Vcic Prep Session Vc 101

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Vcic Prep Session Vc 101

  1. 1. VCIC ® Team Prep Session VC 101 This PPT was created for organizers of internal events to help prepare student teams to compete.
  2. 2. What is a VC’s Job? <ul><li>Return 20-25% to LPs </li></ul>
  3. 3. VC’s Job Duties <ul><li>Fundraising </li></ul><ul><li>Sourcing deals </li></ul><ul><li>Investing </li></ul><ul><li>Growing ventures </li></ul><ul><li>Exiting </li></ul>
  4. 4. VC’s Job Cycle <ul><ul><li>Fundraise </li></ul></ul><ul><li>Close Fund </li></ul><ul><ul><li>Source Deals </li></ul></ul><ul><li>Invest </li></ul><ul><ul><li>Grow Ventures </li></ul></ul><ul><li>Exit </li></ul><ul><ul><li>Fundraise… </li></ul></ul>
  5. 5. VC’s Job Cycle <ul><ul><li>Fundraise </li></ul></ul><ul><li>Close Fund </li></ul><ul><ul><li>Source Deals </li></ul></ul><ul><li>Invest </li></ul><ul><ul><li>Grow Ventures </li></ul></ul><ul><li>Exit </li></ul><ul><ul><li>Fundraise… </li></ul></ul>
  6. 6. Raising a Fund <ul><li>VC fund is a partnership </li></ul><ul><li>GPs (general partners) are the VCs who actively invest the fund in startups </li></ul><ul><li>LPs (limited partners): </li></ul><ul><ul><li>Financial investors with no active role </li></ul></ul><ul><ul><li>“ Institutional”: pension funds, university endowments, insurance companies, etc. </li></ul></ul>
  7. 7. Raising a Fund LP 2 LP 3 LP 4 VC Firm (GPs) Fund 1 $$$$ LP 1 LP n Pledge $$ Commitments only. No actual cash changes hands. Pledge $$ Pledge $$ Pledge $$ Pledge $$
  8. 8. Raising a Fund CalPERS Parish Capital VC Firm (GPs) Fund 1 $$$$ UNC Endowment AIG Pledge $$ Pledge $$ Pledge $$ Pledge $$ Pledge $$ Example NC Pension Fund
  9. 9. Sources of Funds
  10. 10. Example Portfolio Diversity of LP VC is a subset of private equity.
  11. 11. VC Firm vs. VC Fund <ul><li>One firm manages multiple funds </li></ul><ul><li>Firms are LLCs with no end date </li></ul><ul><li>Funds are LLPs with 10-year lifespans </li></ul>Roizen: small and large firms.
  12. 12. Fund Size <ul><li>Large: </li></ul><ul><ul><li>New Enterprise XIII, $2.2B,12 GPs </li></ul></ul><ul><ul><li>Kleiner Perkins XIII, $700M </li></ul></ul><ul><li>Local RTP, for example: </li></ul><ul><ul><li>Intersouth IV, $275M </li></ul></ul><ul><ul><li>Southern Capitol II, $15M </li></ul></ul>
  13. 13. New Enterprise Associates hauls in nearly $2.5B for new fund <ul><li>10/19/09 : 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.  more... </li></ul>Imagine you are a start-up that needs $1M in funding. Can this firm help you?
