VC Due Diligence Basics
October 15, 2002
Craig Gomulka
Draper Triangle Ventures
craig@dtvc.com
Today’s Talk
• Who is Draper Triangle
• Our Investment Profile
• Our Investment Timeline
• Three Stages of Diligence
• Case Study: Hypernex
• Questions
Who is Draper Triangle?
• Located in Pittsburgh, Pennsylvania
• PA-based fund of Draper Fisher Jurvetson
• First-round, early stage, lead investor
• High-tech fund - Education, MEMS, Data,
Semiconductor, Advanced Software,
Medical Devices, Optical, Automation
The DFJ Network
Timberline Venture Partners
Vancouver, WA
Access Venture Partners
Westminister, CO
Austin, TX
Draper Fisher
Jurvetson
Redwood City, CA
DFJ Portage
Chicago, IL
DFJ New England
Cambridge, MA
Draper Fisher
Jurvetson Gotham
New York, NY
Draper Triangle
Ventures
Pittsburgh, PA
Zone Ventures
Los Angeles, CA
Wasatch Venture Fund
Salt Lake City, UT
Draper Atlantic
Reston, VA
The Expanded Network
Late
E-Planet
Stage
Mid
DFJ Fund
and MeVC
Early
Draper
International
Affiliates
Seed
National
International
Draper Triangle Portfolio
Investment Profile - We need to see…
• Focus - Solve a specific problem or meet a
specific need very well in a defined niche.
• Billion dollar markets
• Sustainable competitive advantage
• Well rehearsed presentations
• Realistic valuation expectations
• Strong exit strategy
• That you’ve done your homework on the private
equity community, tell the VC what synergies
exist between you and them.
Investment Profile - We need to see…
• Solid Management Team
– Should have domain experience
– Smart, driven people
– Credible references help
“We buy dreams, not resumes. Draper looks for
people who talk about changing the world, not
building a business. When you ask them where it
will be in ten years, they have an answer.”
Steve Jurvetson – Partner, Draper Fisher Jurvetson
Investment Profile - We don’t like to see
• Citing ghost products as competitive
advantages
• Quoting your markets too far out
• Raising too much money
• Teams looking only for $$$
• CEO and team members who don’t know
their limitations
• Poor market due diligence
The Funding Timeline
1. Review business plan
2. Bring in management team to present
3. Evaluation of opportunity
4. Internal partners meeting
1 to 4
Months
5. Term sheet
6. In-depth due diligence
7. Legal documentation
8. Funding
Initial level of due diligence
• Level I (after the plan and initial go/no-go)
– Meet the team
• Prior entrepreneurial experience
• Experience in the market place
• Would we enjoy working with the team?
– High level understanding of
• Product, Market size and Exit Potential
• Competition and Differentiation
• Marketing, Sales, Competitive strategy
– Go or no-go decision
Secondary level of due diligence
• Level II (gets more interesting now)
– Market research, competitive analysis
– Marketing and sales plan validation
– Financial validation (numbers make sense?)
– Potential/existing customer/partner calls
– Independent industry insider/expert calls
– IP review, existing patent scan
– Better validation of likely exit scenarios
– Have we enjoyed working with the team?
– Go or no-go decision for term sheet
Final level of due diligence
• Level III (after term sheet, the boring stuff)
– Management team background checks
– Corporate and organizational (books in order?)
– Capitalization structure, benefit plan
– Intellectual property (legal review)
– Financials (historical audit/review, tax returns)
– Existing contracts and obligations
– Properties, leases and insurance
– Reps and warranties in the term sheet
Hypernex Case Study: Introduction
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Location: State College, PA
History: Early stage, spinout from ATMI
Size: At time of investment, 6 person team
Technology: Rapid crystalline microstructure
analysis using X-ray diffraction
• Markets/fields of use: Semi, biotech, others
• Product stage: prototype completed and in
use by first prospective customer
• Fund raise: $1.75 M
Hypernex Case Study: the Product
• Is this a “must-have” or a “nice-to-have” for
semiconductor manufacturers?
• What are the hurdles to product completion?
• Who do we need to hire to get us there?
• Third party technologies/licenses?
• Key metrics IBM will use to evaluate the
usefulness of the product?
– Device yield
– Device performance
– Bottom line/ROI
Hypernex Case Study: the Team
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•
•
•
•
•
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Do they know the technology?
Do they understand the space?
Do they have contacts they can leverage?
Do we have contacts they can leverage?
Who else do they need to hire?
Team dynamics - work together well?
Are they excited about what they are
doing?
• How does their history check out/DD
calls?
Hypernex Case Study: the Market
• What are the characteristics?
– Established growth, but very cyclical
– Very large, over the $1B threshold
• Do we own the whole market or a small
part? :Different market sizes acceptable
• Who is driving the sales?
• What market pain are they addressing?
• What trends are in their favor?
Hypernex Case Study: the Competition
• Who else makes XRD for the fab?
• Who else makes XRD for the lab and
could cross over into the fab?
• How intimately is the company’s
competitive protection tied in to their IP?
• What barriers has the company created via
technical, IP or even marketing/biz dev?
• Why has no one else approached this
market?
Hypernex Case Study: the Financials
• First 12-18 months, identify each customer, should
fit precisely with the sales plan, no blind projections
• What supports the assumptions?
– Industry comps
– Management/board prior experience ** adds credibility
• What are the growth drivers of the hockey stick?
– Have you become the industry leader/only solution
– Effects of competition, large or small implications
• Bottom line – any realistic thought put into them?
There is a difference between an educated guess and
POMA
Hypernex Case Study: the Exit
• Which companies benefit from Hypernex
• Which companies are hurt by Hypernex
Both are potential buyers…
• What evidence supports acquisition vs IPO
– Historical instances
– Strategic fit
• Historical acquisition/IPO data very helpful
• VCs statistically can not do low multiple deals
Thank you!
2 Gateway Center, Suite 2050
Pittsburgh, Pa 15222
Phone:
(412) 288-9800
Fax:
(412) 288-9799
craig@dtvc.com
For more
information
and FAQ
http://www.dtvc.com