VC 101


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

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VC 101

  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 <ul><li>Follow us on Twitter </li></ul><ul><li>Read our blogs </li></ul><ul><li>Search our images </li></ul><ul><li>Look up our portfolio companies and use their products </li></ul>
  6. What We’ll Cover <ul><li>What VC is not </li></ul><ul><li>VC partnerships revealed </li></ul><ul><li>Follow the money </li></ul><ul><li>The VC investment process </li></ul><ul><li>Impact of VC trends on you </li></ul><ul><li>Feel free to ask questions during the discussion! </li></ul>
  7. Quick Context: What VC is Not <ul><li>Public Equity </li></ul><ul><li>Hedge Funds </li></ul><ul><li>Pension Funds </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Public Stock Trading </li></ul><ul><li>… etc. </li></ul><ul><li>Private Equity </li></ul><ul><li>Buyouts </li></ul><ul><li>Mezzanine Investments </li></ul><ul><li>Venture Capital </li></ul><ul><li>… etc </li></ul>
  8. Quick Context: What VC is Not <ul><li>Public Equity </li></ul><ul><li>Hedge Funds </li></ul><ul><li>Pension Funds </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Public Stock Trading </li></ul><ul><li>… etc. </li></ul><ul><li>Private Equity </li></ul><ul><li>Buyouts </li></ul><ul><li>Mezzanine Investments </li></ul><ul><li>Venture Capital </li></ul>
  11. VC Partnerships Revealed <ul><li>Limited Partners vs. General Partners </li></ul><ul><ul><ul><li>Who are they and what do they do? </li></ul></ul></ul><ul><li>Reporting </li></ul><ul><ul><ul><li>What responsibilities do GPs have, and what rights do LPs have? </li></ul></ul></ul><ul><li>Investment Profile </li></ul><ul><ul><ul><li>What promises has the VC made around investing and portfolio management? </li></ul></ul></ul>
  12. How to Follow the Money <ul><li>Capital Calls </li></ul><ul><ul><ul><li>Where does the money come from? </li></ul></ul></ul><ul><li>Management Fees </li></ul><ul><ul><ul><li>How do the bills get paid? What does this imply for General Partner incentives? </li></ul></ul></ul><ul><li>Profit Distributions </li></ul><ul><ul><ul><li>What happens as investments mature? </li></ul></ul></ul><ul><li>Staying in Business with Future Funds </li></ul><ul><ul><ul><li>How does a partnership become sustainable and grow? </li></ul></ul></ul>
  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 <ul><li>2.5% annual management fee </li></ul><ul><ul><ul><li>Pays for office space, salaries, other G&A </li></ul></ul></ul><ul><ul><ul><li>Incentive implications for small v. large funds </li></ul></ul></ul><ul><li>All capital is repaid to LP before any profit is shared </li></ul><ul><ul><ul><li>80% of profit goes to LPs </li></ul></ul></ul><ul><ul><ul><li>20% of profit goes to GPs </li></ul></ul></ul><ul><li>An individual VC ’s share of the total GP profit share is called “carried interest” </li></ul>
  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 <ul><li>Deal sourcing and qualification: how good opportunities are found </li></ul><ul><li>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 </li></ul><ul><li>Term sheets: a nonbinding letter of intent </li></ul><ul><li>Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo </li></ul><ul><li>Closing: final signature and LP announcement </li></ul><ul><li>Value offered: capital, relationships, management support </li></ul>
  18. How VC Trends Affect You <ul><li>Growing Funding Market </li></ul><ul><li>Minimum $ amount per investment grows </li></ul><ul><li>Higher VC valuations </li></ul><ul><li>Lower returns % on a higher base </li></ul><ul><li>Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams) </li></ul><ul><li>Shrinking Funding Market </li></ul><ul><li>Minimum $ amount per investment shrinks </li></ul><ul><li>Lower VC valuations </li></ul><ul><li>Higher returns % on a lower base </li></ul><ul><li>Champions mentality (higher funding bar = the strongest or most unique ideas/teams) </li></ul>Whether the market is going up or going down, VC money still has to be invested
  19. Qualifying Questions <ul><li>Understand if they’re in a position to invest </li></ul><ul><ul><ul><li>When did you close your last fund? </li></ul></ul></ul><ul><ul><ul><li>What was your last investment? </li></ul></ul></ul><ul><li>Understand if they’re a good fit for you </li></ul><ul><ul><ul><li>What is your average investment size? </li></ul></ul></ul><ul><ul><ul><li>How many boards are you on? </li></ul></ul></ul><ul><ul><ul><li>How does your process work? </li></ul></ul></ul>