How to avoid wasted time fundraising, and know a tire-kicker when you see one. Know your "customer" - understand how the venture business works, and what motivates VCs. Get educated on the basics of the venture fund business model, and how VCs stay in business. Find out how venture model dynamics and industry trends impact your company.

1. www.intelcapital.com
VC 101 (Startup Edition)
Christine Herron
June 2013
christine@christine.net
@christine

2. www.intelcapital.com
(AKA: How to Avoid Wasted
Time Fundraising)

3. 3
Know Your Audience

4. 4
Know Your Audience

5. 5
Know Your Audience

6. 6

7. 7

8. 8
Easy-to-Follow Bread Crumbs
o Follow us on Twitter
o Read our blogs
o Search our images
o Look up our portfolio companies and use their
products

9. 9
Mapping Out the Venture Business
o VC: “kind of” a finance job
o How a VC partnership works
(and why you care)
o What influences if/when VCs
will take a risk on you
o The VC investment process and
questions you should ask
o Impact of VC trends on you
Ask questions during the discussion!

10. 10
VC: Technically a Financial Industry
Public Equity
o Hedge Funds
o Pension Funds
o Mutual Funds
o Public Stock Trading
…etc.
Private Equity
o Buyouts
o Mezzanine
Investments
o Venture Capital

11. 11

12. 12

13. 13
Basic VC Business Model
o Capital Calls
o Where does the money come from?
o Management Fees
o How do the bills get paid? What does this imply for General Partner incentives?
o Profit Distributions
o What happens as investments mature?
o Staying in Business with Future Funds
o How does a partnership become sustainable and grow?

14. 14
Partnership Dynamics Affect You
o Limited Partners vs. General Partners
o Who are they and what do they do?
o Reporting
o What responsibilities do GPs have, and what rights do LPs have?
o Investment Profile
o What promises has the VC made around investing and portfolio management?

15. 15
Money Going In: Capital Contributions
G
P
G
P
GP
GP
GP
GP
GP
GPLP LPLP
LP
1% of
total
99% of
total
LP
LP LP

16. 16
Money Coming Out: Profit Sharing
G
P
G
P
GP
GP
GP
GP
GP
GP
20% of
total
80% of
total
LP
LP
LP
LP LP
LP
LP

17. 17
Sample Fund Recap
o 2.5% annual management fee
o Pays for office space, salaries, other G&A
o Incentive implications for small v. large funds
o All capital is repaid to LP before any profit is shared
o 80% of profit goes to LPs
o 20% of profit goes to GPs
o An individual VC’s share of the total GP profit share
is called “carried interest”

18. 18
Staying in Business = Raising More Funds
Year1
Year3-4
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
Year6-7

19. 19
Qualifying Questions
o Understand if they’re in a position to invest
o When did you close your last fund?
o What was your last investment?
o Understand if they’re a good fit for your company
o What is your average investment size?
o How many boards are you on?
o How does your process work?

20. 20
Where Are You in this Process?
o Deal sourcing and qualification: how good opportunities are found
o 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
o Term sheets: a nonbinding letter of intent
o Due diligence: ensuring that everything we believe to be true, is true;
research, references, financials, transaction summary/approval,
investment memo
o Closing: final signature and LP announcement
o Value offered: capital, relationships, management support

21. 21
How VC Trends Affect You
Growing Funding Market
o Minimum $ amount per
investment grows
o Higher VC valuations
o Lower returns % on a
higher base
o Gold rush mentality
(lower funding bar =
more risky or copycat
ideas/ teams)
Shrinking Funding Market
o Minimum $ amount per
investment shrinks
o Lower VC valuations
o Higher returns % on a
lower base
o Champions mentality
(higher funding bar = the
strongest or most unique
ideas/teams)
Whether the market is going up or going down,
VC money still has to be invested