alternative investment manager

@protoinvestartesianinvest.com

venture capital investment in australia

Venture Capital Funds …

make money by owning equity in the companies they invest in, which usually have a novel technology or business model in high technology industries, such as IT, software, biotechnology, etc.

Venture Capital …

is financial capital provided to early-stage, high-potential, high risk, growth startup companies.

alternative investment manager who are we?

global alternative investment manager

invest in early stage ventures, in Australia and China

$10M sydney angels sidecar fund

$10M slingshot venture fund

as principal investors we are uniquely placed to extend our platform of niche early stage innovation & venture funds

@artesianvc

artesianinvest.com

alternative investment manager

The traditional venture capital model does not scale to cope with a new paradigm of capital-efficient technology companies

Challenges:

VC must be …as revolutionary as the businesses in which they invest

In Australia venture capital is under funded because as an asset class it is currently too small for institutional $

Money scales … time spent on analysis does not

1

2

alternative investment manager

Later StageExpansion StageEarly ExpansionSeed/Start-Up Stage

Ris

k

Founder, friends & family

Equity Markets

$200K $2M $20M $200M+Avg. Raising

Retu

rn

30x

10x

5x

2x

$50K $100K $1M $5M $100M$500K $10M $50M

Accelerators

Venture Capital

$Private Equity

Commercial Banks

VC

Angel Investors

stages of growth for an entrepreneurial company

alternative investment manager state of traditional vc

US venture dollars raised in $B1:

vc industry has been experiencing its second period of contraction since 2000

2000-2003 vintage funds2004-2007 vintage funds2008-2010 vintage funds

time

total value to paid in multiple2:

TVPI1X

1. NVCA2. Cambridge Associates

median annual raise: $22B

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$0B

$10B

$20B

$30B

$40B

$50B

$60B

$70B

$80B

$90B

$100B

alternative investment manager australia versus the world

@protoinvestartesianinvest.com

1. FUNDING Israel US Canada UK France Germany Australia

2012 GDP ($trillion) 0.24 15.09 1.76 2.43 2.77 3.57 1.37

2012 VC Capital raised ($billion) 0.60 20.6 1.80 1.40 0.72 0.82 0.24

VC Capital raised as % of GDP 0.245% 0.137% 0.102% 0.058% 0.026% 0.023% 0.018%

Global VC indexed vs Australia 14.1x 7.8x 5.8x 3.3x 1.5x 1.3x 1.0x

Sources: Dow Jones Venture Source, Thomson Reuters

2. CUSTOMERS Asia Africa EuropeLatin

AmericaNorth

AmericaMiddle East

Oceania/Australia

Population (million) 3,922 1,073 820 593 348 223 36

Internet Users (million) 1,076 167 518 255 273 90 24

Penetration % 27.5% 15.6% 63.2% 42.9% 78.6% 40.2% 67.6%

Source: InternetWorldStats

alternative investment manager australian vc is dead long live vc

$2B

$200B

Aust

ralia

US

A

vc funds raised since 2002

vc 1.0 is dead …

traditional australian vc can’t go big & can’t go small

cost to startup has fallen dramatically traditional vc model not easily exported to early stage local vc can’t compete with global vc at growth/late stage

… long live vc 2.0

early stage local & later stage global

local vc will invest earlier in more startups target emerging markets for customers and investment crowd-source: funnel & due diligence crowd-fund: co-investment funds

australian vc …

was it ever alive?

alternative investment manager great time to be an entrepreneur

Great time to be an entrepreneur:

now costs significantly less to launch, iterate, and scale companies

sweeping changes in technology and consumer internet adoption have enabled dramatically reduced capital requirements for building new software companies

accelerated access to customers via search, social, and mobile platforms. 0.36

billion

2000 2011

global internet users:

2.20 billion

alternative investment manager challenges facing traditional vc

consequences:

vcs rushing to add smaller early stage investments to their larger/later investments

increasing valuations:

Y Combinator average pre-money $2-4M 2010, $6-8M 2011, $10M 2012

median Series A pre-money (US$11M) at an 8-year high in Q2 20121

bifurcation of market - web/ICT vs. rest

1 Cooley Venture Financing Report Q2 2012

40% 34%30%19%

2007 2011

early stage

late stage

vc investment allocation2:

2007 2011

2 PwC MoneyTree report

There is a massive opportunity for new, disruptive venture capital models

alternative investment manager

government

policy

computer science, coding

meetups, hackathons, co-working

expat

diasporahealthy

grass roots community

regional

centres

universitiesmba 2.0

incubatorsangel groups

acceleratorscrowd

fundinghealthy

early stage:seed & angel

sustainabilit

y

co-investment funds

rebuilding australian vc bottom up

australian vc health report

weak<$50

million

m&a/

trade sales

australian vc 2.0focus away

from silicon

valleyasia &

emerging

market

focus

corporate venturing

series A &small trade sales multiple exits

source local

source

global

asset class

track record

globalization of vc big exits

re-invested iposlife support

late stage:series B, C … ipo institutional

investmentprivate

equity

alternative investment manager influx of new participants in early stage vc

ACCELERATORSINCUBATORS EARLY STAGE VC CO-INVESTMENT

FUNDS

US

AUS

ANGEL GROUPS VC

SA Angels

VC

Stage 1 of disruption Stage 2 : VC 2.0

alternative investment manager traditional vc model failure to scale

Challenges for traditional VCs:

• Traditional VCs are finding it increasingly challenging to scale because the declining cost to start a business means that they must invest in more companies just to deploy the same amount of capital.

