venture capital investment competiton® denmark 7. maj 2015 andreas b. christiansen business...

Venture Capital Investment Competiton®

Denmark

tirsdag 18. april 2023

Andreas B. ChristiansenBusiness RelationT: +45 26 62 62 54 E: abc@vcic.dk

Team Prep Session

What is a VC?• Professional money manager

– Private vs. public equity

– High risk/return

– Works with portfolio of investments.

What is a VC’s Job?

• Return 20-25% to LPs (limited partners).

What is Venture Capital?

• Asset class

• Subset of private equity

• High risk, high return

• Hit driven

VC’s Job Duties

1. Fundraising

2. Sourcing deals

3. Investing

4. Growing ventures

5. Exiting

VC’s Job Cycle

Fundraise

1. Close Fund

Source Deals

2. Invest

Grow Ventures

3. Exit

Fundraise…

Raising a Fund

• A VC fund is a monetary partnership made up of:– GPs (general partners) are the VCs who actively invest the fund in

startups.

– LPs:

• Financial investors with no active role

• “Institutional”: pension funds, university endowments, insurance companies, etc.

• Government.

Raising a Fund

LP2LP2

LP3LP3

LP4LP4

VC Firm(GPs)

Fund 1$$$$

LP1LP1

LPnLPn

Pledge $$

Commitments only. No actual cash changes hands.

Pledge $$

Pledge $$

Pledge $$

Pledge $

$

Raising a Fund

CalPERSCalPERS

Parish CapitalParish Capital

VC Firm(GPs)

Fund 1$$$$

UNC Endowment

UNC Endowment

AIGAIG

Pledge $$

Pledge $$

Pledge $$

Pledge $$

Pledge $$

ExampleNC Pension Fund

NC Pension Fund

Example Portfolio Diversity of LP

VC is a subset of private equity.

VC Firm vs. VC Fund

• One firm manages multiple funds:– Firms are LLCs (limited liability companies) with no end date.

– Funds are LLPs (limited liability partnerships) with 10-year lifespans.

Roizen: small and large firms.

Fund Size

• Large:

– New Enterprise XIII, $2.2B,12 GPs

– Kleiner Perkins XIII, $700M

• Local RTP, for example:

– Intersouth IV, $275M

– Southern Capitol II, $15M

New Enterprise Associates hauls in nearly $2.5B for new fund

10/19/11: BALTIMORE, MD - New Enterprise Associates has secured commitments for $2,457,680,000 for its NEA 13 fund, targeted at $2.5 billion, according to a regulatory filing. NEA, which focuses on IT and healthcare investments, currently has $8.5 billion under management in 12 funds.

Imagine you are a start-up that needs $1M in funding. Can this firm help you?...

Imagine you are a start-up that needs $1M in funding. Can this firm help you?...

Year 0 510

Fund Life: 10 Years

A) Invest and Reserve

B,C,D…) Follow-On Rounds

Harvest/Exit

“Raise” Fund

Example Successful Investment

Invest and Reserve

Follow-On Rounds

Harvest

Ser

ies

AS

erie

s A

Due Diligence

HitMilestones

HitMilestones

Ser

ies

BS

erie

s B

EX

ITE

XIT

0 2 3 5 8 10

Fin

d D

eal

Fin

d D

eal

Series A ROI is calculated on 6 yearsSeries B ROI is calculated on 3 years

A Pattern That Repeats

AA BB Exi

tE

xit

0 2 3 5 8 10

0 2 3 5 8 10

AA BB

AA BB

Portfolio of 10-25 Investments

AA BB

AA BB CC

AA BB

AA BB

Bu

stB

ust

AA

Bu

stB

ust

BBAA

Bu

stB

ust

AA

Bu

stB

ust

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AA

DD

BB

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xit

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Big

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0 5 10

0 5 10

Multiple Funds

Raise $$ Invest Follow-On Harvest

0 5 10

Raise $$$$ Invest Follow-On Harvest

Raise $$$ Invest Follow-On Harvest

Always fundraisingAlways investingAlways growing

Fund 1

Fund 3

Fund 2

Fund 3Fun

d 2Fund 1

Now

Always fundraisingAlways investingAlways growing

Multiple Deals in Multiple Funds

Fund 1

Fund 3

Fund 2

Imagine you are this entrepreneur

Raise $ Invest Follow-On Harvest

Raise $$$ Invest Follow-On Harvest

Raise $$$$ Invest Follow-On Harvest

11 Deals

16 Deals

25 Deals

Source Deals: Focus

Source Deals: Network

• Lawyers, CPAs, CFOs, bankers

• Other VCs (syndication)

• Serial entrepreneurs

• Conferences

• Universities – Technology transfer– Teach, coach, mentor, judge.

