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1. The document discusses various questions regarding Accel Partners' potential expansion into the European venture capital market in 2001. It examines the differences between the US and European VC environments, the advantages and disadvantages of a partnership versus own branch, and Accel's proposed approach.
2. It then provides an overview of changes in the VC sector from the 1980s to 2000s, including periods of growth and decline. There is discussion of the differences between private equity and venture capital.
3. The document finishes with potential questions for valuation of a company called Cape Clear that Accel is considering investing in, including reasons why another top-tier VC like Greylock may also want to invest and what terms should be offered in
1. The document discusses various questions regarding Accel Partners' potential expansion into the European venture capital market in 2001. It examines the differences between the US and European VC environments, the advantages and disadvantages of a partnership versus own branch, and Accel's proposed approach.
2. It then provides an overview of changes in the VC sector from the 1980s to 2000s, including periods of growth and decline. There is discussion of the differences between private equity and venture capital.
3. The document finishes with potential questions for valuation of a company called Cape Clear that Accel is considering investing in, including reasons why another top-tier VC like Greylock may also want to invest and what terms should be offered in
1. The document discusses various questions regarding Accel Partners' potential expansion into the European venture capital market in 2001. It examines the differences between the US and European VC environments, the advantages and disadvantages of a partnership versus own branch, and Accel's proposed approach.
2. It then provides an overview of changes in the VC sector from the 1980s to 2000s, including periods of growth and decline. There is discussion of the differences between private equity and venture capital.
3. The document finishes with potential questions for valuation of a company called Cape Clear that Accel is considering investing in, including reasons why another top-tier VC like Greylock may also want to invest and what terms should be offered in
1. Differences between VC in America and Europe? London is a good spot to have a branch as it is neutral financial territory which means that all the firms can have a presence here without being seen to poach on someone elses preserve Advantages and disadvantages for Accel Partners to go to Europe (page 6 of the case) - Choice of the current LPs; The opportunity to attract a significant member of new European LPs; A first time buzz Bad market at that time (why?) Inexperience in large extent when it comes to European VC, which resulted in both bad and good companies being overpaid. Bad market (market crush) was a consequence of that. Non-US private equity funds received higher management and carried interest
2. Partnership versus own branch in Europe
Partnership: exchange of knowledge and information between two companies, although parttner companies in Europe may often be a weaker side in that exchange process.
Own branch: could be set by transplanting current employees, or recruiting employees from existing firms. In the case of transplanting current employees, the problem would arise regarding the lack of connections they have. On the other hand, employees recruited from other firms could happent to lack knowledge and experience. 3. What is Accels approach and strategy? Is it promising? Finding a team Raising money Finding space Cross-economies compensation system, splitting the carry and the fees between Europe and the US to align the interests of the groups Deal approval process: finding a deal a team would perform the initial due diligence, then present it to more senior partners for review (in the Europe group Jim Schwartz and Joe Schoendorf were in this position). A partner assessed the companies team, the technology the due diligence and discussed it with domain experts. The senior partners and the team presented it to the entire partnership if they thought it was promising. The presentation was conducted by the portfolio company and the senior partners. All the presentations were given in California (if European or American companies). The partnership needed to reach a consensus on the investment decision. European countries normally needed to travel two times to California. Socializing of deals was common. This was informal presentations of possible deals by partners during their weekly meeting.
4. What changed in the VC sector over the years? (80s vs 90s vs 2000s) Mid 80s: VC industry was staffed with too many bankers and accountants; It was fine in term of structuring the deals but lacked expertise to assess trends and technologies and to add value. Large amount of money were raised but inesperience investors tended to do poorly deals at high prices; Venture capital in Europe returned being synonymous with private equity, later-stage investing dominated by buyouts or transactions that involved a fair amount of financial engineering. European firms closed their VC operations U.S. firms closed or sharply reduced their european presence
End 90s - VC recovery in Europe General public was becoming more aware of venture capital as a financing option; Higher returns (than those on London Stock Exchange, by 10 to 20 percentage points) Substantial pool of available capital began to accumulate - European institutions invested up to 10 % of their assets into PE and VC firms, although that percentage was not close to the 20 % of some U.S. groups U.S institutions seeking to diversify their portfolios; Venture capitalism was more socially accepted; Regulatory schemes were slowly being harmonized Technological boom (it didnt achieve the scale of that in the U.S) Lack of operational expertise due in part to conflicting regulatory regimes, European countries established their own small.cap exchanges (Germanys ) European institutions invested up to 10 % of their assets into PE and VC firms, while U.S. institutions
2000 Record-breaking amounts of money raised and invested Collapsed from a high 82,000 to 14,000 EASDAQ was bought NASDAQ Venture investing in Europe was in an uncertain state Small firms that had sprung up over the past few years were struggling Tax rates for capital gains were falling Stock option became acceptable Europes biggest VC is 3i
5. Private Equity vs Venture Capitalism
Private equity is usually when we talk about an existing company with existing products and CF, that will going to be resctructered to optimize its finacial performance. When private equity works properly it can save poorly-performaning companies from bankrupcy and turn them into profitable entreprises.
