory
Confident & Killer”. VCs were instructed to ask themselves two
activities here in Adelaide.
questions at each board meeting: “Are we going to fire the CEO
today? If not, how can we help?”
After 20 years working „in or on‟ early-stage, growth ventures,
on the one hand I am comfortable calling myself a seasoned
With 50% of management fired within months of an early-stage
entrepreneur. On the other hand, I consider myself an
VC investment, naive C-Level entrepreneurs need to understand
apprentice Venture Capitalist. In my mind‟s eye I can see the
that the smiling and nodding investor is likely their executioner; a
day when I can hear the two hands clapping together in happy
badly understood term-sheet their death warrant.
unison.

Post-VCI, I am now even more attracted to the VC term-sheet and
Unquestionably, entrepreneurs without a tangible passion for
less excited by the technology. As one venture-backed
their technology, product or service are soon statistics.
entrepreneur I know said to me recently, „the more you venture,
the more you move to the Dark Side‟.
However, the more experience I accrue from interacting with
VC and developing entrepreneurial ventures, the more I
VC learning is not a franchise owned by the investor set. It‟s time
appreciate the importance of the deal and how it is conceived
for our serious, growth-oriented entrepreneurs to learn for
- let alone how it is constructed and the terms that define it.
the investor really
themselves how thinks and how VCs
professionally craft the deal. If the end-game lies in a profitable
The more I learn about the nooks and crannies hidden in the
exit, the VC term-sheet describes what profitability will look like.
VC term-sheet, the more I am convinced that too many
entrepreneurs are guilty of “falling in love with love”. Too
As one of my past investors said to me, as he tied me over the
many are blinded by the wonders of their technology or the
proverbial barrel, “It‟s the Golden Rule, mate: he who has the gold
mind-blowing size of the market. Too many abdicate their
makes the rules. That‟s life”. Post-VCI, I prefer to think that “He
duty to learn the rules of the venture investment game.
who knows HOW to make gold makes the rules. That‟s Alchemy”.
In the fast-paced and heartless world of „Return on
“Entrepreneurial Alchemy” lies in the rule book and the rule book
Investment‟, ignorance is no longer a defense – particularly
is the VC term-sheet. If both study this equally well, entrepreneur
post September 2008. It only takes one run-in with Liquidity
and venture investor alike, each will hear the coins hitting the
Preference Shares; Redemption Provisions and Full Ratchet
table and two hands clapping in time, to wild hoots and wolf
Anti-dilution Clauses to crush even the most seasoned
whistles: “Vive Le Venturepreneur”! “Vive Le Venturepreneur”!
„technopreneur‟.
© Twoeyes 2008. All rights reserved

Twoeyes Insight – Trip Report VCI 2008

Venture Capital SA
Scholarship Program
By Conor McKenna

On August 25th 2008, Venture Capital SA awarded three
scholarships to locally based private equity practitioners to
attend the 34th Venture Capital Institute education program in
Atlanta, Georgia USA, from 15 – 18 September.

34th Venture Capital
In announcing the winners, David Simmons, the Chair of the SA
Centre for Innovation (which oversees Venture Capital SA), said
Institute (VCI)
the program provided a great opportunity to advance careers
in venture capital and private equity and keep the industry
vibrant.
The Venture Capital Institute is the Educational Foundation for
Venture Capital & Private Equity Professionals Worldwide.
The awarding of these scholarships is consistent with Venture
Capital SA‟s objective of „developing an active, growing and
The VCI combines lectures, case studies, written outlines, and
sustainable South Australian private equity sector‟.
reference materials covering all the primary elements of the
direct venture investing process.
The scholarship program is also aligned with the Economic
Development Board‟s objective of „fostering the development
For the past 34 years, the Venture Capital Institute has offered
and maintenance of high quality venture capital management
5,000 venture capital professionals what is viewed as both a
and investment skills in South Australia, including through the
“required course” for newcomers to the industry and an
development of education courses.‟
excellent continuing professional education program for those
already involved.
The three 2008 scholarships follow on from the awarding of
four in 2005, two in 2006 and three in 2007 – a total of 12 in
Held annually at the Emory Conference Centre in Atlanta, the
the last 4 years.
Venture Capital Institute is an intense, four-day, in-residence
program conducted by experienced venture capital managers,
The cost of the program, including accommodation and return
investors, and attorneys who are recognized experts in their
economy air travel – valued at about $9,000 per attendee - was
fields and committed to sharing their knowledge and
funded by Venture Capital SA.
experiences.
Recipients of the 2008 Scholarships - and now Graduates of
VCI attracts attendees from around the world who benefit not
the 34th VCI - are Ben Bergo, Terra Rossa Capital; Dan Hill,
only from the practical knowledge they take from the program
Paragon Private Equity and Conor McKenna, Twoeyes Venture &
but also from the relationships they form with their peers in
Advisory.
the venture capital industry.
Previous Scholarship recipients and VCI Graduates Include:
The Venture Capital Institute is sponsored by the National
33rd VCI: Melissa Brasted, Terra Rossa Capital; Remco Marcelis, Association of Small Business Investment Companies, (NASBIC).
Paragon Private Equity and Doug Adamson, Playford Capital.
NASBIC is the oldest organization of venture capitalists in the
32rd VCI: Amanda Heyworth, Playford Capital and Damian world. Formed just months after the passage of the Small
Papps, Strategon Capital. Business Investment Act of 1958; NASBIC has played a pivotal
role in promoting the growth and vitality of the industry for
31rd VCI: Geoff Thomas, Paragon Private Equity; Shane Cheek, nearly half a century.
ITEK; Alistair McEwin, Rundle Capital; Jeremy Steele, ANZ
Private Equity.