  14. 14. Fund Life: 10 Years Invest and Reserve Follow-On Rounds Harvest “ Raise” Fund Year 0 5 10
  15. 15. Example Successful Investment Invest and Reserve Follow-On Rounds Harvest Series A Due Diligence Hit Milestones Hit Milestones Series B EXIT Find Deal Series A ROI is calculated on 6 years Series B ROI is calculated on 3 years 0 2 3 5 8 10
  16. 16. A Pattern That Repeats A B Exit 0 2 3 5 8 10
  17. 17. One of Many A B Exit 0 2 3 5 8 10
  18. 18. Portfolio of 10-25 Investments A B A B A B A B C A B A B Bust A Bust B A Bust A Bust A B C A D B Exit Exit Big Exit Exit 0 2 3 5 8 10
  19. 19. Portfolio of 10-25 Investments Big Exit A B A B A B A B C A B A B Bust A Bust B A Bust A Bust A B C A D B 3 2 5 6 8 9 11 10 Exit Exit Exit 4 1 7 0 2 3 5 8 10
  20. 20. Exit Scenario A B A B A B A B C A B A B Bust A Bust B A Bust A Bust A B C A D B Exit Exit Big Exit Exit ? ? ? Bust Exit ? 0 2 3 5 8 10
  21. 21. First Fund Invest and Reserve Follow-On Rounds Harvest “ Raise” Fund Year 0 5 10
  22. 22. First Fund Raise $$ Invest Follow-On Harvest Fund 1 Year 0 5 10
  23. 23. Multiple Funds Raise $$ Invest Follow-On Harvest Raise $$$$ Invest Follow-On Harvest Raise $$$ Invest Follow-On Harvest Always fundraising Always investing Always growing Fund 1 Fund 3 Fund 2 0 5 10 0 5 10 0 5 10
  24. 24. 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
  25. 25. VC’s Job Cycle <ul><ul><li>Fundraise </li></ul></ul><ul><li>Close Fund </li></ul><ul><ul><li>Source Deals </li></ul></ul><ul><li>Invest </li></ul><ul><ul><li>Grow Ventures </li></ul></ul><ul><li>Exit </li></ul><ul><ul><li>Fundraise… </li></ul></ul>
  26. 26. Source Deals: Focus
  27. 27. Source Deals: Network <ul><li>Lawyers, CPAs, CFOs, bankers </li></ul><ul><li>Other VCs (syndication) </li></ul><ul><li>Serial entrepreneurs </li></ul><ul><li>Conferences </li></ul><ul><li>Universities </li></ul><ul><ul><li>Technology transfer </li></ul></ul><ul><ul><li>Teach, coach, mentor, judge </li></ul></ul>
  28. 28. The Wall Street Organization, Inc.
  29. 30. 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
  30. 31. Typical Growth of Bootstrap Venture Normal bootstrap business Grows steadily (if you’re lucky)
  31. 32. Rounds <ul><li>An investment / stock issuance occurs in something called a “round” </li></ul><ul><li>VCs purchase preferred shares, which means they have rights over “common” </li></ul><ul><li>Most ventures need multiple rounds (Series A, Series B, etc.) </li></ul><ul><li>Each round dilutes previous shareholders </li></ul><ul><li>Valuation occurs at the moment of a round (other times difficult to value illiquid asset) </li></ul>
  32. 33. VC Investment Math <ul><li>Pre + Investment = Post </li></ul><ul><li>% Ownership = Investment ÷ Post </li></ul>
  33. 34. Example: $3M Post Preferred Shares Common Shares
  34. 35. Negotiating Points <ul><li>Pre-money valuation </li></ul><ul><li>Investment size </li></ul><ul><li>Option pool </li></ul><ul><li>Board seats </li></ul><ul><li>Liquidation preferences </li></ul><ul><li>Dividends </li></ul><ul><li>Anti-dilution </li></ul><ul><li>Closing conditions </li></ul>Determine % ownership Some of the “rights” of preferred shares