Company Types: PE firms buy companies across all industries, whereas VCs usually are focused on technology, bio-tech, and clean-tech. % Acquired: PE firms almost always buy 100% of a company in an LBO, whereas VCs only acquire a minority stake less than 50%. Size: PE firms make large investments at least $100 million up into the tens of billions for large companies. VC investments are much smaller often below $10 million for early-stage companies. Structure: VC firms use only equity whereas PE firms use a combination of equity and debt. Stage: PE firms buy mature, public companies whereas VCs invest mostly in early-stage sometimes pre-revenue companies. Risk & Return VCs expect that many of the companies they invest in will fail, but that at least 1 investment will generate huge returns and make the entire fund profitable. But it would never work in PE, where the number of investments is smaller and the investment size is much larger if even 1 company failed, the fund would fail.
6. Valuation
Some very rough and sketchy calculations: Valuation of Cape Clear: Venture Capital Method: Harvest Year: 3 EBITDA: 9,628,677 + 523,693 (deprecation) = approximately 10 Debt: 2,470,322 Expected EV/EBITDA of comparables: I calculated this by dividing market cap by revenues of compepitors (see exhibit 5). Then take the average. (e.g. 1140/150.6) Expected EV/EBITDA: approximately 10
1. Valuation: EV/EBITDA * EBITDA = 10*10 = 100 Million - 2,470,322 Debt = 97,5 Million 2. At a discount rate of 30% the Present Value = 97,5/(1,3^3)= 44,4 Million
They are asked to invest at least 15 Million
3. 44,4x - 15 = approximately 35% of Equity.
This means: they would get 28,5 M shares. x / (53M shares + x) = 0,35 x = 28,5 At a price of: 1.9 per share. (28,5 / 15)
Ninja edit: We just calculated the P/E of the two competitors with postive incomes and averaged the valuations that came up. We did it by 1. calculate the P/E of the competitors: market cap / net income / (IPO market cap / IPO share price) 2. average the P/E and multiply by net income of Cape Clear 3. Take the average of that valuation and the EV valuation. 4. Should be pretty close to what resulted from the calculations above since P/E valution is pretty similar.
The problem with this might be high P/E ratio of one company that was given as a comparison, BEA Systems, since its PE ratio on 31/12/2001 was 578.29 (http://www.quandl.com/OFDP- Open-Financial-Data-Project/DMDRN_BEAS_PE_CURR-BEA-Systems-BEAS-Current-PE- Ratio), and in April of 2001, around 450. Given that in this case, only two companies can be taken for their PE ratio (due to the fact that others have negative earnings), average is around 250, which then results in an unrealistically high valuation. Comment: You still have to divide by the number of shares, then P/E gets more realistic!
