→
3Ws of
Venture Investing
Ralph has worked as an
Associate at New Money Ventures, L.P. for the past two years. He has
sourced nearly 1,000 leads of which his firm
selected one for
investment. This investment provided a 5-to 6-time return on
investment (ROI) for New Money Ventures, L.P. In venture-speak, a 5-to
6-time ROI is considered "a double." If Ralph keeps hitting doubles, he
will do well in the venture business; however, his ambitious nature drives him
to want to be one of
→ the very best in the industry
.
To be a premier
venture capitalist, one must "hit a home run." If a company that a
venture capitalist invests in has a return on investment anywhere from 20 to 100
times (or more), then the deal can be considered a "home run."
Venture-backed companies like
→
Amazon,
Apple, Microsoft, Novell, and Federal Express are
a few good examples of "home run" deals.
→
7 Routes To
High Profits
Like most Associates, Ralph
attends quite a few trade shows. One fortuitous day, Ralph decided that he
should attend the Propeller-Head Trade Show. After a couple hours of
walking the trade show floor, Ralph left with his standard five or six trade
show leads. One lead was unusually intriguing. A company that he had
never seen before, Think Pad, Inc. (TPI), had an extremely interesting,
soon-to-be-released product called ThoughtProcessor 1.0. The
ThoughtProcessor product enabled users to access all of the functions of a
computer merely by thinking. With it one could write a document in a word
processing program or create a spreadsheet without having to type a single
letter on a keyboard. Although the 1.0 version of the product had a few
bugs, it had the potential to stimulate a paradigm shift in the computing
industry.
→
Sustainable
Competitive Advantage
While at the trade show, Ralph
introduced himself to the CEO of TPI, Mr. Herman I. S. Slick. Ralph
pointed out to Slick that a partnership with New Money Ventures, L.P. could be
beneficial. In addition to providing TPI with the financing to finish
their R&D work, New Money could add credibility to their board, help recruit a
strong management team, and aid the company in making strategic decisions
throughout the delicate process of growing a company and taking it public.
Slick had declined many VC firms' advances lately because he had not been
convinced that they could offer much value beyond money. However, he was
intrigued by Ralph's proposition and by New Money's previous success in the
software industry. He considered the idea of a
start-up/first round of financing with New Money.
→
Venture Financing Funnel
→
Venture Financing:
Key Documents
A few days after their meeting
at the Propeller-Head Show, Ralph called Slick at TPI's headquarters in Seattle.
Ralph and Mr. Slick talked about TPI's product line, market, distribution
channels, sales model, and management team. Mr. Slick projected that
within three years Think Pad could be a $100 million (gross annual revenue)
company. Over the last two years, Ralph had encountered hundreds of
→
entrepreneurs
who thought that their
products could produce annual revenues of $100 million. He remained
skeptical. Even with his conservative mindset, however, he was impressed
both by the background of the
→
management team and by Snail's quick mind, technological expertise, and
market understanding. Ralph asked Slick to send him the ThoughtProcessor
product and a business plan.
The following day Ralph
received a FedEx package from TPI. Ralph read the plan and then loaded the
ThoughtProcessor software into his computer. Ralph put the special
infrared panel onto his monitor and fixed the infrared goggles on his head.
Once the software was running, Ralph looked at the screen and thought "Open
Microsoft Word." Microsoft Word began to load. He then thought "Open
New Document." A new document appeared. As he composed a letter in
his head, his thoughts appeared in type on the screen. Ralph was
impressed.
Ralph brought the
business plan and product to Reginald Eugene Xavier, New Money Venture's
Managing General Partner, who was known in the venture community as Bob.
After a brief demonstration, Bob made arrangements to fly to Seattle.
The following day Bob met with
Slick and Henry, the VP of Technology who was the genius behind the creation of
the ThoughtProcessor product. Impressed by their story and confident of
Snail's willingness to work with New Money, Bob returned to Boston and began the
due
diligence process. He and Ralph called everyone who knew about Slick,
Henry, Think Pad, and ThoughtProcessor 1.0 and they spoke with industry analysts
who had tested a beta version of the product.
Once Ralph and Bob completed
their
due diligence checks, Bob was ready to hammer out the details of the
investment. After a little
→
negotiation
between Bob and Slick, they both agreed to a
deal structure where New Money Ventures, L.P. acquired a 25% equity stake in
TPI for $2 million. Upon completion of the investment, Bob
joined TPI's board.
In the ensuing months, Bob
helped Slick recruit a VP of Marketing and a VP of Sales. While they had
planned to raise an additional $10 million in a second round of financing to
fund their major
→
sales
and
marketing push, the
strategic marketing relationship that Bob had helped Slick establish with
Microsoft eliminated the need for a large sales force and provided TPI with
enough
cash flow to prosper.
Two years later, TPI went
through the rigorous process of
going public. Bob coached Slick and Henry for the road show − an
intense series of meetings with industry experts and investment
bankers. These meetings provided TPI with an opportunity to educate
the investment community about their story and to gain support for their public
shares.
All the hard work paid off.
TPI went public with 10 million shares outstanding at $20/share. Within
three months, the stock shot up to $40/share, providing New Money Capital, L.P.
with a 50 times
ROI.
Thanks to New Money Ventures,
L.P., TPI was able to
turn their technology into an
extremely profitable business. Thanks to TPI,
Bob and Ralph "hit a home run."
