DFJ
Understanding Venture Capital
September 2009
© 2009 Simon Olson

What are venture capitalists?
• Venture capitalists (also known as VCs)
are professional investors who invest
money in young, privately-owned
companies and work with them to help
them succeed

Important things to remember
• Venture capital is equity, not debt
• The companies are private, not public
• The companies are young, but usually
have more than just an idea*
• The companies are growing
exponentially, not arithmetically
• The companies are usually technology-
related, but not always
*An idea would normally be “seed” capital, not venture capital

How does it work?
• Entrepreneur has an idea
• Gets “seed” capital from friends
and family, “bootstraps” the
idea using his or her own
money, or gets money from an
“angel” investor
• Builds a proof of concept
• Approaches venture capitalist

How does it work?
• Venture capitalist receives a short executive
summary (1-4 pages) or Power Point
presentation (10-15 slides) describing the
opportunity
• Analyzes the materials, rejects 90%
• Talks to the remaining 10%
• Invests in 1 out of the remaining 10%

What does the VC look for?
Investment criteria:
• Entrepreneur
• Team
• Market size
• Timing
• Company growth characteristics
• Exit potential

Venture capitalist’s objective
• To earn at least 10 times the value of
the initial investment in 4-5 years
• Ex. If I invest R$1 million in a company,
I want to be able to sell my stake in it
four years later, for at least R$10 million

Why is such a large return
necessary?

Because, for every Google in
a VC’s portfolio, there were 18
companies that failed!

Portfolio strategy
• Invest in 20, and pray for 2
• 13 companies fail, 5 break even, 2 big
hits
• Out of 2 big hits: one returns capital
for the entire fund, the other accounts
for the return*
*In the best funds, the ratio is more like 33% succeed, 33% break even, and 33% fail.

Portfolio distribution
2 great
successes:
R one returns
the fund’s
e capital and
t the other
u provides the
return
r
n
A few companies
break-even
0
Majority of companies fail
= portfolio company = break-even

After the decision is made to
invest, what’s next?

Services venture capitalist’s provide
• Advice on strategy
• Help recruiting
• Introductions to key customers/partners
• Professionalization (management and
corporate governance)
• Internationalization
• Help with sale of the company or IPO
• Provide capital

How do VCs make money?
• Annual management fee
• Performance fee

Simon Olson