7. Why should Greylock also invest? Advantages and disadvantages of a second (top tier VC):
PROS Would able to contribute with additional value and network contacts to the company They work in the same industry: focus in enterprise software and communication Good contacts in USA in this industry; Experience Diversifying risk If further series were needed Accel would not be the only one who would need to invest
CONS Never worked outside USA Accel would have to give enough of the company to make it worth for Greylock
8. Which term sheet should we offer to? If the term sheet is nod good enough Cape Clear will take decide for another VC but if the term sheet is too good the rendit of this investment will be lower than possible. Never-the-less...as Cape Clear is not willing to move the company to the US we can give them a worse term sheet. Less US VC companies are willing to invest outside of the US (e.g. Sequoia)
Security type: Convertible preferred stocks At year 5 preferred shareholders may convert to common stock or choose to collect liquidation payment
This class of preferred has the option to be redeemed or converted into ordinary shares During a pre-specified period Redemption gives downside protection while conversion provides the upside benefits Conversion may be required at certain events (IPO or trade sale) if the value of firm is sufficiently high (thus making that option in the money) May have anti-dilution clauses to protect investors in future financing rounds
Dividends: Dividend to be paid at exit event before shareholder exercise conversion rights Preferential Dividend to be paid in case of liquidation or conversion: 8% Maximum cumulative dividend: 25% No dividend will be declared or paid on Common without the consent of i) the holders of at least 60% of the then outstanding shares of Series A preferred
Anti-dilution rights Full ratchet
Person to be designated as companys CEO OToole because: Co-founder and CTO at IONA (more contacts; more experience) Clarke would stay as CTO (experience in the industry; knows the product) (Is this really a good idea? Clarke could leave the company because is not happy with this decision).
Investor demands right to participate pro-rate in future financing rounds - Yes Investor demands right to impose Founder Termination in the future Yes Other special conditions: Drag Along provision (obligation on all shareholders of the company to sell their shares to a potential purchaser if a certain percentage of the shareholders vote to sell to that purchaser.
9. Has Accel the right team / the right skills for entering and Italian. Was a Partner at Dought Hanson & Co (European leading private equity firm). Also Europe? Kevin Comolli engineer and Mathematics background (with highest distinction from Northwestern University) and a MBA from Harvard Business School. Speaks advanced German worked as Executive Director for Goldman Sachs International Feargal Rordin engineer with a summer internship at Goldman Sachs and a MBA from INSEAD Joe Golden, was leading the Ciscos European Investment and Acquisition Group, managing 5 billion in 2000, on the hand guy with a sense to do things right, Kaj-Erik Relander, Finn, significant operating experience, former entrepreneur, management consulter, doing deals for a Finnish Venture Capitalist firm which invested in technology, MBA at Wharton and the Helsinki School of Economics, served as a CEO in Telecom Finland (later Sonera)
10. Will companies be influenced by the fact that they have to go to the USA? Will it be less likely that they choose Accel as an investor?
11. Analyse the Opportunity
CAPE CLEAR
Comolli said that Cape Clear has ...everything Accel soughta strong team, a good technology in a new growing space and a defined path to reveues that included a strong focus on international growth. Also the macro-level was good. There was no sign of slowing down in the sector. But the time was not ideal. Accel was still raising the European Fund; not the right team yet of Accel Europe, searching for a office location and trying to set up the process of orking together with the head office in California.
The product: software that facilitates the creation and integration of business applications on the Internet Cape Clear Software develops and markets Web Services products that enable corporations to link their internal IT systems and applications quickly and easily over the Internet. Cape Clear is supporting a new generation of business applications by making back-end systems available to third parties over the Internet. This removes the traditional barriers to creating business-to-business applications.
Create value to: employees and companies. To less specialized individuals because they would be able to perform these tasks (it wouldnt be necessary anymore to hire highly skilled technologists). The company would also benefit because it would be much more productive, it would save time and money, and avoid mistakes in data entry.
An interesting Market: The market is looking for standards-based technology that can be used by mainstream developers to bring different applications together on the internet. Cape Clear has that technology. They were exploring an opportunity that it wasnt being filled yet by anyone. It was a new and growing market Investment in a Hot Sector (at the time web services were a novelty)
Only six months away from competitors.
PROBLEMS: IP protection? Any other type of protection?
