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Venture Capital 101 // Christine Herron // blackbox connect

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Christine Herron's Quick & Dirty Guide to Venture Capital // blackbox connect // Nov 2011

Christine Herron's Quick & Dirty Guide to Venture Capital // blackbox connect // Nov 2011

Published in Economy & Finance , Business
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  • 1. VC 101:Inside the Black BoxChristine HerronIntel CapitalNovember 2011 www.intelcapital.com
  • 2. (AKA: Christine’s Quick &Dirty Guide to VentureCapital) www.intelcapital.com
  • 3. What’s My Motivation? 0
  • 4. What’s Under the Hood? 0
  • 5. Know Your Audienceo Follow us on Twittero Read our blogso Search our imageso Look up our portfolio companies and use their products 0
  • 6. What We’ll Covero What VC is noto VC partnerships revealedo Follow the moneyo The VC investment processo Impact of VC trends on you Feel free to ask questions during the discussion! 0
  • 7. Quick Context: What VC is Not Public Equity Private Equityo Hedge Funds o Buyoutso Pension Funds o Mezzanineo Mutual Funds Investmentso Public Stock o Venture Capital Trading …etc …etc. 0
  • 8. Quick Context: What VC is Not Public Equity Private Equityo Hedge Funds o Buyoutso Pension Funds o Mezzanineo Mutual Funds Investmentso Public Stock o Venture Capital Trading …etc. 0
  • 9. 0
  • 10. 0
  • 11. VC Partnerships Revealedo Limited Partners vs. General Partnerso Who are they and what do they do?o Reportingo What responsibilities do GPs have, and what rights do LPs have?o Investment Profileo What promises has the VC made around investing and portfolio management? 0
  • 12. How to Follow the Moneyo Capital Callso Where does the money come from?o Management Feeso How do the bills get paid? What does this imply for General Partner incentives?o Profit Distributionso What happens as investments mature?o Staying in Business with Future Fundso How does a partnership become sustainable and grow? 0
  • 13. Money Going In: Capital Contributions LP GPLP LP LP GP GP GP GP LP LP GPLP GP GP 99% of 1% of total total 0
  • 14. Money Coming Out: Profit Sharing LP GP GPLP LP LP GP GP GP LP LP GPLP GP GP 80% of 20% of total total 0
  • 15. Sample Fund Recapo 2.5% annual management feeo Pays for office space, salaries, other G&Ao Incentive implications for small v. large fundso All capital is repaid to LP before any profit is sharedo 80% of profit goes to LPso 20% of profit goes to GPso An individual VC’s share of the total GP profit share is called “carried interest” 0
  • 16. Staying in Business = Raising More Funds Each Fund Life = 10 Years3-4 Yrs = 6-7 Yrs = HarvestSeed NewCos & Do Followons Y Fund I ($100M) e Y Y a e e a Fund II ($125M) r a 1 r r 3 6 Fund III - - ($150M) 4 7 Must raise new funds to keep investing in NewCos; once After 6-7 years in business, new fund is raised, NewCo VC will have 3+ concurrent, funding will come from it active funds at any one time; only one, however, will be funding NewCos 0
  • 17. The VC Investment Cycleo Deal sourcing and qualification: how good opportunities are foundo Evaluation: deciding if there’s a good fit with investment parameters; company history, business characteristics, finances, business plan analysis, comparables analysis, pro forma return modelo Term sheets: a nonbinding letter of intento Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memoo Closing: final signature and LP announcemento Value offered: capital, relationships, management support 0
  • 18. How VC Trends Affect You Growing Funding Market Shrinking Funding Marketo Minimum $ amount per o Minimum $ amount per investment grows investment shrinkso Higher VC valuations o Lower VC valuationso Lower returns % on a o Higher returns % on a higher base lower baseo Gold rush mentality o Champions mentality (lower funding bar = (higher funding bar = the more risky or copycat strongest or most unique ideas/ teams) ideas/teams) Whether the market is going up or going down, VC money still has to be invested 0
  • 19. Qualifying Questionso Understand if they’re in a position to investo When did you close your last fund?o What was your last investment?o Understand if they’re a good fit for youo What is your average investment size?o How many boards are you on?o How does your process work? 0