8.1 vc business model.pptx

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How do Venture Capital firms work and how does the money flow. A brief overview.

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8.1 vc business model.pptx

  1. 1. This presentation is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this presentation are the sole responsibility of Rick Rasmussen and do not necessarily reflect the views of USAID or the United States Government. VC Business Model
  2. 2. Sources of Venture (Risk) Capital •  Friends, Family and Fools •  Angels •  Angel Groups •  Venture Capitalists –  Publicly Traded Funds –  Privately Formed Funds •  The Venture Capital Limited Partnership •  Corporations (Strategic Investors) –  Corporate Investor –  Corporate Captive Venture Fund •  IPO and The Public Markets
  3. 3. Venture Capital Fund Structure Venture Partners Associates CFO and Administration General Partners CORPORATE PENSION FUNDS UNIVERSITIES WEALTHY INDIVIDUALS & FAMILIES $$ $ Limited Partners Potential Funding question Invest m e n t Invest m e n t Invest m e n t Invest m e n t Invest m e n t Invest m e n t Invest m e n t Each Fund is a stand-alone entity VC firm may have multiple overlapping funds
  4. 4. VC Business Model •  Funding comes from Limited Partners (LPs) –  Pension funds, large family trusts, sovereign funds… –  Each fund lasts 7-10 years –  Committed money, collected upon a “cap call” •  Fund is managed by General Partners (GPs) •  Fund finds and invests in companies •  Profits returned to LPs as companies exit –  Merger, acquisition, –  Initial public offering (IPO) –  Directorships, additional shares, etc.  
  5. 5. General Partners •  Organize the Fund •  Raise money from Limited Partners •  Find deals and make investments •  Monitor Investments –  Sit on boards –  Help build each business •  Secure Liquidity (Exits)
  6. 6. The VC Business Model Biotech Big Data Mobile App VC  firm  LP LP expecting greater than S&P average over fund life Management fee ~2% per year + Carry ~20% on any exits •  VC will invest in 10 to 50 companies in one fund •  Each partner may do 4 to 8 investments over life of each fund LP Investments
  7. 7. VC Places Multiple Bets Biotech Big Data Mobile SW VC  firm  LP Invest $50M (Money sent as investments made) $3M series A $8M series B $10M series A 40% 18% 25% LP
  8. 8. Typical Scenario (out of 10 companies) One Skyrockets Great returns – hopefully 10x This makes the fund successful 3 do well Moderate returns, at least returning investment 3 trolls Continue to do business without an exit, sucking up bandwidth to manage 3 die But that’s OK, much was learned
  9. 9. Outcome is Known VC Firm Biotech Big Data Mobile SW LP Invest $50M (Money sent as investments made) $3M series A $8M series B $10M series A Shut down! Series C, then IPO at $500M Acquired for $200M LP
  10. 10. Fund Winds Down Biotech Big Data Mobile App VC  firm  LP Invest $50M (Money sent as investments made) $3M series A $8M series B $10M series A Shut down! Series C, then IPO at $500M Acquired for $200M 40% 18% 25% $0 $45M (18% became 9% due to series C) $50M LP
  11. 11. Exit Math •  LP committed $50M but cap calls for $21M •  Over 10 year period paid $10M in management fees •  LP math: –  Capital recovered $95M –  LP got $8M (biotech) + $10M (big data) = $18M –  Portion of carry •  80% of ($50M-$10M)= 0.8 x $40M = $32M •  80% of ($45M - $8M) = 0.8 x $37M = $29.6M •  LP: $31M out, $79.6M returned (net = $48.6M) •  VC: $10M in fees + $15.4M in carry  
  12. 12. Tough to get a huge win…

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