About Venture Capital December 2012 Hervé Lebret
Stanford ecorner Venture Capital Is a Time Bomb David Heinemeier Hansson | 37signals How do venture capitalists decide what to invest in, and why? Steve Jurvetson
Some introductory numbersVC USA UK CH Sweden India France China TotalKleiner Perkins 16 16Sequoia 12 12NEA 7 1 8Benchmark 7 1 8IVP 7 1 8Accel 6 6Greylock 5 5Oak 3 1 1 5Venrock 5 5Index Ventures 2 1 2 5Mayfield 5 5Sofinnova 1 3 4Mohr Davidow 4 4Atlas 1 1 2 4USVP 4 4Innovacom 4 43i 2 1 3Bechtolsheim 3 3TVI 3 3Crosslink 2 1 3MPAE 3 3DFJ 1 1 1 3Redpoint 3 3Harbor Vest 1 2 3Union Square 3 3… …Total 147 10 3 10 3 24 2 199 Extracted from data in http://www.startup-book.com/2011/08/15/more-data-on-ipo-and-founders
Agenda Historical background Economic perspective The VC process
History of venture capital Full story in: You can also read chapter 4 Start-Up, what we may still learn from Silicon Valley
It began as a hobby of the rich… Laurence Rockfeller was interested in science and technology and less in his family business. He assembled a team of advisers, backed many entrepreneurs. In 1969, he structured a $7.5M fund into Venrock Associates. Founded as the one of the first He invested in MinuteMaid, private equity firms in 1946 by Memorex, Genera Signals but "Jock" Whitney, J.H. Whitney & also in movies (Gone with the Co. provided capital and Wind) professional assistance to He coined the term “venture entrepreneurs. capital”.
The Ancestors’ investments Arthur Rock, a banker on the East Coast, is contacted to help them raising $1.5M; an amount he will find in the person of Sherman Fairchild, the largest individual shareholder of IBM and owner of Fairchild Camera. In 1957, Fairchild Semiconductor is founded. Fairchild Semiconductor was very successful and reached 12,000 employees but the founders were bought back their shares by Fairchild… they still became wealthy. Faichild bought back for $2.4M the stake of the 8 founders. ARD financed High Voltage (a $1.8M return for a $200k investment) and Digital Equipment in 1957 (a $70k inv. worth $355M after 14 years). ARD stopped in 1972. ARD biggest flaw was no incentive for associates (no carried interest).
Kleiner Perkins first fund $7M fund with $4M from Hilman (Wilmington), $1M from Rockefeller University. Both Kleiner and Perkins put $150k each. Tandem ($152M) KP First Fund (1972-1984) Genentech ($47M) $16000000 $14000000 $12000000 Cost ($) $10000000 $8000000 $6000000 $4000000 Value on $2000000 June 30,1984 $0 In . pl x I a I . om e or . en l C c. At hn e C c . a l en . ic gy rp. i c T Qu ns . d r ev e en c . er Co Ap nt e ekn rp Am ute rp. em C e C p. m C . . M ust . C r M ast Inc un a l c . An pm o rp ac Dy ria s tio rp Co tus o rp ie nd nc v i C nte orp c. G dah I n m In at rie An D l lag h In o r t Co m d ic In hl ol o o ica Co o Sh Co yz t os lo C l rs s An nt c e e p m e ce o n e ip ro o qu d et an ec E A n io er ch nd O ov at Am e e Ta En N re Sp ffi ec R ed nc vaAdMore on http://www.startup-book.com/2009/02/09/about-kleiner-perkins-first-fund-episode-3
Agenda Historical background Economic perspective The VC process
Nasdaq and the VCs 1971-20064500 904000 803500 70 1974: the oil crisis and ERISA act3000 602500 50 1984: the HDD crisis2000 401500 30 1990: US recession and1000 20 declining IRRs 500 10 0 0 2001: the Internet crash 1971 1976 1981 1986 1991 1996 2001Natural scale Nasdaq ( end y ear) VC f unds ( $B) 10000 100 1000 10 100 1 10 0. 1 1 0. 01 1971 1976 1981 1986 1991 1996 2001Source: Compilation HL Log scale Nasdaq ( end y ear) VC f unds ( $B)
Some returnsAlthough the data are not so easy to obtain (the numbers below are not fullyconsistent…), the VC world has generated exceptional returns. The individualsuccess stories are known. Some previous slides give some more numbers. Thereader can compare to the typical Wall Street numbers…
How do VC make money? Today VCs manage funds of other financing institutions and usually not their own (this is BAs or syndicates of Bas). A typical VC fund lasts 10 years with an investment period of 5-7 years VCs have two sources of funding: A management fee: usually 2% to 2.5% of the size of the fund per year A carried interest: usually 20% of the fund net profits Possibly a hurdle rate (6-8%)
