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VC 101


"VC 101" talk at 500 Startups, July 21, 2011

"VC 101" talk at 500 Startups, July 21, 2011

Published in Economy & Finance , Business
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  • 1. VC 101: Inside the Black Box Christine Herron Intel Capital July 2011
  • 2. (AKA: Christine’s Quick & Dirty Guide to Venture Capital)
  • 3. What’s My Motivation?
  • 4. What’s Under the Hood?
  • 5. Know Your Audience
    • Follow us on Twitter
    • Read our blogs
    • Search our images
    • Look up our portfolio companies and use their products
  • 6. What We’ll Cover
    • What VC is not
    • VC partnerships revealed
    • Follow the money
    • The VC investment process
    • Impact of VC trends on you
    • Feel free to ask questions during the discussion!
  • 7. Quick Context: What VC is Not
    • Public Equity
    • Hedge Funds
    • Pension Funds
    • Mutual Funds
    • Public Stock Trading
    • … etc.
    • Private Equity
    • Buyouts
    • Mezzanine Investments
    • Venture Capital
    • … etc
  • 8. Quick Context: What VC is Not
    • Public Equity
    • Hedge Funds
    • Pension Funds
    • Mutual Funds
    • Public Stock Trading
    • … etc.
    • Private Equity
    • Buyouts
    • Mezzanine Investments
    • Venture Capital
  • 9.  
  • 10.  
  • 11. VC Partnerships Revealed
    • Limited Partners vs. General Partners
        • Who are they and what do they do?
    • Reporting
        • What responsibilities do GPs have, and what rights do LPs have?
    • Investment Profile
        • What promises has the VC made around investing and portfolio management?
  • 12. How to Follow the Money
    • Capital Calls
        • Where does the money come from?
    • Management Fees
        • How do the bills get paid? What does this imply for General Partner incentives?
    • Profit Distributions
        • What happens as investments mature?
    • Staying in Business with Future Funds
        • How does a partnership become sustainable and grow?
  • 13. Money Going In: Capital Contributions 1% of total 99% of total GP GP GP GP GP GP GP GP LP LP LP LP LP LP LP
  • 14. Money Coming Out: Profit Sharing 20% of total 80% of total GP GP GP GP GP GP GP GP LP LP LP LP LP LP LP
  • 15. Sample Fund Recap
    • 2.5% annual management fee
        • Pays for office space, salaries, other G&A
        • Incentive implications for small v. large funds
    • All capital is repaid to LP before any profit is shared
        • 80% of profit goes to LPs
        • 20% of profit goes to GPs
    • An individual VC ’s share of the total GP profit share is called “carried interest”
  • 16. Staying in Business = Raising More Funds Year 1 Year 3-4 Each Fund Life = 10 Years 3-4 Yrs = Seed NewCos 6-7 Yrs = Harvest & Do Followons Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it Fund III ($150M) Fund II ($125M) Fund I ($100M) After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos Year 6-7
  • 17. The VC Investment Cycle
    • Deal sourcing and qualification: how good opportunities are found
    • Evaluation: deciding if there ’s a good fit with investment parameters; company history, business characteristics, finances, business plan analysis, comparables analysis, pro forma return model
    • Term sheets: a nonbinding letter of intent
    • Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo
    • Closing: final signature and LP announcement
    • Value offered: capital, relationships, management support
  • 18. How VC Trends Affect You
    • Growing Funding Market
    • Minimum $ amount per investment grows
    • Higher VC valuations
    • Lower returns % on a higher base
    • Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams)
    • Shrinking Funding Market
    • Minimum $ amount per investment shrinks
    • Lower VC valuations
    • Higher returns % on a lower base
    • Champions mentality (higher funding bar = the strongest or most unique ideas/teams)
    Whether the market is going up or going down, VC money still has to be invested
  • 19. Qualifying Questions
    • Understand if they’re in a position to invest
        • When did you close your last fund?
        • What was your last investment?
    • Understand if they’re a good fit for you
        • What is your average investment size?
        • How many boards are you on?
        • How does your process work?