• In response, they can choose to participate in more deals or bigger deals.

• Often, the latter wins because most VCs will spend a substantial amount of time evaluating a deal, regardless of deal size.

Early stage deal flow

Screening

Due diligence & investment

Money scales, time spent on analysis does not.

alternative investment manager picking winners avoiding losers

Later Stage Investing: Picking Winners

• Active investors / stock-picker• Domain knowledge• Effective due diligence• Working with known

entrepreneurs & investors• Involved in

strategy/management• Insider can react quickly to

good/bad events to guide venture

• More relevant as investment matures and more performance data available

Early Stage Investing: Avoiding Losers

• Diversification/Portfolio approach• Due diligence difficult due to

lack of information • Outsource deal flow & due

diligence• Guild of entrepreneurs/mentors• Co-invest with other early stage

investors• Buying ‘options’ to make

concentrated follow on investments at later rounds when more information/traction

“You need at least 15 early stage investments to have a 90% confidence of getting your money back” 1

“The production of cash is highly concentrated in winners; 90% of all cash returns are produced by 10% of exits” 2

1. Kevin Dick (Rightside Capital) “How Many Angel Investments?”

2. Professor Robert Wiltbank (Kaufman Foundation)

alternative investment manager

$10M invested in 100 Startups (selected from 1,000 applicants)

Exit at $100M

Exit at $75M

Exit at $25M

Exit at $50M

4 exits in 10yrs: ~ 5x capital, 20% IRR 1

1. Assumes $50K invested at $450K valuation in accelerator round & follow on investment of $200K at $1.8M investment at angel round

asymmetrical risk distribution

alternative investment manager

100%

95%

90%

85%

80%

75%

70%

65%

60%

55%

50% > 0.5x > 0.75x > 1.0x > 1.5x > 2.0x > 2.5x > 3.0x

800 investments

400 investments

200 investments

100 investments

50 investments

25 investments

Number of investments in portfolio

effect of portfolio size on return probability

Source: Kevin Dick, Rightside Capital

With 25 investments you have a 65% probability of achieving a 2.5x return on your portfolio

With 200 investments you have almost a 95% probability of achieving a 2.5x return on your portfolio

Return

Probability

alternative investment manager

• Angel Group• Incubator• Accelerator• AngelList

• Fund Manager• Platform• Capital• AFSL

CO-INVESTMENT FUNDSustainable & scalable early stage VC fund

Co-investment Funds - a scalable and sustainable solution for early stage VC

vc 2.0 co-investment funds

ESVCLP STRUCTURETax free returns

alternative investment manager seed/early stage co-investment funds

sydney angels sidecar fund:

$10M ESVCLP combination of sydney angels &

sidecar fund invested $4M in 14 early stage ventures during 2012

+ =

slingshot venture fund:

$10M ESVCLP partners include University of

Newcastle, Hunter TAFE, Newcastle Innovation, PwC

+ =

network, deal flow, filter, due diligence,

mentors

investment management, capital raise,

compliance, legal

co-investment fund:ESVCLP - Australian investors

have no tax liability on income or capital gains

may be an accelerator, incubator, angel group, university, professional

services firm

alternative investment manager

Traditional VCs

Accelerators Incubators

Angel Groups

Early Stage VC Co-investment

Funds

Early Stage VC Fund of Funds

No of companies screened per year

100-200 200-300 200-300 1,000-1,500

No of companies invested in per year

5-6 10-20 10-20 50-100

Number of companies in typical portfolio

25-30 50-100 50-100 250-500

65% 75-85% 75-85% 95%

Typical investment per company

$2-10M $25-250K $100-600K $25-$600K

Capacity to make follow-on investments

YESNO

(except Angel groups)

YES YES

MentorshipInternal

resourcesMentors aligned

with groupsOutsourced to

co-invest partnerOutsourced to

co-invest partner

Scalability by Assets Under Management

YES NO NO YES

Scalability by Portfolio Diversification

NO YES YES YES

Traditional VCs

Accelerators Incubators

Angel Groups

Early Stage VC Co-investment

Funds

Early Stage VC Fund of Funds

No of companies screened per year

100-200 200-300 200-300 1,000-1,500

No of companies invested in per year

5-6 10-20 10-20 50-100

Number of companies in typical portfolio

25-30 50-100 50-100 250-500

Probability of achieving 2.5x return

65% 75-85% 75-85% 95%

Typical investment per company

$2-10M $25-250K $100-600K $25-$600K

Capacity to make follow-on investments

YESNO

(except Angel groups)

YES YES

MentorshipInternal

resourcesMentors aligned

with groupsOutsourced to

co-invest partnerOutsourced to

co-invest partner

Scalability by Assets Under Management

YES NO NO YES

Scalability by Portfolio Diversification

NO YES YES YES

future of early stage venture capital