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www.intelcapital.com
VC 101 (Startup Edition)
Christine Herron
June 2013
christine@christine.net
@christine
www.intelcapital.com
(AKA: How to Avoid Wasted
Time Fundraising)
3
Know Your Audience
4
Know Your Audience
5
Know Your Audience
6
7
8
Easy-to-Follow Bread Crumbs
o Follow us on Twitter
o Read our blogs
o Search our images
o Look up our portfolio companies and use their
products
9
Mapping Out the Venture Business
o VC: “kind of” a finance job
o How a VC partnership works
(and why you care)
o What influences if/when VCs
will take a risk on you
o The VC investment process and
questions you should ask
o Impact of VC trends on you
Ask questions during the discussion!
10
VC: Technically a Financial Industry
Public Equity
o Hedge Funds
o Pension Funds
o Mutual Funds
o Public Stock Trading
…etc.
Private Equity
o Buyouts
o Mezzanine
Investments
o Venture Capital
11
12
13
Basic VC Business Model
o Capital Calls
o Where does the money come from?
o Management Fees
o How do the bills get paid? What does this imply for General Partner incentives?
o Profit Distributions
o What happens as investments mature?
o Staying in Business with Future Funds
o How does a partnership become sustainable and grow?
14
Partnership Dynamics Affect You
o Limited Partners vs. General Partners
o Who are they and what do they do?
o Reporting
o What responsibilities do GPs have, and what rights do LPs have?
o Investment Profile
o What promises has the VC made around investing and portfolio management?
15
Money Going In: Capital Contributions
G
P
G
P
GP
GP
GP
GP
GP
GPLP LPLP
LP
1% of
total
99% of
total
LP
LP LP
16
Money Coming Out: Profit Sharing
G
P
G
P
GP
GP
GP
GP
GP
GP
20% of
total
80% of
total
LP
LP
LP
LP LP
LP
LP
17
Sample Fund Recap
o 2.5% annual management fee
o Pays for office space, salaries, other G&A
o Incentive implications for small v. large funds
o All capital is repaid to LP before any profit is shared
o 80% of profit goes to LPs
o 20% of profit goes to GPs
o An individual VC’s share of the total GP profit share
is called “carried interest”
18
Staying in Business = Raising More Funds
Year1
Year3-4
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
Year6-7
19
Qualifying Questions
o Understand if they’re in a position to invest
o When did you close your last fund?
o What was your last investment?
o Understand if they’re a good fit for your company
o What is your average investment size?
o How many boards are you on?
o How does your process work?
20
Where Are You in this Process?
o Deal sourcing and qualification: how good opportunities are found
o 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
o Term sheets: a nonbinding letter of intent
o Due diligence: ensuring that everything we believe to be true, is true;
research, references, financials, transaction summary/approval,
investment memo
o Closing: final signature and LP announcement
o Value offered: capital, relationships, management support
21
How VC Trends Affect You
Growing Funding Market
o Minimum $ amount per
investment grows
o Higher VC valuations
o Lower returns % on a
higher base
o Gold rush mentality
(lower funding bar =
more risky or copycat
ideas/ teams)
Shrinking Funding Market
o Minimum $ amount per
investment shrinks
o Lower VC valuations
o Higher returns % on a
lower base
o 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

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Vc 101 for Startups

  • 1. www.intelcapital.com VC 101 (Startup Edition) Christine Herron June 2013 christine@christine.net @christine
  • 2. www.intelcapital.com (AKA: How to Avoid Wasted Time Fundraising)
  • 6. 6
  • 7. 7
  • 8. 8 Easy-to-Follow Bread Crumbs o Follow us on Twitter o Read our blogs o Search our images o Look up our portfolio companies and use their products
  • 9. 9 Mapping Out the Venture Business o VC: “kind of” a finance job o How a VC partnership works (and why you care) o What influences if/when VCs will take a risk on you o The VC investment process and questions you should ask o Impact of VC trends on you Ask questions during the discussion!
  • 10. 10 VC: Technically a Financial Industry Public Equity o Hedge Funds o Pension Funds o Mutual Funds o Public Stock Trading …etc. Private Equity o Buyouts o Mezzanine Investments o Venture Capital
  • 11. 11
  • 12. 12
  • 13. 13 Basic VC Business Model o Capital Calls o Where does the money come from? o Management Fees o How do the bills get paid? What does this imply for General Partner incentives? o Profit Distributions o What happens as investments mature? o Staying in Business with Future Funds o How does a partnership become sustainable and grow?
  • 14. 14 Partnership Dynamics Affect You o Limited Partners vs. General Partners o Who are they and what do they do? o Reporting o What responsibilities do GPs have, and what rights do LPs have? o Investment Profile o What promises has the VC made around investing and portfolio management?
  • 15. 15 Money Going In: Capital Contributions G P G P GP GP GP GP GP GPLP LPLP LP 1% of total 99% of total LP LP LP
  • 16. 16 Money Coming Out: Profit Sharing G P G P GP GP GP GP GP GP 20% of total 80% of total LP LP LP LP LP LP LP
  • 17. 17 Sample Fund Recap o 2.5% annual management fee o Pays for office space, salaries, other G&A o Incentive implications for small v. large funds o All capital is repaid to LP before any profit is shared o 80% of profit goes to LPs o 20% of profit goes to GPs o An individual VC’s share of the total GP profit share is called “carried interest”
  • 18. 18 Staying in Business = Raising More Funds Year1 Year3-4 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 Year6-7
  • 19. 19 Qualifying Questions o Understand if they’re in a position to invest o When did you close your last fund? o What was your last investment? o Understand if they’re a good fit for your company o What is your average investment size? o How many boards are you on? o How does your process work?
  • 20. 20 Where Are You in this Process? o Deal sourcing and qualification: how good opportunities are found o 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 o Term sheets: a nonbinding letter of intent o Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo o Closing: final signature and LP announcement o Value offered: capital, relationships, management support
  • 21. 21 How VC Trends Affect You Growing Funding Market o Minimum $ amount per investment grows o Higher VC valuations o Lower returns % on a higher base o Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams) Shrinking Funding Market o Minimum $ amount per investment shrinks o Lower VC valuations o Higher returns % on a lower base o 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