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Presentation Notes


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Presentation Notes

  1. 1. The information enclosed was formulated from USF Entrepreneurship Club’s guest lecturer William Quigley. The information is a recitation of the topics Mr. Quigley covered. Mr. Quigley is a Managing Director at Clearstone Venture Partners ( and came to speak at USF on behalf of the Entrepreneurship Club on April 5, 2006. With over $650MM in committed capital, some of Mr. Quigley’s notable investments include PayPal, NetZero, Overture Services, CitySearch, and PeopleSupport. For further information on the USF Entrepreneurship Club and how it helps foster entrepreneurship, please contact club president Aaron Halimi at How do VCs make money? Venture Capitalists (VC) receive money from Limited Partners (LP), which is used to make investments. A limited partner typically is an investment bank, college endowment or wealthy/influential individual. The VC firm returns 80% of investment proceeds to the LP and keeps the remaining 20%, which is split between the partners of the VC firm. The second way VC’s make money is through management fees. The industry standard management fee rate is a 2.5% fee of funds raised, paid out annually for ten years. Management fees are used to pay salary and expenses for VC firms. Below are some examples of how management fees work. LP’s guarantee the management fee for 10 years from the inception of the fund. As you can see, it is in the interest of the VC firm to raise large funds in order to earn large annual management fees. Example 1 Example 2 Fund Size $100,000,000 Fund Size $1,000,000,000 Management Fee 2.5% Management Fee 2.5% Annual Payments $2,500,000 Annual Payments $25,000,000 What is a typical VC fund size? Lately funds have gotten larger and are generally anywhere from $100 million to $1 billion. For example, Clearstone Venture Partners has had fund sizes of $100MM, $350MM and $200MM. In 2005 venture firms raised approximately $20 billion from LP’s.
  2. 2. How do you become a VC? Each year about 40-50 positions open up at early stage VC firms (not including late stage VC firms). Knowing this, you can imagine that it is quite competitive to land a position at a VC firm. 10 of these positions are filled each year by Kauffman Fellows ( A way for a person to become a VC is to be a Kauffman Fellow or work in product marketing. Product marketing is very similar to the work that VC’s do and therefore a good stepping stone for when you become a VC (assuming you like product marketing). What is the difference between an Angel investor and a VC? There are many differences. One major difference is Angel investors typically invest their own money whereas a VC invests institutional investors (LP’s) money. Another difference is that an Angel investor will typically invest in early funding rounds (i.e., seed or series A) whereas a VC will typically invest in Series A, B & C. As rounds go out, fund raised typically get larger. What happens if a VC firm’s investments do not perform? If a VC firm does not perform, then when it comes time to raise another fund there won’t be any willing LP’s to invest and the VC firm will have to shut down. This has happened recently. Many new VC firms popped up during the tech boom, earned limited returns and therefore could not raise another fund when the market became “normal” again. Where are most VCs located? Most technology VC firms are located on Sand Hill Road in Palo Alto, CA. This is the “90210” of the venture capital community. How do you submit a business plan to a VC? On average, a VC firm receives 40-50 business plans a week and makes 6-12 investments a year. The most frequent way business plans are submitted to VCs are through a VCs website or email. VC associates typically review the submissions. The associate then decides which plans are attractive and worth handing over to partners for further review. If a partner likes the business plan they will call you to arrange a meeting. Keep in mind, all plans are reviewed and if you have an attractive plan you will be contacted in 1-2 days. Words of advice, submit your plan to a maximum of 5 VC firms and wait for a response (i.e., don’t send your plan off to 50 firms in one day). If no one contacts you that means the firm was not interested. However, the process does not end here because
  3. 3. one should always try to solicit feedback. Call and ask why the plan was not attractive. This way you can tweak your business plan before you send it off to the next 5 VC firms. How do VC’s evaluate business plans? The first thing VC’s look at is the management team. Has the management team worked together in the past at a start-up or at a large corporation where they “did good things”? VC’s love winners. Has the entrepreneur had successful startups in the past? The second thing looked at is the business. The last thing looked at is financials. Numbers are projections made up with what entrepreneurs think VCs want to see. VCs know this and therefore do not give much weight to them. The most important factor is the management team. Sometimes a “bell cow” entrepreneur (a successful entrepreneur who has had multiple “wins” in the past) will submit a business plan that a VC firm passes on. However, since the entrepreneur is a proven success, the VC firm will ask the entrepreneur to incubate another company. How long should my business plan be? Today business plans are on average 5-10 pages in length and are more of an executive summary than a business plan. In the years past, business plans were 50 pages in length. How long does it take for a VC to make an investment? Investments by VC’s typically are done within 60-90 days from the date at which the VC first becomes aware of a company. So day one is the day a VC is introduced to a company’s business plan and day 60/90 is the day the VC cuts the company a check for lets say $2 million. Keep in mind that about 7 out of every 10 VC investments eventually go bankrupt/“fail”. What are some current “hot areas” for VC investments? Some current hot areas for VC investments include 3G access, biometrics and web 2.0. What sort of option package should I expect if I chose to work for a VC backed start-up (assuming manager level position)? Depending on the industry and round of financing (denoted by A, B & C below) managers can expect to receive different stock option packages. For example, by looking at the chart below, you see that if you go to work for a web 2.0 start-up, in it initial round of financing (series A), you can expect to receive an option package that is .25% of the company. If you are hired on at series B financing stage, you can expect to receive an
  4. 4. option package that is .10% of the company. Keep in mind that these estimates apply to VC funded companies. If the start-up you are going to work for is not VC backed, double the percentages below. As a savvy candidate one should also ask a prospective employer if there are any convertible warrants outstanding which might dilute your option package. Financing Round Industry A B C Web 2.0 0.25% 0.10% 0.05% Software 0.50% 0.25% 0.10% Telecom 0.75% 0.35% 0.20% William Quigley, Managing Director, Clearstone Venture Partners William Quigley joined Clearstone in February 1999 and focuses on Clearstone's communications investments. His investments are centered around three broad themes: lowering the cost of delivering data and voice services, reducing the manufacturing costs of communications components and enabling the delivery of value added services. William joined Clearstone Venture Partners from Mid-Atlantic Venture Funds, where he invested in early stage communications companies targeting the software, equipment and service sectors. At MAVF, he was responsible for investments in Integrated Chipware, a real time embedded OS developer, Wisor Telecom, an OSS vendor to telecom service providers and NexTone Communications, a manufacturer of voice over IP equipment. Prior to MAVF, William spent six years in a variety of business planning and operational roles at The Walt Disney Company. His work at Disney included designing field operation and sales support systems for several of the company's largest divisions. William also co-managed Disney's merchant banking group where he negotiated and structured equity positions in the company's strategic licensees. Prior to Disney, William was a Senior Consultant with Arthur Andersen's Financial Services Group where he developed financial and business strategies for a wide range of companies in the media and communications and financial services industries.
  5. 5. William received his MBA, with distinction, from Harvard Business School, and holds a BS, with honors, from the University of Southern California. He is a Kauffman Fellow.