Vc 101 for Startups

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How to avoid wasted time fundraising, and know a tire-kicker when you see one. Know your "customer" - understand how the venture business works, and what motivates VCs. Get educated on the basics of the venture fund business model, and how VCs stay in business. Find out how venture model dynamics and industry trends impact your company.

Published in: Economy & Finance, Business

Vc 101 for Startups

  1. 1. www.intelcapital.comVC 101 (Startup Edition)Christine HerronJune 2013christine@christine.net@christine
  2. 2. www.intelcapital.com(AKA: How to Avoid WastedTime Fundraising)
  3. 3. 3Know Your Audience
  4. 4. 4Know Your Audience
  5. 5. 5Know Your Audience
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  8. 8. 8Easy-to-Follow Bread Crumbso Follow us on Twittero Read our blogso Search our imageso Look up our portfolio companies and use theirproducts
  9. 9. 9Mapping Out the Venture Businesso VC: “kind of” a finance jobo How a VC partnership works(and why you care)o What influences if/when VCswill take a risk on youo The VC investment process andquestions you should asko Impact of VC trends on youAsk questions during the discussion!
  10. 10. 10VC: Technically a Financial IndustryPublic Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock Trading…etc.Private Equityo Buyoutso MezzanineInvestmentso Venture Capital
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  13. 13. 13Basic VC Business Modelo Capital Callso Where does the money come from?o Management Feeso How do the bills get paid? What does this imply for General Partner incentives?o Profit Distributionso What happens as investments mature?o Staying in Business with Future Fundso How does a partnership become sustainable and grow?
  14. 14. 14Partnership Dynamics Affect Youo Limited Partners vs. General Partnerso Who are they and what do they do?o Reportingo What responsibilities do GPs have, and what rights do LPs have?o Investment Profileo What promises has the VC made around investing and portfolio management?
  15. 15. 15Money Going In: Capital ContributionsGPGPGPGPGPGPGPGPLP LPLPLP1% oftotal99% oftotalLPLP LP
  16. 16. 16Money Coming Out: Profit SharingGPGPGPGPGPGPGPGP20% oftotal80% oftotalLPLPLPLP LPLPLP
  17. 17. 17Sample Fund Recapo 2.5% annual management feeo Pays for office space, salaries, other G&Ao Incentive implications for small v. large fundso All capital is repaid to LP before any profit is sharedo 80% of profit goes to LPso 20% of profit goes to GPso An individual VC’s share of the total GP profit shareis called “carried interest”
  18. 18. 18Staying in Business = Raising More FundsYear1Year3-4Each Fund Life = 10 Years3-4 Yrs =Seed NewCos6-7 Yrs = Harvest& Do FollowonsMust raise new funds to keepinvesting in NewCos; oncenew fund is raised, NewCofunding will come from itFund 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 befunding NewCosYear6-7
  19. 19. 19Qualifying Questionso Understand if they’re in a position to investo When did you close your last fund?o What was your last investment?o Understand if they’re a good fit for your companyo What is your average investment size?o How many boards are you on?o How does your process work?
  20. 20. 20Where Are You in this Process?o Deal sourcing and qualification: how good opportunities are foundo Evaluation: deciding if there’s a good fit with investment parameters;company history, business characteristics, finances, business plananalysis, comparables analysis, pro forma return modelo Term sheets: a nonbinding letter of intento Due diligence: ensuring that everything we believe to be true, is true;research, references, financials, transaction summary/approval,investment memoo Closing: final signature and LP announcemento Value offered: capital, relationships, management support
  21. 21. 21How VC Trends Affect YouGrowing Funding Marketo Minimum $ amount perinvestment growso Higher VC valuationso Lower returns % on ahigher baseo Gold rush mentality(lower funding bar =more risky or copycatideas/ teams)Shrinking Funding Marketo Minimum $ amount perinvestment shrinkso Lower VC valuationso Higher returns % on alower baseo Champions mentality(higher funding bar = thestrongest or most uniqueideas/teams)Whether the market is going up or going down,VC money still has to be invested

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