34th VCI Curriculum &
Remarks
By Conor McKenna
By Conor McKenna
Now in its 34th year, the Venture Capital Institute is an interactive
four-day educational program that incorporates detailed lectures,
forums and networking events designed to strengthen
participants‟ understanding of the entire process of risk capital
investing.

The Institute has been refined and improved each year to reflect
changes in investment strategies and cyclical industry conditions. Clare Fairfield (Centre Right), Chair of VCI, with the three
South Australian Scholarship recipients, Dan Hill (Paragon),
Utilising a practitioner-led approach, the Curriculum offers Conor McKenna (Twoeyes) and Ben Bergo (Terra Rossa).
innovative techniques for the traditional aspects of the venture
investing process, including due diligence; ethical considerations;
Business Plans, Due Diligence & Tips
pricing, structuring and negotiating deals; preparing profitable

on the CEO Interview Process
exit strategies; and understanding current tax and legal issues
affecting investments.
Eugene D. Hill, SV Life Sciences Advisors, Boston MA

Effective Communication as a Eugene stressed that time is the VC‟s most precious resource. He

Venture Capitalist explored how to prioritize and evaluate viable business plans by
developing critical screening and organizing techniques based on
Steve Vivian, Prism Capital, Chicago IL
analysis of the substantive due diligence issues: Market;
Management; Method; Money & Metrics. Eugene also examined
Held as an optional session on the eve of VCI proper, this
the major risk factors facing an investment decision: Management
workshop looked at what best practice is in preparing, writing
(esp. CEO); Technological; Market; Regulatory & Operational.
and presenting investment committee memos, LP reports and
other critical correspondence. Steve stressed the importance of
.
listening (or not talking) and body language, as well as written
Marketing - Developing Effective
and verbal communication.
Deal Flow
The Art V Science of Venture Bart Schachter, Blueprint Ventures, San Francisco CA
Investing
Deal flow is the lifeblood of a successful venture fund. Bart looked
Pitch Johnson, Asset Management, Palo Alto CA
at innovative and more traditional techniques for improving the
quality and quantity of the deals a VC would like to receive. In
Delivered by one of the industry‟s most respected pioneers, this
many respects, this session comprehensively covered the
session questioned if VCs are too reliant on spreadsheet analysis.
fundamentals of marketing and proved that marketing and brand
Pitch explored the balance between „Art‟ (utilization of judgment
development for a VC firm is no different to any other professional
& gut intuition) and „Science‟ (collecting and analyzing facts &
services business.
numbers that describe the business). He also gave an insight into
how successful VCs develop their investment philosophies
through consistent evaluation of the purpose, structure, risk,
returns and environment. He also looked at the personal style of
their funds and their relations with people.



Being an Effective VC Director -
Reviewing Techniques of Pricing &
Coach, Confidante & Killer
Valuations
Stephen Fleming, GA Tech Enterprise Innovation
Monro B. Lanier III, Hickory VC, Huntsville AL
Institute, Atlanta GA
This session was focused on how to capture the appropriate
Stephen gave an excellent overview and some very practical
compensation for the risks inherent in Venture Investing. It
advice as to the responsibilities and accountabilities of VCs
was a thorough and high quality examination of the basic
serving as directors of their portfolio companies. Topics included
formulas and new alternatives in pricing and valuation.
the policy decisions to be encountered; working with CEOs (until
you fire them!) and keeping your partners advised. He also
Monro discussed how to build pricing models, develop
examined structuring the investor‟s needs into the deal, in order
sensitivity analysis and how best to use industry comparables
to provide the foundation for a mutually rewarding directorship.
to help determine enterprise value. He considered investments
at multiple stages and how to address this in reaching a final
valuation. He also stepped through examples of
Term Sheets for Structuring &
dilution/exit/liquidity, considering the impact of Liquidity
Negotiating Deals
Preferences; Redemption Provisions and Full Ratchet Anti-

Jeffrey Leavitt, DLA Piper US LLP, Atlanta GA
dilution clauses. This was a most beneficial look at key
mechanisms used in constructing VC term-sheets.

Jeffrey demonstrated how even the best deal structure won‟t
convert a lousy investment into a successful one. However, a well
Ethics in Venture Capital - A Candid
structured VC term sheet can make a good investment better and
Discussion minimise losses. Key definitions; checklists; sample term sheets
Andrew C. Wicks, the Darden School, UVA and models for successful deal negotiations were examined.

During this thought-provoking session, Andrew challenged the
Changing the Management & Board
audiences‟ thinking about ethics in venture capital investing.
in Troubled Times
We explored a couple of case studies and „what if „scenarios,
Lew Jaffe, Jaffe & Associates, Marblehead MA
which were followed by quite heated debate. It was surprising
how many delegates did not fully grasp their Fiduciary Duty as
What should a management team be doing during an actual turn-
a Director. Most were solely focused on winning the deal. This
around? A highly experience „Gun for Hire‟ and turnaround
was a really worthwhile session and exposed how important a
specialist, Lew offered a hard-nosed perspective from inside the
thorough understanding of Directors‟ Duties is to be an
bowels of a venture.
effective investor.

An Entrepreneur‟s View of the Specialized Networking for
Venture Capital Industry International Students
Patrick Hamner, Servant Capital Partners & Heelys Chris Davis, McCarter & English, LLP, New York NY

An entrepreneur‟s perspective regarding deal structure, the Chris led an informal discussion about the “good, bad and the ugly”
negotiating process and the value VCs bring - or don‟t bring - to of dealing with US VCs. The session provided a unique policy
the company. Qualified to speak from both sides of the discussion about building and structuring a venture capital industry.
investment equation, Patrick made candid and compelling Chris also discussed the role of US VC lawyers in detail.
comments about the VC/Entrepreneur relationship.



