venture capital 101
DESCRIPTION
Venture Capital 101 presentation on the basics of VC such as what venture capital is, and how it works. I delivered this presentation to a student group called InSITE that I belong to (mix of Columbia and NYU MBA and Law students). Enjoy! -Brian Rothenberg www.brianrothenberg.comTRANSCRIPT
Venture Capital 101Brian Rothenberg
What is Venture Capital (VC)?
• A type of private equity typically provided for early-stage, high-potential, growth companies
• VCs generate a return through an eventual liquidity event such as an IPO or M&A sale of the company • Venture capital investments are generally made as cash in exchange for shares in the invested company
Typical VC fund structure
Source: http://en.wikipedia.org/wiki/Venture_capital
How VCs make money
1. Management fees - annual• Up to 2-3% of assets under
management
2. Carried interest – “carry”• 20%+ share of the profits from the
fund’s investments
VC firm hierarchy
General & Venture PartnersPrincipals
Sr./Associates
Analysts
Admin
Seed Start-up Sustained Growth
Sources of funds over lifecycle
Early Growth
Pre-Revenue Revenue/Profitable
Founder’s Savings
Friends/Family
Angels
Venture Capital
Seed Start-up Sustained Growth
Round series and rough sizes
Early Growth
Pre-Revenue Revenue/Profitable
Bootstrap Angel/Seed Series A Series B Series C+
$50K - $1.5M$0 - $100K+ $2M - $7M $5 - $15M $5 - $50M+
VCs primarily do five things
1. Raise $$$
2. Find companies to invest in (sourcing)
3. Close deals
4. Invest time/effort to help grow companies
5. Get firms to exit
What do VCs look for?1.People
• “A” team, right skills, previous success
2.Opportunity • Market, sustainable, business model,
competition
3.Context• Technology, M&A or IPO’able?
4.Deal• Want the deal, but don’t want to
overpay
Market size is very important
Market needs to be large ($B’s) & growing• VCs stretch goal is 10x return on $ • They give you $10M, they want
$100M back• If they own 25% stake, you need to
sell for $400M+ to hit their targets…• …this can only be achieved with a
big opportunity in a huge marketNote: While a VC’s homerun goal is 10x, most consider a 3x a pretty good exit, and anything above that is gravy
High company to funding ratio
For every 100 companies looked at…• 70 are tossed out• 30 get first call• 10 get second call / meeting• 1 gets funded
VCs look at a lot of companiesThe odds are against the
entrepreneurNote: This is based on only a couple actual VCs’ input and is intended for illustrative purposes
Terms of VC financing
• Valuation: how much equity to get/give for a given valuation?
• Negotiating deal terms: term sheets and stock purchase agreements• Liquidity preference, board seats, option
pools, cumulative dividends, full ratchet, etc.
What happens after investing?
• Value-added investing• VCs are active investors – try to make
investments worth more• Help with strategy, recruitment,
introductions through network, follow-on funding, etc.
• Exit – liquidity event to recoup investment• Mergers & Acquisitions• IPO• Liquidation
Sectors: hot or not?
• Digital Media / Internet • Cleantech• Life Sciences – Biotech / Devices• Mobile• E-commerce / Local
Hot
Not• Semiconductors• Hardware• Consumer Packaged Goods
The VC industry is contracting…U.S. VC Fundraising Slow Through 3Q’09
Commitments to Venture Capital Funds (based on multiple closings)
$53.8
$82.3
$42.7
$19.3
$10.3
$18.7
$28.0$31.3
$41.0
$27.9
$8.1
$0
$20
$40
$60
$80
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD09
Funds
Rai
sed
($B)
Source: Dow Jones VentureSource
Many VCs predict the industry will shrink by 30-50%
9th Annual Innovation Award for Computing Systems, 2009
$13.1M Series A; $2M Series B; $30M Series C
Undisclosed Series A and B; $15M Series C
$1.5M Series A
$2M Series A; $7.4M Series B
AND
Have InSITE companies received VC funding? $157M+ !!
InSITE VC Sponsors
A few VC resourcesA VCContinuationsRedeye VCSeparate PieceStartup MathTechCrunchWall Street Journal - VC DispatchVenture Made TransparentVentureBeat
Questions?Thanks!