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Understanding Venture Capital
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Understanding Venture Capital


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A very basic presentation designed to help familiarize emerging market entrepreneurs with some of the principles of venture capital.

A very basic presentation designed to help familiarize emerging market entrepreneurs with some of the principles of venture capital.

Published in: Economy & Finance, Business

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  • 1. DFJ Understanding Venture Capital September 2009 © 2009 Simon Olson
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. 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%
  • 6. What does the VC look for? Investment criteria: • Entrepreneur • Team • Market size • Timing • Company growth characteristics • Exit potential
  • 7. 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
  • 8. Why is such a large return necessary?
  • 9. Because, for every Google in a VC’s portfolio, there were 18 companies that failed!
  • 10. 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.
  • 11. 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
  • 12. After the decision is made to invest, what’s next?
  • 13. 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
  • 14. How do VCs make money? • Annual management fee • Performance fee
  • 15. Simon Olson