Agenda Historical background Economic perspective The VC process You can read chapter 5 Start-Up, what we may still learn from Silicon Valley
What do VCs look for? “Some winning venture capitalists claim to look almost exclusively at the backgrounds and personalities of the founders; others focus mostly on the technology involved and the market opportunity the venture addresses” from The New Venturers, Wilson (1984) “There are people risks, markets risks, product development risks and finance risks. We will not invest in a company unless we understand and are comfortable with three of these risks.” “The components of success are product differentiation, a fast-growing market, a team of dedicated people and money.” Don Valentine quoted in Wilson (1984)
The main terms of an investment The size of the investment and related valuation. The pre- and post-money valuations differ by the size of the investment. The ESOP size also has an impact and the fully diluted valuation includes the newly avalables stock options. The price per share and the number of shares created. The class of shares, usually preferred. The structure of the board of directors. The vesting and reverse vesting mechanism of the stock options andfounders’ shares. The kind of liquidation preference. The anti-dilution mechanism. The redemption rights. The priority rights, the restrictions on the sales and the transfer of shares. The exit conditions, and in particular the clauses that may force a sale(tag along, drag along). The expenses linked to the investment. The kind of decisions that investors control after their investment, usuallythrough veto rights (the protective provisions).
$0 $200000000 $300000000 $400000000 $100000000 $500000000 $600000000 $0 $11000000 $22000000 $33000000 $44000000 $55000000 $66000000 $77000000 $88000000 $99000000$110000000 Series C Series B Series A$121000000 Common$132000000$143000000$154000000$165000000$176000000$187000000$198000000 Liquidation preference$209000000$220000000$231000000$242000000$253000000$264000000$275000000$286000000$297000000$308000000$319000000$330000000$341000000$352000000$363000000$374000000$385000000$396000000$407000000$418000000$429000000$440000000$451000000$462000000$473000000$484000000$495000000$506000000$517000000$528000000$539000000$550000000$561000000$572000000$583000000$594000000
Anti-dilution Investors protect their shares in case of a “down-round”, i.e. a new financing round with a lower price per share. There are three mechanisms (see excel-file): Full ratchet Weighted narrow-based average Weighted broad-average The full ratchet gives the new (lower) price to the previous preferred shareholders who receive new shares. A weighted average is a combination of old and new price. The narrow-based weighted average takes into account only the total number of outstanding preferred shares for determining the new weighted average price for the old shares. The broad-based weighted average accounts for all equity previously issued and currently undergoing issue. 1st round 2nd roundPrice $2.00 $0.75Amount $6000’000 $750’000Anti- Broad-based Narrow-based Full ratchetdilution Shares % Shares % Shares % Shares %Common 10000’000 76.9% 10000’000 70.7% 10000’000 68.8% 10000’000 52.6%Series A 3’000’000 23.1% 3140’187 22.2% 3555’556 24.4% 8000’000 42.1%Series B 1000’000 7.1% 1000’000 6.9% 1000’000 5.3%Total 13000’000 14140’187 14555’556 19000’000
Comments on termsA term sheet follows the technical due diligence (3-6 months) and isconditional to legal and accounting due diligence. If all is positive, aninvestment should follow in 1-3 months.Terms are seldom balanced and reflect investors’ power. There is a “no-prisoner” approach! There are however standard with not much deviation Confidentiality/exclusivity/costs are the only binding terms Avoid milestones! Be prepared…
If you want to be part of the game… Career Traits for the Aspiring Venture Capitalist Steve Jurvetson