IntroToVC

Venture Capital: An Introduction: 

Venture Capital: An Introduction Adapted from a presentation by Nora Zietz on July 26, 2004 Elements, Relationships, and a look into the life of a VC

Venture Capital: 

Venture Capital Outline: What is Venture Capital? Background of Venture Capital A Day in the Life of a VC

What is Venture Capital?: 

What is Venture Capital? Money invested: By professionals (venture capitalists) In early-stage companies In order to produce financial returns. Does not include: Buyout investing Mezzanine investing Angel investors.

What is Venture Capital?: 

What is Venture Capital? Funds are usually: Raised from the investors (limited partners) By the firm (general partners) For a set period of time (around 12-years) Supposed to return above-average interests (during bubble, 40%,50%, 90% yearly) By investing in private companies and exiting via IPO or buyout.

Money Flow in Venture Capital: 

Money Flow in Venture Capital Limited Partners commit to $x million Participate in draw-downs on regular basis Money is not given to the VC’s all up front. The VC charges a few percent of the money committed, to pay for salaries and expenses. Usually, first liquidity events go to repaying investors. When investors are fully repaid, limited and general partners share the proceeds (80%-20% or 85%-15%). The general partner share is called “carry.” Many permutation of arrangements with limited partners.

Players in Venture Capital: 

Players in Venture Capital Limited Partners Typical investors in venture capital funds: Pension funds Foundations Local governments Universities Wealthy individuals General Partners Ex-CEOs Ex-investment bankers Ex big-8 consultants The occasional scientist or MD

Types of Venture Capital Funds: 

Types of Venture Capital Funds Funds tend to specialize by stage, industry, or geography Stage: Seed Funds (the earliest institutional funds) Early Funds (will go in right after seed) Mezzanine Funds (prefer funding just prior to liquidity, IPO or buyout) Industry Oxford Biosciences (Medical) Trident, Northpoint (IT, telecom) NEA – Company is a generalist but individual general partners specialize Geography (Samller Funds tend to stay in a region) Anthem Capital – Local here

Where does VC fit in?: 

Where does VC fit in?

Venture Capital: 

Venture Capital A few facts VC firms invest about $7.5 billion/quarter (FY2007 Q1) National Venture Capital Association Of the $7 billion/quarter (Q1’07): $169mill go to startup/seed $963 mill go to early-stage $2.875 billion go to expansion $3.05 billion go to mezzanine

Venture Capital: 

Venture Capital More facts: where the money is invested (Q1’07) Silicon Valley $2.1 billion New England $976 million Southeast $579 million Greater DC $197 million

Venture Capital: 

Venture Capital What venture capitalists do: Finance rapidly growing companies Typically buy equity rather than lend money Often sit on the board of directors Help management teams (but also direct) Take a long-term view

Venture Capital: 

Venture Capital Characteristics of “venture fundable” companies: Experienced management Defensible market Good business model (can make money) Proprietary intellectual property Manageable funding requirements Valuation expectations in line with market

Venture Capital: 

Venture Capital The process of obtaining venture capital: Introduction by a lawyer, another VC, a “known” entrepreneur Send business plan Face-to-Face meeting Due diligence process (VCs check out management and vice versa) Deal negotiations Investment The partnership continues typically for years

A Day in the Life of a VC: 

A Day in the Life of a VC VCs travel 60-90% of time Network with other VCs, lawyers, I-bankers, CEOS they funded in past – and limited partners Attend industry conferences for market intelligence and deal flow Meet companies, read biz plans Heavy due diligence, phone and in person Attend industry conferences Negotiate deals Participate on boards of directors

More about a VC: 

More about a VC Have to know everybody, every trend in their industry, every detail about their portfolio companies, and every law about investing Must guess right about markets trends Must be supportive to their companies, but must coax when they are wrong