Venture Capital 101

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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.com

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  • (InSITE stands for Investments from Student Interaction with Technology Entrepreneurs.)
  • These companies are past concept stage and have developed with some seed money and are now looking for their first round venture funding. Companies that we worked with in the past included: Fizzy Lizzy, a carbonated juice (not soft drink) that can be found in Citrella, Eli’s and other healthy food stores. Wakozi is seamlessweb for beer liquor or convenience items. Rights Flow… HopStop…
  • Raise $$$ - very difficult, 20-30% of General Partner time spent, Find companies to invest in (sourcing) Close deals Invest time/effort to help grow companies Get firms to exit
  • VC funds are like an upside down pyramid – more top heavy with partners, few associates/analysts Harder to get a post-MBA associate/sr. associate role than pre-MBA roles (fewer of them, many people want them)
  • These companies are past concept stage and have developed with some seed money and are now looking for their first round venture funding. Companies that we worked with in the past included: Fizzy Lizzy, a carbonated juice (not soft drink) that can be found in Citrella, Eli’s and other healthy food stores. Wakozi is seamlessweb for beer liquor or convenience items. Rights Flow… HopStop…
  • Very rough
  • Raise $$$ - very difficult, 20-30% of General Partner time spent, Find companies to invest in (sourcing) Close deals Invest time/effort to help grow companies Get firms to exit
  • These companies are past concept stage and have developed with some seed money and are now looking for their first round venture funding. Companies that we worked with in the past included: Fizzy Lizzy, a carbonated juice (not soft drink) that can be found in Citrella, Eli’s and other healthy food stores. Wakozi is seamlessweb for beer liquor or convenience items. Rights Flow… HopStop…
  • These companies are past concept stage and have developed with some seed money and are now looking for their first round venture funding. Companies that we worked with in the past included: Fizzy Lizzy, a carbonated juice (not soft drink) that can be found in Citrella, Eli’s and other healthy food stores. Wakozi is seamlessweb for beer liquor or convenience items. Rights Flow… HopStop…
  • These companies are past concept stage and have developed with some seed money and are now looking for their first round venture funding. Companies that we worked with in the past included: Fizzy Lizzy, a carbonated juice (not soft drink) that can be found in Citrella, Eli’s and other healthy food stores. Wakozi is seamlessweb for beer liquor or convenience items. Rights Flow… HopStop…
  • RecyleBank has cleared nearly $100M in venture funding… Hycrete, makers of a specialized concrete, cleared $15M in their most recent round… And just yesterday, Organic Motion was named the winner of the Wall Street Journal’s 9 th Annual Innovation Award for Computing Systems. Organic Motion has actually worked with InSITE twice. They began in our traditional program, and came back a year later for a custom consulting project. We try to maintain our relationships with our companies, and clearly they feel we add more value that just putting them in front of a VC…
  • These companies are past concept stage and have developed with some seed money and are now looking for their first round venture funding. Companies that we worked with in the past included: Fizzy Lizzy, a carbonated juice (not soft drink) that can be found in Citrella, Eli’s and other healthy food stores. Wakozi is seamlessweb for beer liquor or convenience items. Rights Flow… HopStop…
  • (InSITE stands for Investments from Student Interaction with Technology Entrepreneurs.)
  • Venture Capital 101

    1. 1. Venture Capital 101 Brian Rothenberg
    2. 2. What is Venture Capital (VC)? <ul><li>A type of private equity typically provided for early-stage, high-potential, growth companies </li></ul><ul><li>VCs generate a return through an eventual liquidity event such as an IPO or M&A sale of the company </li></ul><ul><li>Venture capital investments are generally made as cash in exchange for shares in the invested company </li></ul>
    3. 3. Typical VC fund structure Source: http://en.wikipedia.org/wiki/Venture_capital
    4. 4. How VCs make money <ul><li>Management fees - annual </li></ul><ul><ul><li>Up to 2-3% of assets under management </li></ul></ul><ul><li>Carried interest – “carry” </li></ul><ul><ul><li>20%+ share of the profits from the fund’s investments </li></ul></ul>
    5. 5. VC firm hierarchy General & Venture Partners Principals Sr./Associates Analysts Admin
    6. 6. Seed Start-up Sustained Growth Sources of funds over lifecycle Early Growth Pre-Revenue Revenue/Profitable Founder’s Savings Friends/Family Angels Venture Capital
    7. 7. 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+
    8. 8. VCs primarily do five things <ul><li>Raise $$$ </li></ul><ul><li>Find companies to invest in (sourcing) </li></ul><ul><li>Close deals </li></ul><ul><li>Invest time/effort to help grow companies </li></ul><ul><li>Get firms to exit </li></ul>
    9. 9. What do VCs look for? <ul><li>People </li></ul><ul><ul><li>“ A” team, right skills, previous success </li></ul></ul><ul><li>Opportunity </li></ul><ul><ul><li>Market, sustainable, business model, competition </li></ul></ul><ul><li>Context </li></ul><ul><ul><li>Technology, M&A or IPO’able? </li></ul></ul><ul><li>Deal </li></ul><ul><ul><li>Want the deal, but don’t want to overpay </li></ul></ul>
    10. 10. Market size is very important <ul><li>Market needs to be large ($B’s) & growing </li></ul><ul><ul><li>VCs stretch goal is 10x return on $ </li></ul></ul><ul><ul><li>They give you $10M, they want $100M back </li></ul></ul><ul><ul><li>If they own 25% stake, you need to sell for $400M+ to hit their targets… </li></ul></ul><ul><ul><li>… this can only be achieved with a big opportunity in a huge market </li></ul></ul>Note: While a VC’s homerun goal is 10x, most consider a 3x a pretty good exit, and anything above that is gravy
    11. 11. High company to funding ratio <ul><li>For every 100 companies looked at… </li></ul><ul><ul><li>70 are tossed out </li></ul></ul><ul><ul><li>30 get first call </li></ul></ul><ul><ul><li>10 get second call / meeting </li></ul></ul><ul><ul><li>1 gets funded </li></ul></ul><ul><ul><li>VCs look at a lot of companies </li></ul></ul><ul><ul><li>The odds are against the entrepreneur </li></ul></ul>Note: This is based on only a couple actual VCs’ input and is intended for illustrative purposes
    12. 12. Terms of VC financing <ul><li>Valuation: how much equity to get/give for a given valuation? </li></ul><ul><li>Negotiating deal terms: term sheets and stock purchase agreements </li></ul><ul><ul><li>Liquidity preference, board seats, option pools, cumulative dividends, full ratchet, etc. </li></ul></ul>
    13. 13. What happens after investing? <ul><li>Value-added investing </li></ul><ul><ul><li>VCs are active investors – try to make investments worth more </li></ul></ul><ul><ul><li>Help with strategy, recruitment, introductions through network, follow-on funding, etc. </li></ul></ul><ul><li>Exit – liquidity event to recoup investment </li></ul><ul><ul><li>Mergers & Acquisitions </li></ul></ul><ul><ul><li>IPO </li></ul></ul><ul><ul><li>Liquidation </li></ul></ul>
    14. 14. Sectors: hot or not? <ul><li>Digital Media / Internet </li></ul><ul><li>Cleantech </li></ul><ul><li>Life Sciences – Biotech / Devices </li></ul><ul><li>Mobile </li></ul><ul><li>E-commerce / Local </li></ul>Hot Not <ul><li>Semiconductors </li></ul><ul><li>Hardware </li></ul><ul><li>Consumer Packaged Goods </li></ul>
    15. 15. The VC industry is contracting… Many VCs predict the industry will shrink by 30-50%
    16. 16. 9 th 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+ !!
    17. 17. InSITE VC Sponsors
    18. 18. A few VC resources A VC Continuations Redeye VC Separate Piece Startup Math TechCrunch Wall Street Journal - VC Dispatch Venture Made Transparent VentureBeat
    19. 19. Questions? Thanks!

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