Early Stage Venture Investments Buyouts, Mergers & Acquisitions
Rob Palumbo, Accel-KKR, Atlanta GA
Karen Kerr, Agile Equities, New York NY

Rob explored how buyouts are unique to other private equity
Karen provided an interesting discussion that explored the „5
investments. He discussed what types of opportunities were
Myths of Venture Capital‟. She also gave tips on how to find good
better suited for buyouts and investigated how to position an
deals, conduct meaningful due diligence and monitor investments
investee company for a profitable acquisition.
in a way that is helpful to the management venture-backed
teams. Valuations, second rounds and the effect on the VC fund‟s
ability to raise another fund were also relevant discussion topics.

Selecting A Venture Management
Pricing, Structuring & Negotiating: A Team – A Limited Partner‟s View
Case Study Analysis 4 Person Panel Discussion
Sean Foote, Labrador Ventures, Palo Alto CA The panel explored the partnership offerings received by Limited
Partners versus the investments completed. What are the
evaluation criteria of the proposed fund and its management
Divided into teams of venture capitalists and entrepreneurs,
team? Is there standardization in the fund review process? What
participants had to determine the present and future value of a
are IRR expectations for alternative investing? The panel
fictitious company. The teams then structured and prepared the
provided US VC Fund Managers with a check list of the „do‟s and
terms for the proposed investment and negotiated a deal.
don‟ts‟ in finding and working with their Limited Partners.
Conducted before, during and after the evening meal, this
workshop-cum-lecture session offered an intensive hands-on
Developing Global Venture
case study opportunity. It proved to be an interesting exercise on
Partnerships
both sides of the negotiating table.

3 Person Panel Discussion
The following morning, Sean reported on the various deal
negotiation outcomes. This was another dynamic and interactive International funds see the U.S. as a key investment target with
session where we reviewed and debated the structure and terms of solid IPO opportunities and a proven marketplace. U.S. fund
the deals made the night before. We also debated and analyzed managers are seeing remarkable opportunities overseas.
why the negotiations proved successful or not.

The panel discussed how bridge cultural differences, implement
common analysis and control systems and find the right partners
ZEN & the Art of Venture Exits to build successful global ventures.

Art Marks, Valhalla Partners, Vienna VA
The author was invited to join the panel as the representative of
the international venture capital community.
Art Marks led a most informative session on the due diligence of
exiting an investment. He explored how to build the exit tactics
I shared a view from a regional economy seeking access to the US
into the VC term sheet and how to prepare the company and it‟s
market. Using Australia as the example, I stressed the importance
„State of Mind‟ for the actual exit – especially an IPO. He also
of developing relationships with our US VC colleagues to ensure
explored other options including recaps, mergers and sale back
that our products can access the greater US market, to mutual
to management.
benefit.



Golden Nuggets
On the Art & Science of VC
By Conor McKenna
There is both „Art & Science‟ in every step in the Venture
Some of the „golden nuggets‟ I took away from my experience Capital Process.
in Atlanta, Georgia when I attended the 34 Venture Capital
Institute in September 2008 include: The Science is in:
a) The collection of facts.
1. It takes 20 years to build a reputation and five minutes to b) The analysis of those facts.
ruin it. If you think about that, you‟ll do things differently. c) Developing & analyzing numbers that describe
the business.
2. Remind yourself every morning: nothing I say this day will
teach me anything. So if I‟m going to learn about the The Art is in:
entrepreneur‟s business, I must do it by listening. a) What facts to collect.
b) What numerical analysis to make.
3. You can observe a lot by just watching. Good listening is c) What the facts and analysis mean.
the most needed skill of a venture capitalist. d) Dealing with people.
e) The utilization of judgment & intuition.
4. Winning deals is a competitive effort. You need to clearly f) Carrying out all actions with honesty and personal
and convincingly show sellers dealing and partnering with integrity.
your firm that it is good for them. This requires hearing
what they want and need. Understand that much Art involves making decisions about
people and working with them. Do not fail to make
5. When it comes to venture investing, the only successful
calculations and analysis based on numbers. Cultivate your
substitute for brains is silence.
judgment about the meaning of the numbers. Listen to your
gut. And base all your actions on a high degree of personal
6. When dealing with entrepreneurs and other investors,
integrity.
remember you are not dealing with creatures of logic, but
creatures of emotion.
There are 10 key steps in the Venture Capital Process:
1. Determining the purpose of the VC Fund.
7. Never write when you can talk. Never talk when you can
2. Clarifying the internal decision making process.
nod. And never put anything in email.
3. Getting quality deal flow.
4. Meeting with entrepreneurs.
8. It‟s difficult to be a jerk to people who treat you with
5. Analyzing Business Plans.
respect; to people you like.
6. Determining pathways to liquidity.
7. Making valuations.
9. Have a Goal and make it clear. However, when negotiating
8. Making & closing deals.
a deal, the goal isn‟t to win every point. Listen more than
9. Following & advising companies.
you talk. Seek a fair outcome that still allows you to serve
10. Orchestrating significant future liquidity events.
your fiduciary. Figure out what you think is really
important before you begin. But don‟t start there. Start in
Top Ten Lies of Venture Capitalists
places you agree and places where you can concede. Use
your partnership but try not to get ahead of it. Remember
that negotiations have very long memories.
1. “We can make a quick decision.”
2. “I liked your company, but my partners didn't.”
10. Consider making your enemies your friends. Try not to
3. “If you get a lead, we will follow.”
take business personally but don‟t be pushed around by
4. “Show us some traction, and we'll invest.”
people impugning your integrity.
5. “We have lots of dry powder.”
6. “We're investing in your team.”
7. “I have lots of bandwidth to dedicate to your company.”
8. “This is a vanilla term sheet.”
9. “We can open up doors for you at our client companies.”
10. “We like early-stage investing.”



