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
(www.clearstone.com) 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, MP3.com and PeopleSupport. For further information on the USF
Entrepreneurship Club and how it helps foster entrepreneurship, please contact
club president Aaron Halimi at email@example.com.
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
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
(www.kauffmanfellows.org). 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
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
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
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
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
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.
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.