12. Analyse the Cape Clear Team. Is this a good team? The skills and experience of the combined management team They had the right skills for this opportunity: The Trio already knew each other, and had work together in IONA They came from IONA - one of Irelands first technology superstars. Competences in management and in the industry Anrai OToole was IONAs co-founder and CTO Colin Newman head marketing They left a perfectly safe job to build a new their own company, so they were committed with this idea. The fact that Newan and OToole left their job draged US VC firms attentio immediately n They took ACT investment because they knew ACT could act as a mentor. The Trio didnt have enough knowledge concerning Venture Capital. Conclusion - The team had: Strong management experience Strong marketing and sales experience Have strong scientific knowledge in the relevant innovation Have the relevant contacts Ready to establish the right partnerships on order to get access to relevant strategic resources (We want Silicon Valley money; They reject some investors)
Reasons why U.S. VCs entered Europe Avoid competition in the US which drove the deal prices up Diversifying investment portfolio Salaries in Europe were lower UK spoke same language No serious competition in Europe (most European companies focused on financial s and not on supporting the firms) - Adding value
Worries about Europe Does not offer sufficient diversification because its highly correlated with US economy Europe was focuses about wireless & telecommunication Less experienced stuff
Comparing Europe vs. US European VCs came form financial background and solely focus on revenue forecast (American focus on Businesses, product, customers , market conditions, value proposal. Etc. ) Europe: industry is staffed with bankers and accountants (don't anticipate trends and technologies to invest in) Due diligence after offering a term sheet Harder to exit investment (hard to do IPO) US companies usually had more money, more expertise and a brand-name cachet with limited partners, entrepreneurs, other VC firms and potential customers and acquires of portfolio companies. They would provide a bridge to the biggest market
Accel Abroad Only one office in Europe Leverage cooperation between offices Separate fund for Europe o 1. Give choice to current LPs o 2. Attracting new European LPs o 3. First time fund excitement hard to educate European LPs about the industry management fees at carry is larger in the US (Europes smaller fee p.6/7 for numbers ) Milestone: December 200, $250 Million raised, no team, no office, markets falling,
Relationship of European & US offices London and California ppl would see each other deals Weekly investment meetings Offside meetings CEO summits for portfolio companies High travel and time costs European companies usually had to fly twice to the US Cross economics: Both offices Shared carries and fees to align interest Consensus needed for investment decision
The Deal approval process after conducting due diligence, GPs fly to US to present; if accepted fly with portfolio company deal approval like in the US ( p. 9) vise versa supervision informal networks: weekly informal meetings , software and network teams, called socializing the deal everyone was responsible for the deal
Cape Clear Investment founded June 1999 by professors Three guys from IONA technologies Keen to start something new Team very motivated and left a lot of options on the table (Cortez Rule) Irelands First technology superstart Very experienced team Previous success of IONA ($40 Million at IPO in US) Three months spend on studying the marker to spot niche Software integrates business applications Easy to implement, by less specialized stuff (p.10)
Reasons why they want American VC -Little time, need for financing -Cape Clear focused on the US. Market -But important to stay in Ireland
In 2000 raised $1.5m in angel financing to have someone experienced in the VC industry on the team. NO government financing Set up a subsidiary in California (just to have presence) In October 2000 hired two superstar executives from IONA OToole and Newman They invested $1.5m Acquisition of small UK company for application server (got footprint in UK) Launch in December 2000 (increased attention from US VCs) In March 2000 Microsoft published SOAP and competition increased In February 2001 they met with Accel American VSc were only interested in doing business with companies with HQ in US (besides Accel)
Why Greylock is good for Accel Aneel Bhursi (GP at Greylock) had been on board of PeopleSoft ( similar democratizing effect on HR systems) Greylock provides networking in the US Never invested outside the US Wanted big stake in the company (at least 20%) to make investment worthwhile with traveling to Dublin Greylock understood what Cape Clear needed They had expertise, experience in driving such a product to the market
Valuing Cape Clear Cape Clear is 6 months ahead of any firm in the US Accel wanted to lead the project, but also wanted Greylock in the company ACT ventures (business Angel investor from first round) had to keep ownership Only way to do it: dilute ACT ventures and management
Opportunity: Cheap to buy Ahead of competition Excellent team (motivate skilled, experience), know how to develop a product, the know the industry and its needs, know how to build a company for an IPO, Sales in the US production/research in Europe (less costs, at the same time creates problem for the VC in terms of exit options,
Problems: 1)Should Accel dilute ACT ventures and Management? 2) What is the best for the company? 3) Download package vs. enterprise wide sale 4) No HQ in the US makes it harder for an IPO 5) What does Greylock add to the option pool? 6) What would adding Greylock mean for pricing and potential returns?
Who is who Comolli, Kevin : Managing general partner of Accel Partners London office Rordin, Fearghal: principal at Accel Partners London Swartz, Jim: co-founder and general partner, working half-time on Accel VIII and half-time on Accel Europe Schoendorf, Joe: partner at Accel, who works half-time for Accel Europe Golden, Joe: staff of Accel Europe Relander, Kaj-Erik: staff of Accel Europe