On Valuations
Top Ten Lies of Entrepreneurs
1. What is the market – for investing now and for exiting the
1. “Our projections are conservative.”
investment in the future?
2. “Gartner says our market will be $50B by 2009.”
3. “Boeing will sign our contract next week.”
2. What might the company be worth to new investors (Return
4. “Key hires will join us when we get funded.”
on Investment & Cash Return, both adjusted for risk)?
5. “No one else is doing what we do.”
6. “Several firms are doing due diligence.”
3. What is the company worth to management and existing
7. “Google is too slow to be a threat.”
investors (pre and post investment)?
8. “Beta sites will pay to test our software.”
9. “Patents make our business defensible.”
4. Is the valuation fair? Does it work? Are there adequate
10. “All we have to do is get 1% of the market.”
management options? Is everyone still motivated?

5. What is the Supply & Demand for deals & money like at
Tidbits
present?

6. How good is management‟s experience, pedigree & Pricing and valuation techniques used in VC Term-sheets
providence? are designed to capture appropriate compensation for risks
inherent in venture investing.
7. How loud is the „Buzz‟ factor currently around the deal?
Spreadsheets are less useful at start up and early stages,
8. If existing investors are participating in the round, other than as a sanity check.
valuation doesn‟t change their % ownership if pro rata.
Do not confuse precision with accuracy (beware
9. If no pro rata, the VC‟s incentive is for higher valuation. spreadsheets with many decimal places).

10. If fundraising, VC may want a very high valuation often There is no precisely correct method of valuation, so make
regardless of other economics. sure to estimate from several perspectives.

11. Never forget the Fiduciary Duty that all Directors must Analyze range of returns based on reasonable outcomes.
focus on all shareholders and act in the best interests of
the company. Remember that the more dollars invested requires more
dollars returned at exit.
12. Fair market value is established by a willing buyer & a
willing seller – without compulsion to buy or sell and The market sets the price – but the market can be fickle.
armed with reasonable knowledge of relevant facts.
Valuation should never be the only consideration.

Anecdotal Evidence Suggests
Key VC Calculations
Valuation matters more than it seems to.

Pre money = Post money – New $$
Post money = New $$ / % Acquired
When it comes to valuations:

The Math:
$3.0M buys 30% ownership
Inexperienced VC‟s (and entrepreneurs) over-price as they
Post money = $3.0 / 30%
underestimate risks and the need for capital going forward. Post money = $10.0
Pre money = $10.0 – $3.0
Early stage VC‟s under-price later stage deals, using an
Pre money = $7.0
overly high discount rate.
Later stage VCs over-price early-stage deals.



“We cater to two constituencies: the
On VC Directorships founders and management of private
companies who have selected us as
There is a very definite hierarchy of who a VC Director has a their venture capital partners and the
responsibility to: limited partners who have trusted us
with their money. We want to do well by
1. All Shareholders - „Fiduciary Responsibility‟. both but founders and management
2. Then, the VC‟s class(es) of shareholder. come first. We have learned that the
3. Then the VC‟s Limited Partners. only way to develop a fabulous company
4. Then the VC Partnership. is one step at a time. This only happens
5. Then the VC themselves. if the company makes wonderful
products or delivers a service that thrills
If there is ever an occasion for conflict between two sets of large numbers of customers. If that
responsibilities, the higher one always wins. occurs, the founders, management and
employees of these companies prosper.
Remember that, as a VC Director, you are not the CEO! If you It is only then that the investor deserves
want to run a company, go get one funded. Until then, you are to be rewarded. It has to happen in that
there to advise and encourage - NOT to run the show. order. There are no shortcuts”.

The key asset a VC Director can bring is their perspective from
Sequoia Capital
experience. It makes sense that a VC Director should therefore
have appropriate experience.

“VC‟s invest in people they like and don‟t invest in people they
don‟t like. It‟s easy to become friends with the CEO. That‟s fine
On Management
but, sometimes the CEO has to go. This is very common in
early-stage investments. When a company grows quickly, the
required skill-set changes dramatically. When the need arises Manage the 7 C‟s:
– and it does – you must be able to shoot your own dog”
Cash.

“In an ideal world, all investors would have identical objectives: Customers.

obscene capital gains for their stock”. Culture/co-workers.

Change.

In the real world, where people are involved, other factors Clock.

intrude: Co-operation.

Series of Preferred stock owned by each firm. Communication.

Size of VC fund.
Age of VC fund entity owning stock (are they still The 5 attributes of a successful Enterprise or Turnaround:
investing from the fund or are they ready for
harvest?). 1. An executable plan.
Other investments taking priority. 2. Sufficient liquidity to fund the plan.
Over-lapping board memberships. 3. Management (and a supportive BOD) that are:
Time commitments. a. Focused on execution.
b. Dedicated to doing whatever it takes to
Selling a new series of Preferred at a price lower than the last succeed.
round will dramatically dilute the stake of earlier investors, c. Good communicators (listeners, not just
managers and founders. A „Down Round‟ is especially painful talkers).
for earlier investors who cannot participate („pay to play‟) in
4. A product that the market place needs &/or wants.
the new round (ie end of life of their fund, other deals have
5. Supportive outside community:
drained their capital, mortgaged to the hilt).
a. Customers willing to buy.
Keep focused on what is right for the company – not for your b. Vendors willing to sell.
class of stock.



