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VC 101: Inside the Black Box
(AKA: Christine’s Quick & Dirty Guide to Venture Capital)
What We’ll Cover
Public vs. Private Equity VC partnership structure Follow the money The VC investment process Impact of VC trends on you
Feel free to ask questions throughout the discussion!
Public vs. Private Equity Context
Public Equity Hedge Funds Pension Funds Mutual Funds Public Stock Trading
…etc.
Private Equity Buyouts Mezzanine
Investments Venture Capital
…etc
VC Partnership Structure
Limited Partners vs. General PartnersWho are they and what do they do?
ReportingWhat responsibilities do GPs have, and
what rights do LPs have?Investment Profile
What are a VC’s specific guidelines for investing and portfolio management?
VC Partnership Elements
GP
GP
GP
GP GPGP
GP
GP
“THE FUND”
LP
LP LPLP
LP
LP
Following the Money
Capital CallsWhere does the money come from?
Management FeesHow do the bills get paid? What does this imply for
General Partner incentives?
Profit DistributionsWhat happens as investments mature?
Successive FundsHow does a partnership become sustainable and
grow?
Capital Contributions
GP
GP
GP
GPGP
GPGP
GPLP LPLP
LP
“THE FUND”
1% of total
99% of total
LP
LP LP
A Typical VC Fund Example
2.5% annual management feePays for office space, salaries, other G&A Incentive implications for small v. large funds
All capital is repaid to LP before any profit is shared80% of profit goes to LPs20% of profit goes to GPs
An individual VC’s share of the total GP profit share is called “carried interest”
Profit Sharing
GP
GP
GP
GPGP
GPGP
GP
“THE FUND”
20% of total
80% of total
LP
LP
LP
LP LP
LPLP
VC Growth = More, Larger FundsY
ear
1
Yea
r 3-
4
Each Fund Life = 10 Years
3-4 Yrs = Seed NewCos
6-7 Yrs = Harvest & Do Followons
Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it
Fund III ($150M)
Fund II ($125M)
Fund I ($100M)
After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos
Yea
r 6-
7
The VC Investment Cycle
Deal sourcing and qualification: how good opportunities are found
Evaluation: deciding if there’s a good fit with investment parameters; company history, business characteristics, finances, business plan analysis, comparables analysis, pro forma return model
Term sheets: a nonbinding letter of intent Due diligence: ensuring that everything we believe to be
true, is true; research, references, financials, transaction summary/approval, investment memo
Closing: final signature and LP announcement Value offered: capital, relationships, management support
Impact of VC Trends on You
Growing Funding Market Minimum $ amount per
investment grows Higher VC valuations Lower returns % on a
higher base ‘Gold rush’ mentality
(lower funding bar = more mediocre ideas/ teams)
Shrinking Funding Market Minimum $ amount per
investment shrinks Lower VC valuations Higher returns % on a
lower base Champions mentality
(higher funding bar = the strongest ideas/teams)
Whether the market is going up or going down,VC money still has to be invested