VCTips Workshop 2009-11-16

VC 101 : Inside the Black Box Christine Herron First Round Capital November 2009

(AKA : Christine’s Quick & Dirty Guide to Venture Capital)

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!

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

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

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?

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?

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

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

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”

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

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

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

For seed-stage conversations Christine Herron Kent Goldman Phin Barnes Howard Morgan Rob Hayes Chris Fralic Josh Kopelman http://firstround.com twitter: @firstround [email_address]

VCTips: An Inside Look at the VC Landscape and Fundraising Strategy Oren Netzer Founder and CEO DoubleVerify Inc.

DoubleVerify Overview
25 Employees
Offices in Tel Aviv and New York
Raised $3.5M Series A in May 2009
Pioneered Online Media Verification
Customers include agencies, marketers and ad networks

What We Do
Employ tracking pixels in ads and web crawlers to track actual delivery of online ad campaigns
Compare actual delivery to client’s media plan and buying guidelines
Confirm full compliance between plan and actuals
Real-time non-compliance remediation
Screenshots provided as evidence of every non-compliance incident

The Importance of Your First Customers
Your Worst Mistakes – Your first customers will experience the earliest and “buggiest” version of your product
Reality Check - Your first customers will teach you what the market really wants
Market Demand - Your first customers will create your market demand
Best or Worst References – Your first customers can make or break your next sales or fundraising

6 Step Guide to Managing First Sales
Start early - Get first customer as early as possible in the development cycle
Choose carefully – this customer will experience your worst screw-ups
Fix problems – and release next version
Then choose next two customers
Go out of your way - Make these customers your biggest fans and supporters
Repeat from step 3

DoubleVerify Timeline at a Glance
First Beta version released March 2008 with client
Founded May 2008
Raised seed round June 2008
First major client September 2008
Second major client February 2009
Formal Product Launch May 2009
Currently servicing over 30 customers
November 2009 first profitable month

First Sales - Lessons Learned
Choose your first customers carefully
You never know where the sale is going to come from
Be persistent but not pushy
Oversell, only if you can deliver
Listen to your customers
Customers are partners, not ATMs
Know how to ask them for money
Be Lucky

Thank You Oren Netzer [email_address]

VC Meeting 1.0

*Spoiler Alert

Its Not About the Money

Many Paths (some more effective than others)

Prototypical VCs

Real People

Know Your Audience
Read Our Blogs
Search Our Images
Follow Us on Twitter
Use Our Portfolio Cos. Products

Make a Personal Connection

Blow Us Away

Qualifying Questions
When Did We Close Our Last Fund
What Was Our Last Investment
How Many Boards Are We On
How Does Our Process Work

Qualify Whether We’re in a Position to Invest

Thanks [email_address] www.bryce.vc @bryce

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VCTips Workshop 2009-11-16

by Christine Herron

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