On Management Turnarounds On what Entrepreneurs should care about
Have a clearly defined goal from the beginning. 1. VC‟s ability to help company grow:
Because the company has always done it a certain way, - Experience with start ups, early stage, contacts,
doesn‟t make it right. “Sacred cows make the best customer assistance.
hamburgers”. 2. VC‟s industry operating experience can be a negative.
Determine viability of current strategies: do they support 3. VC‟s reputation for trust, honesty and good
the end game (over the short, medium or long term). treatment of entrepreneurs.
Maximize your market opportunities. 4. VC‟s ability to give company sufficient attention:
Beware of becoming a „one trick pony‟. Identify profitable - Location, fund size, fund life cycle
core competencies & diversify within them. - Internal dynamics: desperate for exit? Succession
It‟s the customers‟ job to be enamored with the issues? Distracted by fundraising?
technology - not the company‟s. 5. VC‟s ability to facilitate an exit – Generate Returns
Talk to customers and find out what they need and will - Most VC returns come from a handful of funds.
pay for.
Senior management should manage – delegate and
The 5 Myths of Venture Capital
leverage all your team.
Key personnel retention – incentives for success.
Communication plans/shared vision – repair corporate Myth 1: VC is an easy way to get rich quickly.
culture & morale; rebuild customer trust & stakeholder
support. Reality: It‟s a slow road to wealth accumulation:
Break down walls between departments to allow smooth
- 2+ years to raise the fund.
and efficient transfer of customer (and other) information. - 3-4 years to invest the fund.
Analyze the industry & the company‟s competitive
- 5-10 years to harvest the fund.
position. - Significant risk of claw backs.
Use competitive benchmarking (internal & external).
Always look for efficient methods to dispose of non-
Myth 2: Efficiency is achievable.
essential assets.
If an asset is not making money, turn it into cash. Reality: Venture is inherently inefficient.
All resources must be leveraged - cash, team, external - VC couldn‟t make high returns if it weren‟t.
relationships (with customers, vendors and stakeholders - - Back to fist myth > VC isn‟t easy!
both debt & equity).
Take calculated risks: determine payback, what resources
need to be employed (what are the trade-offs?). Myth 3: VCs are all geniuses.
Make the hard employee decisions swiftly.
Reality: NOT!!
Always have a back door: things change so be prepared to
- Technical knowledge is not as important as
execute alternate plans.
interpersonal skills.
Stay focused on the goal.
- Once successful, VC‟s personality flaws tend to
be interpreted as genius.

Myth 4: Hyper-specialization is required.

On Networking Reality: Hyper-specialization produces blind spots to new
innovations that are the big investment winners.
VC‟s must focus on developing proprietary deal-flow
 - Connecting is more important - and profitable -
by building, nurturing and leveraging their networks. than dissecting.
read the book, „Innovators Dilemma‟.
-
Leverage your networks to understand the

opportunity and to understand the risks. Myth 5: Too few good ideas.

Reality: Innovation hasn‟t slowed down:
- Translating innovation into $$$ is the job of VC.



On Due Diligence
On Adding Value
 Focus on the People: Management, directors, advisors,
1. Recruit professional management ASAP:
existing shareholders. Do you want to marry these guys?
- “B Technology and A Management team
always make money” (Old VC adage).
 Focus on the Market: Does the product/service solve a
2. Team building includes the Board of Directors:
„bleeding neck‟ problem? Who is the customer and how can
- Fewer VCs and more industry pros.
they be helped to increase revenues, reduce costs. Who are
- Other value added investors both VC &
the Competitors?
Corporate.
3. Become Unofficial VP of Business
 Focus on the Assets: What is the innovation? Can it be
Development/Sales:
protected? What are the competing solutions?
- Leverage networks for sales/strategic
relationships.
 “Buy assets and sell revenues”.
- Keep eye out for technology or business
combinations.
 Focus on the Exit: Who is the ultimate buyer?

On Managing the Fund
On Structuring
1. Remember to maximize the value of the portfolio:
 Structure depends on diligence.
- Identify the risks and develop mitigation
strategies.
 Use structure to win deals and manage risk.
- Don‟t throw good money after bad.
 Wash out risk by tranching the deal and by having a - Put more money into your best deals.
financing syndicate.
2. Cash-on-Cash is more important than Internal Rate of
Return. This is even more the case for early stage
 “Your price, my structure”.
investors.
- Keep it simple if possible.
- Be fair, but don‟t over pay. 3. Communication with Limited Partner is critical in advance
- “Buy low & sell high”. of fund raising - even if they are not an LP yet.
4. Build a good team and share the rewards.
Risk Mitigating Tool
5. Build lasting companies with good teams at all levels –
Technology Tranche
management, board and partnerships.
Market Tranche, anti-dilution, liquidation
6. The venture business is scored on returns. Returns come
preference
from exits. No exits and nothing else matters.
Management Board seat(s), protective provisions
Finance Syndication, participation/co-sale rights, 7. Have a defined exit strategy.
anti-dilution, protective provisions,
8. Don‟t rely on IPO market.
liquidation preference, voting rights
9. It‟s the portfolio, stupid!
10. Network. Network. Network.
On Managing the Investment

1. Starts before the close:
There are 3 Moments of Truth in the
- Identify risks during due diligence and develop
Venture Business………
risk mitigation strategies.
2. Build the right syndicate.
1. The price at which you buy.
3. Leverage your network to add value.
2. The price at which you sell.
4. Communicate, communicate, communicate:
3. The price at which you distribute.
- During board meetings, but especially between
board meetings.
- Avoid surprises. Surprises erode trust.
5. Most importantly, build a great board!