The Wall Street Organization, Inc.

Stages of Equity Funding

Friends/Family

$1,000-$50,000

Seed or Pre-Seed

$25,000-$250,000

Angel or Early Stage

$50,000 - $500,000

VC Rounds 1, 2, 3… or A, B, C…

(Institutional)

$500,000 - $50M

IPO

Typical Growth of Bootstrap Venture

Normal bootstrap businessGrows steadily (if you’re lucky)

Rounds

• An investment / stock issuance occurs in something called a “round”.

• VCs purchase preferred shares, which means they have rights over “common”.

• Most ventures need multiple rounds (Series A, Series B, etc.).

• Each round dilutes previous shareholders.• Valuation occurs at the moment of a round

(other times difficult to value illiquid asset).

How Does a Round Work?

Pre-Money Valuation

+

Investment

=

Post-money Valuation

$

$

$$

+

=

Example: $3M Post

Preferred Shares

Common Shares

Negotiating Points

• Pre-money valuation• Investment size• Option pool• Board seats• Liquidation preferences• Dividends• Anti-dilution• Closing conditions

Determine % ownership

Some of the “rights” of

preferred shares

Growing Ventures

• On the Team– “Active” participation = board seat(s)– Advisors (connections, strategy, etc.)

• Future rounds– Valuation – Milestones– Syndication

Board Seats

• Board of directors controls the venture (unlike board of advisors)

• Small ventures have small boards that meet often (quarterly), 3-7 members

• Odd number to prevent ties

• % ownership of stock should be (approximately) reflected in % of board seats– E.g. own 60% of stock, control 3 of 5 seats

Advisors

• Even if not on board, VCs will have strategic input

• VC network benefits– Management team additions– Customers– Partners– Competitors

Future Rounds

• Future rounds are the norm, not the exception (most entrepreneurs do not realize this)

• VCs help find “syndicate” investors– Later rounds can be much larger– New network benefits

• Up round: valuation is higher and investment is (usually) higher

• Down round: valuation is lower

Future Rounds

• VCs in Series A almost always join Series B– “Pro rata” means they invest to keep same %

ownership– aka, “maintain position”

• In a hits-driven business, not maintaining a position is as bad as no hit– “Last money in” dictates the terms

Series A and B Conflict

• Series A investor, like the entrepreneur, wants a high pre-money valuation for Series B

• Series B wants lower pre-money valuation

• A VC who is in both rounds is trying to find middle ground

• VCs are generally trying to find a “fair market price” to avoid a future conflicts

Example Up Round

• Series A: “1 on 1”– $1M Pre-money valuation

– $1M Investment → $2M post-money valuation

• Series B: “2 on 3”– $3M Pre-money

– $2M Investment → $5M post-money valuation

Inv = $1M

Series A Series B

Post = $5M

Pre = $1M

Post = $2M

Inv = $2M

Pre = $3M

Shares at $1 Shares now $1.5

1M VC shares

1M Founder shares

2M total shares

1.33M Series B shares

2M Series A shares

3.33M shares Ownership

Series A VC Shares1M/2M = 50%

Diluted to 1M/3.33M = 30%

Series B VC Shares 1.33M/3.33M = 40%

FoundersSame as Series A VC

shares

Things go well

Hit milestones

Increased valuation

Up Round: 1on1, 2on3

Dilution

Original Shares

Added SharesNew

Share Pool

Original Shares

Same quantity of orange. Lower percentage.