  35. 36. VC’s Job Cycle <ul><ul><li>Fundraise </li></ul></ul><ul><li>Close Fund </li></ul><ul><ul><li>Source Deals </li></ul></ul><ul><li>Invest </li></ul><ul><ul><li>Grow Ventures </li></ul></ul><ul><li>Exit </li></ul><ul><ul><li>Fundraise … </li></ul></ul>
  36. 37. Growing Ventures <ul><li>On the Team </li></ul><ul><ul><li>“ Active” participation = board seat(s) </li></ul></ul><ul><ul><li>Advisors (connections, strategy, etc.) </li></ul></ul><ul><li>Future rounds </li></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Milestones </li></ul></ul><ul><ul><li>Syndication </li></ul></ul>
  37. 38. Board Seats <ul><li>Board of directors controls the venture (unlike board of advisors) </li></ul><ul><li>Small ventures have small boards that meet often (quarterly), 3-7 members </li></ul><ul><li>Odd number to prevent ties </li></ul><ul><li>% ownership should be reflected on board, majority controls </li></ul>
  38. 39. Advisors <ul><li>Even if not on board, VCs will have strategic input </li></ul><ul><li>VC network benefits </li></ul><ul><ul><li>Management team additions </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>Partners </li></ul></ul><ul><ul><li>Competitors </li></ul></ul>
  39. 40. Future Rounds <ul><li>Future rounds are the norm, not the exception (most entrepreneurs do not realize this) </li></ul><ul><li>VCs help find “syndicate” investors </li></ul><ul><ul><li>Later rounds can be much larger </li></ul></ul><ul><ul><li>New network benefits </li></ul></ul><ul><li>Up round: valuation is higher and investment is (usually) higher </li></ul><ul><li>Down round: valuation is lower </li></ul>
  40. 41. Future Rounds <ul><li>VCs in Series A almost always join Series B </li></ul><ul><ul><li>“ Pro rata” means they invest to keep same % ownership </li></ul></ul><ul><ul><li>aka, “maintain position” </li></ul></ul><ul><li>In a hits-driven business, not maintaining a position is as bad as no hit </li></ul><ul><ul><li>“ Last money in” dictates the terms </li></ul></ul>
  41. 42. Series A and B Conflict <ul><li>Series A investor, like the entrepreneur, wants a high pre-money valuation for Series B </li></ul><ul><li>Series B wants lower pre-money valuation </li></ul><ul><li>A VC who is in both rounds is trying to find middle ground </li></ul><ul><li>VCs are generally trying to find a “fair market price” to avoid a future conflicts </li></ul>
  42. 43. Example Up Round <ul><li>Series A: “1 on 1” </li></ul><ul><ul><li>$1M Pre-money valuation </li></ul></ul><ul><ul><li>$1M Investment -> $2M post-money valuation </li></ul></ul><ul><li>Series B: “2 on 3” </li></ul><ul><ul><li>$3M Pre-money </li></ul></ul><ul><ul><li>$2M Investment -> $5M post-money valuation </li></ul></ul>
  43. 44. Up Round: 1 on 1, 2 on 3 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 Shares 1M/2M = 50% Diluted to 1M/3.33M = 30% Series B VC Shares 1.33M/3.33M = 40% Founders Same as Series A VC shares Things go well Hit milestones Increased valuation
  44. 45. Dilution Original Shares Added Shares New Share Pool Original Shares Same quantity of blue. Lower percentage.