Linking SA VC Globally The world-class learning and international connections they
have brought home could well turn out to be a key bridge to the
By Conor McKenna future of venture in South Australia.
Having experienced networking at an international level at the
At a personal level, VCI 2008 provided me with a unique
34th VCI, my hardened view is that international exposure is a key
opportunity to share experiences and network with private
ingredient to the ongoing success of South Australia‟s private
equity professionals from around the world – about 150 of
equity and venture capital community.
them from 12 countries from 4 continents.
While up-skilling is a requirement of most professions, for our
Ranging in age groups from very recent college graduates to
nascent local industry the opportunity to gain experience and
university types in their late fifties, the average Private Equity &
exposure on a global scale is invaluable.
Venture Capital industry experience was a modest 2.6 years.

Private equity and venture capital investment is not contained to
Representing US$41B in capital under management, the
state or even national boundaries. It‟s therefore important that
majority came from VC Corporates (30%) and VC Partnerships
our resident practitioners remain at the forefront of industry
(21%). There were a goodly amount of Government officials –
developments and mix with their international peers.
especially from developing VC communities, such as Canada,
South Africa, Brazil, Nicaragua, China, India & Japan.
Despite turbulent times, there is a growing supply of money as
well as a growing cohort of experienced investment professionals
Most were armed with a blackberry, an Ivy League MBA, a set of
and other essential service providers now resident in Adelaide.
sharp cuff-links and a pair of even sharper elbows. At the
onset, most egos seemed to be on stilts and steroids.
Importantly, there is a healthy multi-sector deal-flow delivering
better prepared investment opportunities. These ventures are
As the days progressed, we underwent structured networking:
increasingly led by savvy entrepreneurs and are supported by
each dining experience was designed to match you with those
more astute „Business Angel‟ investors and board members.
on your table, be it by industry type, investment stage or
geography. People soon relaxed out of their „VC persona‟.
Since the establishment of Playford Capital in 2001, the private
equity and venture capital sector in South Australia has started to
A key element of the formalized networking was on the first
build size and momentum. Key milestones have included the
night when we partook in „Speed Networking‟. Debuting at VCI
launch of Paragon Equity in 2002, AVCAL‟s foundation in
2008, this event required pre-registration using special on-line
Adelaide in 2003, the establishment of the Venture Capital Board,
networking software. This was designed to match the individual
ANZ Private Equity and Rundle Partners in 2004, and the launch
with 10 others who fitted the preferred industry profile. You
of Terra Rossa Capital in 2006.
then met at numbered/coloured tables for 6 minutes and then
moved on to your next „date‟.
However, to maintain momentum, it is paramount we continue to
up-skill our venture community and seek international
By day 2, we had all started to relax, most realizing they didn‟t
experience wherever possible.
know as much as they thought they knew. Personally, I was
were pleasantly surprised that, even though I came from a
To ensure equitable deal-making and worthwhile outcomes for all
little-known place „somewhere near Sydney‟, I felt I could stack
stakeholders, greater professionalism through world-class
up with the cohort in terms of knowledge and experiences.
education & training is required on both sides of the equation –
entrepreneurs and venture investors alike.
By day, 3 we were provided with the invaluable „VCI Facebook‟,
a printed and bound Participant Directory, complete with photos
Educational programs like the Venture Capital Institute (VCI)
(taken day 1) and contact details.
provide participants from all corners of the globe with the
opportunity to create international networks they can draw on
On the last day we established an on-line community on
throughout their careers and learn from some of the world‟s
LinkedIn.com Groups: VCI 2008. This is a powerful & instant
leading practitioners.
international network that can be shared and accessed for many
years going forward.
VCI is globally recognised as the Private Equity & Venture Capital
industry‟s premier educational program and has nearly 5000
Suddenly, Adelaide is part of an international Venture Capital
graduates from around the world. Thanks to the vision and
network. It‟s nice to think that there‟s no one on the list from
commitment of the Venture Capital Board, 12 industry
the venture community in Sydney or Melbourne.
practitioners from SA have already attended VCI over the last 4
years.



Bridging SA‟s Valley of Death
By Conor McKenna

Contrary to what many might think, few Angel investors come
The term “venture capital” has been defined in many ways but
from the more traditional and conservative „family money‟.
generally refers to relatively high-risk, early-stage equity
financing of young and emerging high growth companies.
Whereas professional VCs tend to come from a strong finance
or consulting background, the characteristics of the Angel
There are two primary sources of external equity capital for
investor appear to be that of a well-educated, middle-aged,
entrepreneurs: one is visible and highly formalized and the other
„cashed-up‟ or „cashed-out‟ entrepreneur or senior corporate
is largely invisible and very informal.
executive.

The „visible‟ venture capital market is composed of formal
The best private investors tend to have considerable operating
venture capital funds. These funds are managed by highly trained
experience, having successfully founded and/or grown one or
finance professionals who invest capital in growth companies on
more businesses.
behalf of a group of passive investors (usually Superannuation
Funds).
Invariably, they possess a deep, influential and highly valuable
local & international network of business, government and
In Australia, the formal Private Equity community is professionally
financial contacts.
represented by AVCAL, the Australian Venture Capital & Private
Equity Association Limited. (www.avcal.com.au).
Most of all, they seem to really enjoy the challenge of backing
the next generation of entrepreneurs, rolling up their sleeves
Most small to medium-size businesses looking for venture
and actively working alongside the foundation team when the
funding probably aren't going to find big East Coast VC firms
going gets tough.
interested in what they're doing.