Why Dilution is Bad

Original Pool

Every 1% you lose of a 20X Exit

is going to hurt20 times more

Inv = $2M

Series A Series B

Post = $24M

Pre = $4M

Post = $6M

Inv = $12M

Pre = $12M

Shares at $1 Shares at $2

2M VC shares

4M founders shares

6M total shares

6M Series B shares

6M Series A shares

12M shares

Up Round: 2 on 4

12 on 12Ownership

Series A VC Shares2M/6M = 33%

Diluted to 2M/12M = 16.7%

Series B VC Shares 6M/12M = 50%

Founders4M/6M = 67%

Diluted to 4M/12M=33.3%

Inv = $1M

Series A Series B

Post = $2.5M

Pre = $1M

Post = $2M Inv = $1M

Pre = $1.5M

1M shares

1M shares

2M shares 1.33 shares

2M shares

3.33M shares

Shares at $1 Shares at $0.75

Remember, these are

negotiated(so you start here, then do the math)The rest is math

VC ownership after Series B

(50% x 1.5/2.5) + 1/2.5

=1.75/2.5 = 70%

OR

2.33M shares ÷ 3.33M total = 70%

Down Round: 1 on 1

1 on 1.5

Imagine a Scenario

• The venture needs cash

• Early round VCs cannot participate (ran out of dry powder)

• How does this affect negotiations?– Lower pre-money valuation– No ability for earlier VC to take advantage of

lower valuation.

Capitalization Table

• A table that shows the ownership structure of a venture

• Includes all shareholders and all classes of shares

• Also called “cap chart”

• Sign up at www.LearnVC.com for cap chart examples

Example Cap Chart

Option Pool

• Negotiated, but the norm is to take it out of the founders’ side (or ‘hide’)

• Result: can severely dilute founders

Inv = $1M

Series A

Pre = $1M

Post = $2M

No Option Pool

1M VC shares

1M Founder shares

2M total shares

25% Option Pool Example

Inv = $1M

Series A

Founders

Post = $2M

25% Option Pool =500K shares

1M VC shares

500K Founder shares

2M total shares

500K option shares Option PoolPre = $1M

Future Rounds Impact on ROI

• VCs want to “maintain their position”– Keep same % of ownership to exit– Requires “dry powder” for future rounds– Probably need syndication – Trying to avoid dilution

• You must estimate future funding/dilution to estimate your ROI

VC Return

• “Top Quartile” venture firms return >20% average ROI to LPs

• Fund has life of 10 years

• Average investments are 5-7 years

StartupStartup

StartupStartup

StartupStartup

StartupStartup

StartupStartup

Invest

StartupStartup

StartupStartup

StartupStartup

StartupStartup

StartupStartup

StartupStartup

Portfolio

VC Firm(GPs)

$$

$$

$$

$$

$$

$$

Fund 1$$$$

Capital Call $$

Capital Call $$

Capital Call $$

Capital Call

$$

Capital C

all

$$

LP2LP2

LP3LP3

LP4LP4

LP1LP1

LPnLPn

SingleSingle

Exits

HomeRun

HomeRun

duddud

duddud

duddud

TripleTriple

VC Firm(GPs)

Fund 1$$$$

$$

$$

$$

duddud

duddud

duddud

duddud

SingleSingle

SingleSingle

DoubleDouble

duddud

$$$$$$$$$$

$$

$$

$$$$

$

$

$$

$$

SingleSingle

LP2LP2

LP3LP3

LP4LP4

LP1LP1

LPnLPn

Example Fund

• 150M fund

• Fees: 3M/year (salaries, rent, travel)

• Carry:– 12 portfolio ventures at $10M avg. investment– To get 20% ROI, we need ~$450M

(20% of 150M = $30M x 10 years)– That’s two ventures going 20X!!

Getting to 20% ROI

• Rule of thumb: 3X on entire fund

• However, each investment is not 10 years– Money not “put to work” until a capital call– Exit could happen before end of fund

• You could reach 20% with only 1.5X

How do GPs/VCs Make Money?• Management fee (~2%/year to cover

expenses) for 10 years

• “Carry”– % of capital gain that VCs keep– 20% benchmark– Requires liquidity event(s)

Conclusion: VC’s Job Cycle

Fundraise

1. Close Fund Source Deals

2. Invest Grow Ventures

3. Exit Fundraise…

Understand the “Ecosystem”

Fund 1

Fund 3

Fund 2

The game is not “picking the right

deal.” It is laying the groundwork for

continued success.

Raise $ Invest Follow-On Harvest

Raise $$$ Invest Follow-On Harvest

Raise $$$$ Invest Follow-On Harvest

11 Deals

16 Deals

25 Deals

Key Takeaways

• Understand the lifecycle of VC job (not just picking deals)

• Expect future rounds

• Must have an eye on exit.