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VC 101: How, What & Why VCs Do What They Do

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by Andrew Russ, Startup & Venture Capital Business Development, AWS

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VC 101: How, What & Why VCs Do What They Do

  1. 1. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved VC 101: How, What & Why VCs Do What They Do (and the key things you should know as a Founder) Drew Russ, Startup & Venture Capital, Business Development
  2. 2. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved About Me
  3. 3. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved What We are Going to Discuss: • Venture Capital: The Definition, The Theory • Venture Capital Mechanics: Fund Structure, Time as a Factor, How VCs Make Money, Roles and Responsibilities and Deal Sourcing • Venture Capital: The Deal and the Bargain • The Other Flavors of Venture Capital and Corporate VC • A Glimpse of VC 201 • Thanks!
  4. 4. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved What is Venture Capital: The Definition HigherRiskLowerRisk Lower Return Higher Return Money Market Funds Corporate Bonds Large cap Equities Hedge Fund Private Equity Investing in a restaurant Venture Capital Inherit it • Venture Capital is a form of Private Equity • For private ventures that cannot raise traditional financing (e.g. bank loan, capital markets) • High risk, with potential for a high return in a relatively short timeframe • Non-majority ownership
  5. 5. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved What is Venture Capital: The Theory I’ve said many times on this blog that our target batting average is “1/3, 1/3, 1/3” which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments. - Fred Wilson, Union Square Ventures
  6. 6. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved What is Venture Capital: The Theory contd. “Venture capital is not even a home run business. It’s a grand slam business” - Bill Gurley, Founder of Benchmark Capital
  7. 7. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital Mechanics: Fund Structure Management Company General Partner 1, LLC General Partner 2, LLC I II Fund I, LP Fund II, LP LPs LPs Portfolio Companies Portfolio Companies
  8. 8. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital Mechanics: Time is a Factor Commitment Period • Typically 5 years • Length of time for Identifying and investing in new companies • Allocate reserves to each investment that can be used in “follow on” rounds • This is why VCs raise a new fund every 3-5 years Investment Period • The length of time a fund can remain active • Typically 10 years (“a 10 year fund”) • Extensions are allowed, but limited • Management of investments goes beyond period, secondary sales occur
  9. 9. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital Mechanics: How VCs Make Money Management Fees • Typically between 1.5% and 2.5% annually of funds managed • Paid quarterly and independent of investment success • Pays the salaries and “keeps the lights on” • This fee begins to decrease after the end of the “commitment period” Carried Interest • The share of the profit that a VC keeps after returning all capital to LPs • Achieving “carry” is a fund-wide hurdle, but not all members of a firm have equal share • Partners who perform well, can not achieve carry due to poor performance of fund overall
  10. 10. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital Mechanics: Roles & Responsibilities • Analysts • Associates • Sr. Associates/Principals • Managing Directors / General Partners • Other: EIRs, Venture Partners, Operating Partners…
  11. 11. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital Mechanics: Sourcing to The Wire
  12. 12. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital & Time: Why VCs invest at Different Stages Early Stage • Founder focused • Ideation risk and product market/fit • Will own more of the company • Smaller investmetns with potential for higher multiples Mid Stage • “Traditional” VC • Team focused • Traction and scaling risk (sales and marketing) • Its about “pouring gas on the fire” Late Stage • Exit risk • How big can the Market become • IPO windows and acquisition potential • Mix of VCs, PE, Public investors (mutual funds)
  13. 13. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved A glimpse of VC 201: The Term Sheet and Cap Table Premoney The Valuation of a business prior to any additional investment of capital Postmoney The valuation of the business PLUS additional capital invested after the close of a round of financing
  14. 14. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Venture Capital: The Bargain INFLUENCE VCs rarely want control when company is performing against plan LIQUIDATION PREFERENCE Investors typically have rights to get their money out first DILUTION At exit, founders and management will typically own 10-20%
  15. 15. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved What is Venture Capital: The (other) Flavors of VC • Today we are talking about independent, institutional Venture Capital Investors • But there are other types of investors that a startup founder may encounter: Angel Investors AcceleratorsIncubators Corporate VCs
  16. 16. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved What is Venture Capital: A bit more on Corporate VCs • Leverage existing businesses • Inspire new products • Access new technology • Identify new markets • (Be cool; extend the brand) Why Challenges • Direct investment • Indirect investment • Incubation / Acceleration How • Fluctuating internal support • Shorter sighted • Slower decision making • Varying value-add • Conflicts of interest Corporate Strategic Non-Strategic
  17. 17. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved Other Reading Books • Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist • Term Sheets & Valuations: A line by line look at the Intricacies of Term Sheets and Valuations • Blogs & Books Blogs & Newsletters • Dan Primack’s Term Sheet • Mark Suster’s Both Sides of the Table • CB Insights • Product Hunt • The Creator’s Code by Amy Wilkinson Tweets • @awsstartups • @firstround – solid early stage fund, platform • @karaswisher– Re/Code, breaks a lot of news • @benedictevans – A16Z, data hound
  18. 18. © 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved© 2016, Amazon Web Services, Inc. or its Affiliates. All rights reserved aws.amazon.com/activate Thanks!

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