While most entrepreneurs just want money, there is a great
As a result, there is a big gap between start-up and early-stage
difference between „smart capital‟ and „dumb money‟. Unlike
funds (grants, personal resources, sweat equity, boot-strapping,
the dollars you can convince Aunty Mavis to part with, Angels
family and friends) and venture capital.
can position a young company for growth and help it survive in
tough times.
This capital gap is also known as the “Valley of Death”, because it
is littered with the broken bones and business plans of thousands
They do this through the „value add‟ they bring to the venture,
of entrepreneurs who have been unsuccessful in finding venture
over and above the dollars they invest: professional guidance
backing to fund their growth.
and mentoring; introductions to strategic partners & industry
experts; helping attract and recruit experienced managers to fill
That's where the „invisible‟ venture capital market becomes
key roles; and importantly, attracting „follow-on‟ investors to
critical. The invisible market is a highly elusive source of
provide the next round of funding.
financing for entrepreneurial ventures. In Australia, it is still very
unstructured and largely informal, comprising a diverse and
„Informal‟ Angel investors and „formal‟ venture capital funds
geographically dispersed set of high net worth individuals.
play complementary rather than competing roles in the
financing of new ventures. This complementary relationship has
These private investors, typically known as „Business Angels‟, are
two dimensions – stage and size.
interested in investing a portion of their personal wealth in high-
risk, high-return early stage entrepreneurial ventures, usually in
Compared to venture capital funds, Angel investors exhibit a
exchange for equity in the company or a share of future profits.
significantly higher propensity to invest at the seed, start-up
and early-stage.
This class of investor typically gets involved in a venture long
before larger, more formal rounds of venture capital.
Angel investors also tend to have longer exit horizons and less
risk aversion than venture capital funds.
Because they afford fledgling businesses the time and money they
need to survive the start up phase and grow, Angel investors are
In terms of size of investment, venture capital funds tend to
often the backbone to building successful high growth
invest substantially more dollars per round of funding than do
entrepreneurial ventures.
private individuals.



South Australia‟s entrepreneurial ventures currently attract less
In recent years, VC funds have grown so large that they simply
than about 5% of all funds invested by the formal venture
cannot invest amounts less than a few million dollars.
capital community.
In the main, an Australian VC‟s “sweet spot” is an investment of
The challenge facing our emerging venture community is to
between $3M and $10M. Consequently, they tend to shy away
ensure that the largely latent - yet very deep - pool of
from seed and early stage investments, which are the ones Angels
indigenous capital gets motivated to actively consider private
prefer.
equity investing as an alternative asset class to traditional
investments, such as property and shares.
Funding boundaries vary, but Angel investments typically ranges
from $50,000 to $3.0 million, largely dependent on whether the
SA cannot depend on traditional industries for its future
investment is made by a single Angel or a syndicate of private
economic development. We need to birth a base of new
investors.
companies that have access to the wealth and experience of a
well-organised and accessible local Angel investing community.
Other than those differences, the successful Angel Investors are
thinking more and more like venture capital investors. Like VCs,
Entrepreneurs and Angels can then work collaboratively with
Angel investors today want more than ever to see that the
government and private sector service providers to develop risk
entrepreneur has a significant personal stake in the company
reduced, „capital ready‟ ventures, some of which will potentially
before they'll invest.
prove attractive to the East Coast Venture Capital community.
The telltale sign is the amount of sweat equity - the money,
To beat the „Valley of Death‟ in South Australia, the local
hours and effort – the entrepreneurs have personally committed
business community, government, universities and research
to developing the start up business. If there's no blood, sweat
centres need to work together to create an environment where
and tears on the ground and „skin in the game‟, more than likely,
technology innovation, entrepreneurship and venture investing
they won‟t be interested in taking negotiations to the next stage.
can flourish.
In many cases, Angel investors are the only way a start up venture
can bridge the „Valley of Death‟ and grow large enough to attract
the interest of the venture capitalists.

Angel investment is oftentimes essential to „harden‟ the business
case for the early stage venture, allowing it to secure its
Intellectual Property, bed down the operating management team,
build the board of directors, attract strategic partners, complete
product development, win first customers and ramp up revenue
growth.

Once this has been achieved, the „capital ready‟ venture has a
better – but certainly not guaranteed - chance of attracting
formal venture investors who can provide the next round of
follow-on expansion funding to unlock its growth potential.

Another and exceptionally important similarity between VCs and
Business Angels is that, given a choice, both groups prefer that
their investments be located close to home.

The vast majority of Australian Venture Capital funds are located
in the VC Hot Spots of Sydney and Melbourne. As a result, the
„indigenous capital‟ provided by local high net worth individuals
is essential to fund the growth of entrepreneurial ventures in
„regional economies‟ like South Australia, that have limited direct
access to formal Venture Capital funds.



From Little Things However, it‟s not the word “small” that matters, but the attitude
behind it, the mindset that utters it. In a global market, if you
By Conor McKenna think small, you are. If you don't, you're not. All the rest is just
Member, Business Development Council commentary.
Chair, Innovation & Entrepreneurship Sub-Committee
South Australia doesn‟t need big, mature businesses to be
globally competitive. What we need are more export-focused,
Having spent 5 days with about 150 VCs from 12 countries and 4
high-growth ventures where technology and innovation are the
continents, it is interesting to reflect upon the business landscape
coin and currency of the future.
of South Australia in 2008:

