Due diligence – in-depth investigation of the venture & you
Time frame to do a deal: 3 to 12 months
Entrepreneur decision making
Chemistry is key
Managing VC Portfolio Companies
Objective: invest large amounts of money in high growth, potentially large companies
Specialize in certain industries
A, B, C, & D Rounds of preferred stock
Each round is often staged with milestones
Board of Directors
Hands-on vs. portfolio approach
What Do VC’s Look For?
Expertise in industry
Commitment of CEO
Market potential - very large & high growth
Growth stage of development - VC money has the greatest impact
Proprietary product or service
Control: Why do VC’s Often Wind-up Owning > 50% of a Venture?
Not because want to run company or distrust the management
To achieve a satisfactory return
Ref: BZ-Exhibits 6.1 & 6.2
VC Required Return on Investment
Early Stage 8x
Second Stage 5x
Third Stage 4x
Return DCF Cash on Cash Bygraves & Zacharakis 0
What Are the Implications to the Entrepreneur of VC Returns?
The later the stage, the better the deal
The better the management, the better the deal
The quicker the exit, the better the deal
Why people want to be VC’s?
Management fees 2%
Specialize in an industry
Carried interest – 80/20
Series of funds
Value Proposition - 3 Elements
What are the features?
Who is the target market?
What are the benefits?
Value Proposition “ XYZ is a_______[describe] company. By its _______[feature(s)], it provides ______ [unique benefit(s)] to ______[target market]”
Simple Value Proposition SST Corporation “ SST is a stainless steel toothbrush company. By its one bristle brush made of high tensile stainless steel, it provides an exhilarating tooth cleaning experience to thrill-seeking X-gen consumers”
Simple Value Proposition Dell Computer “ Dell Computer sells personal computers to consumers. Our build-to-order manufacturing and customer-direct sales enable us to offer custom built computers at very competitive prices. Our customers get the computer that they have always imagined and save money.”
Simple Value Proposition Vic’s Coffee “ Vic’s Coffee is a Boulder based coffee house. Its gourmet coffee, convenient and fast service, provide a welcoming environment for people who want to meet with their friends or a stimulating morning coffee for on-the-go business people.”