  45. 46. Why Dilution is Bad Original Pool Every 1% you lose of a 20X Exit is going to hurt 20 times more
  46. 47. Up Round: 2 on 4 12 on 12 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 Ownership Series A VC Shares 2M/6M = 33% Diluted to 2M/12M = 16.7% Series B VC Shares 6M/12M = 50% Founders 4M/6M = 67% Diluted to 4M/12M=33.3%
  47. 48. Down Round 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% 1 on 1 1 on 1.5
  48. 49. Imagine a Scenario <ul><li>The venture needs cash </li></ul><ul><li>Early round VCs cannot participate (ran out of dry powder) </li></ul><ul><li>How does this affect negotiations? </li></ul><ul><ul><li>Lower pre-money valuation </li></ul></ul><ul><ul><li>No ability for earlier VC to take advantage of lower valuation </li></ul></ul>
  49. 50. Capitalization Table <ul><li>A table that shows the ownership structure of a venture </li></ul><ul><li>Includes all shareholders and all classes of shares </li></ul><ul><li>Also called “cap chart” </li></ul><ul><li>Sign up at www.LearnVC.com for cap chart examples </li></ul>
  50. 51. Option Pool <ul><li>Negotiated, but the norm is to take it out of the founders’ side (or ‘hide’) </li></ul><ul><li>Result: can severely dilute founders </li></ul>
  51. 52. 25% Option Pool Example Inv = $1M Series A Pre = $1M Post = $2M No Option Pool 1M VC shares 1M Founder shares 2M total shares 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 Pool Pre = $1M
  52. 53. Future Rounds Impact on ROI <ul><li>VCs want to “maintain their position” </li></ul><ul><ul><li>Keep same % of ownership to exit </li></ul></ul><ul><ul><li>Requires “dry powder” for future rounds </li></ul></ul><ul><ul><li>Probably need syndication </li></ul></ul><ul><ul><li>Trying to avoid dilution </li></ul></ul><ul><li>You must estimate future funding/dilution to estimate your ROI </li></ul>
  53. 54. VC’s Job Cycle <ul><ul><li>Fundraise </li></ul></ul><ul><li>Close Fund </li></ul><ul><ul><li>Source Deals </li></ul></ul><ul><li>Invest </li></ul><ul><ul><li>Grow Ventures </li></ul></ul><ul><li>Exit </li></ul><ul><ul><li>Fundraise… </li></ul></ul>
  54. 55. VC Return <ul><li>“ Top Quartile” venture firms return >20% average ROI to LPs </li></ul><ul><li>Fund has life of 10 years </li></ul><ul><li>Average investments are 5-7 years </li></ul>
  55. 56. Invest Startup Startup Startup Startup Startup Startup Startup Startup Startup Startup Startup Portfolio VC Firm (GPs) $$ $$ $$ $$ $$ $$ Fund 1 $$$$ Capital Call $$ Capital Call $$ Capital Call $$ Capital Call $$ Capital Call $$ LP 2 LP 3 LP 4 LP 1 LP n
  56. 57. Exits Single Home Run dud dud dud Triple VC Firm (GPs) Fund 1 $$$$ $$ $$ $$ dud dud dud dud Single Single Double dud $$$$$$$$$$ $$ $$ $$$ $ $ $ $$ $$ Single LP 2 LP 3 LP 4 LP 1 LP n
  57. 58. Examples <ul><li>150M fund </li></ul><ul><li>Fees: 3M/year (salaries, rent, travel) </li></ul><ul><li>Carry: </li></ul><ul><ul><li>12 portfolio ventures at $10M avg. investment </li></ul></ul><ul><ul><li>To get 20% ROI, we need ~$450M (20% of 150M = $30M x 10 years) </li></ul></ul><ul><ul><li>That’s two ventures going 20X!! </li></ul></ul>
  58. 59. Getting to 20% ROI <ul><li>Rule of thumb: 3X on entire fund </li></ul><ul><li>However, each investment is not 10 years </li></ul><ul><ul><li>Money not “put to work” until a capital call </li></ul></ul><ul><ul><li>Exit could happen before end of fund </li></ul></ul><ul><li>You could reach 20% with only 1.5X </li></ul>
  59. 60. How do GPs/VCs Make Money? <ul><li>Management fee (~2%/year to cover expenses) for 10 years </li></ul><ul><li>“ Carry” </li></ul><ul><ul><li>% of capital gain that VCs keep </li></ul></ul><ul><ul><li>20% benchmark </li></ul></ul><ul><ul><li>Requires liquidity event(s) </li></ul></ul>
  60. 61. Conclusion: VC’s Job Cycle <ul><ul><li>Fundraise </li></ul></ul><ul><li>Close Fund </li></ul><ul><ul><li>Source Deals </li></ul></ul><ul><li>Invest </li></ul><ul><ul><li>Grow Ventures </li></ul></ul><ul><li>Exit </li></ul><ul><ul><li>Fundraise… </li></ul></ul>
  61. 62. 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

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