Class 2 Lecture


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  • Small business investment captial
  • Class 2 Lecture

    1. 1. The History and Current State of The Venture Capital Market © Andrew W. Hannah
    2. 2. Agenda <ul><li>Review of last class </li></ul><ul><li>Venture capital history </li></ul><ul><li>Current state of the market </li></ul><ul><li>Winning Angels comments </li></ul><ul><li>Assignments </li></ul><ul><li>Next class </li></ul>© Andrew W. Hannah
    3. 3. Review of Last Class <ul><li>Sources of entrepreneurial equity </li></ul><ul><li>Main differences between angels and venture investors </li></ul><ul><ul><li>Source of capital </li></ul></ul><ul><ul><li>Size of investments </li></ul></ul><ul><ul><li>Number of investments </li></ul></ul><ul><ul><li>Stage of deals </li></ul></ul>© Andrew W. Hannah
    4. 4. Review: Venture Investment Cycle <ul><li>Sourcing </li></ul><ul><li>Evaluating </li></ul><ul><li>Valuing </li></ul><ul><li>Structuring </li></ul><ul><li>Negotiating </li></ul><ul><li>Supporting </li></ul><ul><li>Harvesting </li></ul>© Andrew W. Hannah
    5. 5. What did you learn??? Article Review © Andrew W. Hannah
    6. 6. VC History <ul><li>1400’s: Chris and Isabella </li></ul><ul><li>Pre 1939: angels, government, families (Rockefeller/Mellon) </li></ul><ul><li>1939: Venture Capital is first used as a term at a banker convention </li></ul><ul><li>1946: JH Whitney & Co./ARD launches first VC funds </li></ul><ul><ul><li>Vision – institutionalize risk capital and the investment process, invest in people </li></ul></ul><ul><ul><li>Whitney: Minute Maid </li></ul></ul><ul><ul><li>ARD, General George Doroit: DEC </li></ul></ul><ul><li>1956: Thermo Electron launches first “incubator” </li></ul><ul><li>1958: SBIC act passed: loan guarantees/low interest loans </li></ul><ul><li>1965: less than $100M in new ventures </li></ul>© Andrew W. Hannah
    7. 7. VC History (Continued) <ul><li>Late 1960’s: Bull IPO market </li></ul><ul><ul><li>Pinnacle: DEC, a 1958 investment of $70K from ARD proved model can work </li></ul></ul><ul><ul><ul><li>77% ownership, $350M market cap in 1970, ARD owned 10% </li></ul></ul></ul><ul><li>Early 1970’s: First crash: minis and semi conductors </li></ul><ul><ul><li>Largest fund: $80 million from Chicago State Street (insurance) </li></ul></ul><ul><li>Mid 1970’s: No IPO’s – 7 year slump </li></ul><ul><li>Late 1970’s: The turnaround begins </li></ul><ul><ul><li>49% cap gains slashed to 28% </li></ul></ul><ul><ul><li>Removal of stock option taxes </li></ul></ul><ul><ul><li>Prudent man rules – prevents pension funds from investing </li></ul></ul><ul><ul><li>Small business Investment Incentive Act – pension funds as limited partners </li></ul></ul><ul><li>1980: VC’s raised and invested less than $600 million </li></ul><ul><ul><li>Family money largest source </li></ul></ul>© Andrew W. Hannah
    8. 8. VC History (Continued) <ul><li>1983: Second VC Crash – painful but shorter </li></ul><ul><ul><ul><li>Result of excesses of pc run up and too much money </li></ul></ul></ul><ul><ul><ul><li>But venture captial was strategically important </li></ul></ul></ul><ul><li>1988: VC’s raised and invested $3.7 billion </li></ul><ul><li>Early 1990’s: A different scene, an IPO boom </li></ul><ul><ul><li>Only 3.3% of funds were going into early stage deals </li></ul></ul><ul><ul><li>Pension investments = 50% of VC money </li></ul></ul><ul><li>1993: Biotech bust </li></ul><ul><li>Late 1990’s: VC’s raised= $26 billion </li></ul><ul><ul><li>The pinnacle: 1999 new Investments: $48 billion </li></ul></ul><ul><ul><li>41% into early stage (50% of all funded companies) </li></ul></ul><ul><li>2000: The Crash! Why? </li></ul><ul><li>2002: VC’s raised only $2.3 billion raised in Q1 2002 </li></ul>© Andrew W. Hannah
    9. 9. The State of the VC Market Today <ul><li>How did we get here today? </li></ul><ul><ul><li>Internet </li></ul></ul><ul><ul><li>Raising too much money too fast </li></ul></ul><ul><li>The fallout – returning money, reducing fees, less investment </li></ul><ul><ul><li>But venture capital is strategic – necessary to get return up </li></ul></ul><ul><li>What type of deals are getting done these days: </li></ul><ul><ul><li>Internet? </li></ul></ul><ul><ul><li>Software? </li></ul></ul><ul><ul><li>Applied Materials? </li></ul></ul><ul><ul><li>Healthcare? </li></ul></ul><ul><li>Internet deals </li></ul><ul><ul><li>Q1 2000: $8 billion </li></ul></ul><ul><ul><li>Q1 2002: $434 million (back to 1998 levels) </li></ul></ul><ul><ul><li>M&A Markets </li></ul></ul>© Andrew W. Hannah
    10. 10. Winning Angels <ul><li>Know Statistical Significance </li></ul><ul><ul><li>How many deals do you have to do to get a winner? </li></ul></ul><ul><ul><li>What is the lesson? </li></ul></ul><ul><li>Know Expected Value </li></ul><ul><ul><li>Cameron’s Lemonade: 1:10 will be winners </li></ul></ul><ul><ul><li>Ultimate value = $1 million </li></ul></ul><ul><ul><li>Your share = 10% </li></ul></ul><ul><ul><li>What should you invest? </li></ul></ul><ul><ul><li>After 20 investments your likelihood is 88% </li></ul></ul><ul><li>FASTRETURNS.COM example </li></ul>© Andrew W. Hannah
    11. 11. Overview: sourcing and screening Markets Stage Management Markets Products Detail Review Terms and Structure © Andrew W. Hannah Investment Model Deal Filter Due Dil Deal
    12. 12. For The Next Class <ul><li>WA pp 31 – 71 </li></ul><ul><li>Info Card B: Venture Investors </li></ul><ul><li>Question Card A: Venture Capitalists, deal structure, and filtering </li></ul><ul><li>The Venture Capitalist case </li></ul>© Andrew W. Hannah