This presentation discusses the anatomy of a venture capital investment from the perspective of a venture capitalist. It notes that VCs typically only fund about 1% of the startup companies they review each month. When considering an investment, VCs evaluate factors like how much funding is required, the company's traction and milestones, potential exits, and risks. Major risk factors include issues with the team, market, competition, technology, and legal or IP concerns. The goal for VCs is achieving a high return exit through an acquisition or IPO.

1. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
VC Psychology 101
1

2. Anatomy of a VC
Money In à
$
Money Out à
$$$$$
$$$$$
What’s in it for me?
Risk Factors

3. The odds are against you
Per month Per year
60 new deals 720 companies
8 for pre-screen
3 make it to dinner meeting 36 companies
Maybe one new investment 8 per year
3
Approximately 1.1% funding rate

4. Money In:
• How
much
funding
is
required?
– Is
this
within
the
size
and
scope
of
my
fund?
– Should
I
syndicate?
With
whom?
• Where
does
this
move
the
company?
– Next
proof
points
– Timelines
to
next
steps
– How
much
runway
– Can
I
“stage”
the
investment
to
lower
risk?
• ValuaGon
– Compared
to
other
companies
in
the
field
– Compared
to
other
companies
I
can
invest
in
– Can
I
syndicate?
– Are
they
desperate?
Can
I
cut
a
bargain
deal?

5. Traction is a Magic Word
• Traction: the progress of a start-up company and the
momentum it gains as the business grows
– Proof-points that validate your business projections
• VCs invest in businesses – not just ideas
• The likely success of startups is often determined by
– Market potential of their product
– Velocity of product development

6. Money Out
• VCs only profit where there is an exit
• What is the most likely exit?
• Acquisition
• How much work is required?
• Building team
• Getting partnerships
• Metrics for success 6

7. Money out
• Is there a market?
• Timing, liquidity, # of other transactions
• What are industry multiples?
• Who would most likely buy this company?
• Partners
• Customers
• Competitors
• What’s the turn around time?
7

8. Risk Factors
• What risks might stop me from an exit?
– Team
– Market
– Competitor
– Technology
– Potential IP / Patent claims
– Legal (incorporation, stock claims)
• This is what due diligence is all about
– Start to finish for due diligence can take 3 to 6 months

9. Team Risk
• By far the number one risk factor
• Most companies fail due to team issues
• Which is better?
– An average team with a great product?
– A great team with a decent product?
• Great team knows the journey, can pivot, realign strategy, etc.
• CEO
– Credible, honest, trustworthy
– A motivator, a manager
– Can make tough decisions

10. Market Risk
• Market needs to develop along with the company
• Room to grow, expand, think BIG
– TAM, SAM, SOM
• Looking for a $1B market
• Risk examples:
– Too early: market for product doesn’t exist yet
– Too late: too many competitors, market saturated
– Too small: won’t grow to a size that’s worth while
– Too regional: will only grow to fill a country, can’t cross borders

11. Competitive Risks
• Know all your potential competition
– Are there competitors that can take away your lead?
• Want to invest in #1 or #2 in market
• Direct competition
– Exact product
– Better, faster cheaper
• Indirect competition
– Another way to solve the problem
– Substitution 11

12. Technology Risks
• Applicable for some businesses
• Hardware:
– Costs, manufacturability, safety, source of supply
• Limits of physics
– Semiconductors, industrial
• Efficacy
– Medical devices, pharma
• Regulatory
– Approval issues
– Timing 12

13. IP/Legal Risks
• Was the company incorporated properly
– (Delaware C corp, LLC)
• Who are prior shareholders and their rights?
– Are they superior to yours?
• Lawsuits pending
• Intellectual Property (IP) ownership
– Are there possible patent infringements?
• What is the legal landscape (people suing each other)?
13

14. VC World - What’s in in for me?
• Bragging rights
– Want a Cool market sector
– