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Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
Private Equity Investment: Lecture 2 - VC and other financing
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Private Equity Investment: Lecture 2 - VC and other financing

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  • 1. Professional Equity Investment (Venture Capital and Angel) Lecture 2 EBD 481, Fall 2009 Galbraith
  • 2. Equity Investment Process Seed Money 1st Round Financing (Series A) 2nd Round Financing (Series B) Clean-up Financing (Series C) Year 1 Year 3 Year 5 $50k $1 million $3 million $1 million Milestones and Benchmarks Private Investment Venture Capital Firms
  • 3. Historical Development of Professional Venture Capital
    • 1946: Beginning of Professional VCs
    • Formation of American Research & Development (ARD)
    • ARD’s Performance
      • $3.5 million was raised ($2 million from institutional investors)
      • By end of 1947, ARD had invested in eight ventures, six of which were startups
      • By 1951 the performance was still lack-luster (stock price was at $19 down from the initial offering price of $25 in 1946)
      • 1957 Invested in Digital Electronic Corporation
      • ARD Sold 1972; made money, about 15.0% annual return for investors (v. 7.2% in stock market)
  • 4. Historical Development of Professional Venture Capital (cont’d)
    • 1953:
      • Small Business Administration (SBA) was formed
      • Legislation permitted the federal government to actively engage in fostering new business formation
    • 1958:
      • SBA Created Small Business Investment Companies (SBICs)
      • Due to tax and leverage advantages, the SBIC became the primary vehicle for professionally managed venture capital
  • 5. Corporate Venture Capital
    • About 7 to 10% of VC dollars
    • Invest in technologies/deals that have transferability to the corporation
    • Don’t necessarily share the “profit” motive as Angels and fund-based VCs
    • Deal rate is much lower, but support is much higher for funded firms
    • Popular in pharmaceuticals, telecommunications, software and defense technologies
    • Microsoft, Intel, Merck, Qualcomm, and Millennium Pharmaceuticals
  • 6. Qualcomm Ventures (QVC)
    • Qualcomm Ventures (QCV) was formed and began funding in 2000, with a $500-million fund commitment to make strategic investments in early-stage high-technology ventures. Since then, QCV has funded numerous companies in the wireless sector, and set up several exclusive regional funds to spur development in key strategic markets, including a $60-million fund in Korea, a $30-million fund in Japan, a $100-million fund in China and a €100-million fund in Europe.
    • QCV makes strategic investments in wireless-industry ventures that provide both a strong potential return on investment (ROI) and complement existing Qualcomm products and services. When selecting portfolio companies, QCV seeks a balance between ROI and long-range strategic value to the company and the wireless industry.
  • 7. Qualcomm Ventures – Investment Criteria
    • Strategic Value Criteria
      • A strong fit with Qualcomm's products and initiatives
      • The potential to significantly affect the wireless value chain
      • A significant and sustainable competitive advantage
    • Financial Criteria
      • Potential liquidity and financial returns - Comparable to VC investors
      • Investment stage - Expansion, typically the second round of financing
      • Investment size - Between $500,000 and $10M, based on the opportunity
      • Ownership - Typically investing in privately held entities
      • Syndication - A strong investor group and board; typically QCV co-invests with financial VCs
  • 8. SOLICITING INVESTMENTS: Suppliers of Venture Capital – 25-Year Average
  • 9. Professional Venture Capital Investing Cycle
  • 10. ORGANIZING THE FUND: VC Fund Placement Memorandum
    • Front-matter Declarations
    • State Securities Disclosures
    • Offering Summary
    • Fund Overview
    • Executive Summary
    • Summary of Terms
    Fund is Formed, Investments Made, New Fund Created
  • 11. Useful Terms
    • Carried Interest:
    • portion of profits paid to the professional venture capitalist as incentive compensation
    • Two and Twenty Shops:
      • investment management firms having a contract that gives them a 2% of assets annual management fee and 20 percent carried interest
  • 12. OBTAINING COMMITMENTS: Arrangements with Fund Investors
    • Capital Call:
    • when the venture fund calls upon the investors to deliver their investment funds
      • Common to require subsequent investments consistent with the levels of investors’ initial contributions
  • 13. DUE DILIGENCE AND ACTIVE INVESTING: VC Fund Management
    • Deal flow:
    • flow of business plans and term sheets involved in the venture capital investing process
    • Due diligence (in venture investing context):
    • process of ascertaining the viability of a business plan
  • 14. VC and Angel Screening - Venture Characteristics
    • Proprietary
    • Growth
    • Founder Commitment
    • Experience
    • Track Record
    • Management
    • Fire Within
    • Business Model
    • Business Plan
    • Deal Structure
    • Exit Plan
  • 15. Screening Outcomes
    • Seek lead investor position
    • Seek a non-lead investor position
    • Refer venture to more appropriate financial market participants
    • SLOR (standard letter of rejection) the venture
  • 16. Structuring an Equity Investment
    • Term Sheet:
    • summary of the investment terms and conditions accompanying an investment
    • Typical Issues Addressed in a Term Sheet
      • Valuation
      • Ongoing funding needs
      • Size and staging of financing
      • Preemptive rights on new issues
      • Commitments for future financing rounds and
      • performance conditions
      • Form of security or investment
      • Redemption rights and responsibilities
  • 17. Structuring (cont’d)
    • Typical Issues Addressed in a Term Sheet
      • Dividend structure (Number of VCs and outsiders)
      • Additional management
      • Board appointments
      • Conversion value protection
      • Registration rights
      • Exit conditions and strategy
      • IPO-dictated events (e.g. conversion)
      • Co-sale rights (with founders)
      • Lock-up provisions
  • 18. Structuring (cont’d)
    • Typical Issues Addressed in a Term Sheet
      • Employment contracts
      • Incentive options
      • Founder employment conditions: compensation, benefits, duties, firing conditions, repurchase of stock o termination, term of agreement, post-employment activities and competition
      • Founder stock vesting
      • Confidentiality agreements and protection for intellectual property
  • 19. Exit Strategies
    • Acquisition -- least costly of exit strategies
    • Public Offering -- most costly, but exciting and maintain some control (Future Lecture?)
    • Joint Venture -- intermediate strategy
    • Equity Buyback -- expensive, but way to get venture capitalists out of business
  • 20. Summary - Advantages and Disadvantages of VC Funding
    • Equity
    • Oversight
    • Control
    • Over payment for funds
    • Need to have exit strategy
    • Contractual Commitments
    • Legal and paperwork
    • Marketing and Management Assistance
    • Leverage for debt financing
    • Networking for additional funds and contacts
  • 21. Grant and Guerrilla Financing
  • 22. Grant Financing
    • Government and Private Grants for R&D and Commercialization
      • No equity
      • Amount may be about $10billion per year in U.S. (angel financing about $20billion per year) – largest in segments which are funded
  • 23. Grant Financing
    • Small Business Innovation Research (SBIR)
      • DoD, NASA, DHS, DoC, EPA, DoT, DoEd, DoE, HHS (NIH), NSF & USDA
      • The SBIR Program provides up to $850,000 in early-stage R&D funding directly to small technology companies (or individual entrepreneurs who form a company);
        • Phase 1 ($75,000)
        • Phase II ($750,000)
        • Phase III (sell product)
    • Small Business Technology Transfer & Research (STTR)
      • The STTR Program provides up to $850,000 in early-stage R&D funding directly to small companies working cooperatively with researchers at universities and other research institutions;
  • 24. Grant Financing
    • Department of Defense: SBIR/STTR/Fast Track - Main Page
    • TechLink : : Links to Department of Defense, DoD Component, and Related Websites for SBIR/STTR Information
  • 25. Grant Financing
    • Other Grants (CCAT, TechLink, BAAs, etc)
    • Local and Regional Economic Development Grants
      • Industrial Development Bonds
      • Tax Breaks
      • Other Incentives
    • Private Foundations
  • 26. Guerrilla Financing
    • Credit Cards
    • Relatives and Friends
    • Trade Credit
    • Revenue Financing
    • Small Shares, with buyback provision
    • Factoring
    BOOTSTRAPPING

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