If we can set this as our clear objective, our business community
The small business sector of South Australia comprises
– public and private – could focus on being brilliant at the basics.
80,000 businesses that employ less than 20 staff.
We could focus on ensuring locally-born intellectual capital is
These businesses make up 95.8% of all businesses.
converted into sustainable, world-class ventures, to the ultimate
Small businesses employ more than half of the workforce -
benefit of our State.
about 235,000 workers.
Over 83% of employ less than 4 people.
The vast majority of these businesses employ no staff at all. If we do this repeatedly and professionally, size will come with
Only 13,000 businesses employ between 5 and 20 staff. age. “From little things, big things grow”.
Only 4,000 businesses could be classed as 'Big' - meaning
they employ over 20 full-time staff. In short, we need to change the way we think and approach the
problem. If we want to achieve better than our current results, we
Some might think these figures paint a pretty bleak picture for need to change our strategy.
South Australia‟s future. The good news, however, is 1 in 4 small
businesses exports overseas and the majority employ between 5 With this in mind, the South Australia‟s Business Development
and 20 people. Council has recently created 4 work groups to focus on 4 key
issues facing the South Australian small business sector.
That makes about 20,000 vibrant businesses that each possess a
global outlook. One of these groups is the Sub-committee for Fostering
Innovation & Entrepreneurship.
These businesses are the beating heart of South Australia. They
represent the current wave of enterprises bringing the best of The group brings together four members of the Business
South Australia to global markets. Development Council. Members are business owners and they
represent the private sector. Joining the members are key people
Today, it‟s the commercialization of market-driven intellectual from across relevant Government departments -including the SA
capital that drives competitive advantage. Wealth is created by Centre for Innovation; Venture Capital SA; Department of Trade &
turning innovation into new technologies and capabilities that can Economic Development; the Office of Small Business and The
lead to globally competitive products and services. Science and Innovation Directorate.

From the perspective of many of the entrepreneurs driving these The focus of the Innovation & Entrepreneurship Group is to
ventures - and the investors backing some of them - they are Sustainably create the operating
explore ways to:
definitely not „small businesses‟. They just haven‟t reached their environment in South Australia where technology,
growth potential yet.
innovation, entrepreneurship, business ownership and
venture investing can build deep roots and flourish.
Many are owners of businesses that are in the early or adolescent
stages of their development. A great deal of them would share a
The Innovation & Entrepreneurship Sub-committee will also
boundless entrepreneurial mindset, a truly global vision and
provide specific feedback to the Business Development Council
unrestricted export aspirations.
on ways in which the Government and the business sector can
work together to capitalise on opportunities and create a dynamic
For many of them, “small” is restrictive and not in their
economy that is competitive, resilient, diverse and innovative.
vocabulary. Instead, they like “big” words - Innovation;
Technology; Intellectual Property; Commercialization; Venture
To the birth of the initiative, I say “Vive Le Venturepreneur” –
Funding; Exports; Global Markets.
because they are the ones who see the future first. Our future.



About Conor McKenna Areas of Specialization
BA(Lit) GDBusAdmin MBA(Adv) MAICD
Commercial viability assessment

Founder and Managing Director of Twoeyes, Conor McKenna is a Technology validation

venture developer, strategic advisor, agent of change, 'interim CEO', Strategic due diligence

business owner, company director and equity investor. Investment opportunity recommendation

Deal structuring & negotiation

During his 20 year career, he has lived and worked in Ireland, Strategic plan development & documentation

England, Canada, Italy and Australia. Marketing & operations plan development & execution

„Key hire' recruitment & strategic board building

His experience spans many industries, including manufacturing, Intellectual property protection

distribution, retail, professional services, IT, internet, multimedia, Technology commercialisation

glass and plastic packaging, wine marketing, water desalination, Systems & process development & documentation

venture capital, medical and allied health services, corporate Quality systems accreditation

training and event management. Integrated on-line/off-line marketing strategy development

Brand design & development

Within these industries, Conor has worked with start-ups, spin- Joint venture marketing

outs, family businesses, small-to-medium enterprises, large Strategic network building & business matching

corporates, not-for-profit organisations and State and Local Sales management

Government agencies. Operations management

Grant application & tender writing

He has broad operating experience - from the first employee in a Private equity capital raising

start-up to a management role with the Australian subsidiary of a Exit strategy formulation

Fortune 500 American multi-national, where he was responsible for Strategic trade sale strategy development

a $50M budget and reported on 1B units in „Just in Time‟ supply. Due diligence preparation


Credentials
He has been a strategic business consultant, government
ministerial advisor and non-executive director of a number of
Graduate
private companies and not-for-profit organisations.
34th Venture Capital Institute, Atlanta GA, USA
Member
An award-winning venture developer, strategic network-builder
Australian Institute of Company Directors
and repeat entrepreneur, Conor is also the inventor of a patented
Master of Business Administration (Advanced)
technology that forms the basis of a successful global product
Adelaide University School of Business
innovation.
Graduate, Foundation Course in Venture Capital
Australian Venture Capital & Private Equity Association Ltd
The company he subsequently founded has since commercialised
Executive Diploma in Business Planning
the technology and raised significant equity investment and grant
South Australian Enterprise Workshop
funding. It has secured strategic partners in all its major global
Graduate Diploma Business Administration
markets and has developed manufacturing capacity on 3
University of South Australia
continents.
Bachelor of Arts (Italian & English Literature)
University College Galway, Ireland
Conor is currently retained as a strategic advisor to a number of
growth-oriented ventures. He is also an active member on a

Contact
number of private sector boards where he specializes in strategic
operations management consulting.

Conor is a Member of the Business Development Council of South
Australia. He is also Chairman of the Business Development
Council‟s Sub-Committee for Innovation and Entrepreneurship.

Going forward, Conor remains a market-driven strategic thinker
with an entrepreneurial ability to identify and unlock commercial
potential, execute to plan, leverage strategic connections, effect
change and deliver results that reduce risk and create value,
particularly in the eyes of the next round of investor.

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