Full article can be found [[here|/static/files/MBI/Module%203/How%20Venture%20Capitalists%20Evaluate%20Potential%20Venture%20Opportunities.pdf]]

Russ Siegelman KPCB:
* How do you evaluate potential venture opportunity?
** Opportunity size
*** Need a company to have a \$100M to \$300M revenue stream in 5 years
*** Market potential \$500M
*** Need 25% market share
** Long lasting competitive edge
** Patent / IP portfolio
** Team
*** Strong technical founder
*** Sales oriented entrepreneur
* How do you evaluate the [[Business Model]]?
**For existing markets, products:
*** Better version, credible, proven solutions
** For new markets, products:
*** Can be more radical: look at risk / reward
* What due diligence do you conduct?
** Big when the offering has high technical content
** Involve potential future customers
** Industry due diligence: probe experts
** Check people and team references
* What is the process through which funding decisions are made?
** Identify 3 or 4 risks that we want to mitigate
** Stage investments (medical devices)
** Smallest investment is \$500K, typically first round is \$3M to \$5M
** Average plan takes 6 weeks from initial meeting until the investment
* What financial analysis do you perform?
** Don't focus on margin or value chain
*** ''Software should be high gross margin, the question becomes to distribute or sell''
*** ''Enterprise products need to sell a \$200000,- otherwise you cannot a afford direct sales force.''
*** Lower price products need an efficientm low cost distribution channel
** On HW side focus on BOM or selling price
***  Look at 50% GM
** Only look at the financial plan to examine credibility of the entrepreneur
* What role does risk play in your evaluation?
** Risk / Reward ratio
** They have off sites to evalue how they did
* How do you think about a potential exit route?
** They don't. They are looking for sustainable growth and high risk / high return opportunities

Sonja Hoel, Menlo Ventures
* How do you evaluate potential venture opportunity?
** She looks at market first
*** Market growth
*** Market size
*** Competition
*** Customer adoption rates
** Looks at companies that do well despite of themselves (again largely related to market)
** Prepared to take risk, specifically with new markets
** Use a process called SEMS (systematic emerging market selection)
** Is the company targetting Fortune 1000 customers?
** They track market size, the team, unique technology, whether the product is developed at the time  they invest
*** Market size and developed product matter the most
** Technology involved has to be difficult to execute
** Look at the management team (need flexibility in willingness to change the team later on)
** Look at location
* How do you evaluate the business model?
** Largely look at sales price and whether direct sales is required or not
* What due diligence do you conduct?
** Talk to potential customers: "Would they buy it or not?"
** Ask entrepreneurs they worked with on previous investments
* What is the process through which funding decisions are made?
** Process can take several months through a year
** They look to invest $20M - $30M per venture
* What financial analysis do you perform?
** Again they look more at the business realism behind the numbers 
** Once a year they analyze the deals they turned down
* What role does risk play in your evaluation?
** Reduce risk by investing in companies that are or become market leader
* How do you think about a potential exit route?
** We have to think [[IPO]] (initial product offering, a corporation's first offer to sell stock to the public) all the time


Fred Wang, Trinity Ventures
* How do you evaluate potential venture opportunity?
** No template but
*** Team
*** Market opportunity
*** Product / value proposition
*** Technology differentiation
** Carefully select a CEO that will bring it to success
*** Focus on this helped eliminate mistakes
*** A good CEO attracts other high quality people
** A critical success factor is the sector
*** They work thesis driven here, once a quarter they select interesting sub sectors and select a company
*** If they cannot find a good company in a subsector they find interesting: they'll start their own
** Rule of thumb is 100M revenue
** For IT they look at the CIO's & VP's top 2 or 3 priorities and they are willing to spend several Mln (compare SAP). A $20K application will not hit their radar
** Market size rule of thumb is harder ($1B to $2B)
** No much emphasis on  IP / Patents
** Avoid: 'wild eyed technologist; without good business partner
* How do you evaluate the business model?
** Revenue: its important to understand if it is a 20K or 200K piece of software
** ''How does the product increase value it gets from a customer'':
*** Additional modules
*** More users
*** How does this affect pricing?
*** Small set or larger set of customers?
** Not much attention for marketing initially
** Cautious with business models that need a lot of initial funding
* What due diligence do you conduct?
** Two partners that sponsor the company
** Look at the founder: can he be CEO
** Spend a lot of time on the financial model
** If there is momentum: there will be a lot of focus on the sales team.
* What is the process through which funding decisions are made?
** [[Seed investments]]
** [[Tranched investments]]
* What financial analysis do you perform?
** Financial model discusion reveal how smart a team is
** Build a bottom up projection using empirical data on comparable situation
* What role does risk play in your evaluation?
** Risks are investigate and milestones are defined
* How do you think about a potential exit route?
** The bulk of the companies get acquired
** An [[IPO]] is always the best outcome
** We have a moderately sized fund: venture outcomes have higher impact on fund size


Robert Simon, Alta Partners
* How do you evaluate potential venture opportunity?
** Two ways:
*** "I invest in people first and foremost", smart people will find opportunities
*** "I care about markets: i look for big opportunities
** Under the market: "how much pain does a customer have" and how much is he prepared to pay to solve it
** On the market site:
*** Replacement for a product, better, cheaper, faster
*** 'Brave new world' with unknown markets
** Look at 1B markets, to get there first look at 200M
** Look at the technology to see how proprietary it is (should be order of magnitude better)
** Looks at the timing of the technology (don't want to be to much ahead)
* How do you evaluate the business model?
** Gave two, for me unclear examples
* What due diligence do you conduct?
** Talking to customers or potential customers
** Don't need paying customers
** Talk to people who have worked with the team. Reference checks
* What is the process through which funding decisions are made?
** Little part of their portfolio goes to 'brave new world' companies (start seeding at $500K)
** Discriminate between good venture opportunities and good business opportunities (depending on the percentage owned by the entrepreneur)
* What financial analysis do you perform?
** Look at the revenue model and the expense model
*** First they look at the expense model, when is it running break even?
*** Again prefer bottom up revenue model over top down
* What role does risk play in your evaluation?
** Create 2 to 5 page memo containing:
** Technical risks
** Competitive risks
** Market risks
* How do you think about a potential exit route?
** Market size north of $200M and revenue 60M to 80M
** Building lasting companies that continue to grow is a more reliable way to make money then to gamble on just in time exit scenarios
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Fri, 05 Nov 2010 10:43:17 GMT
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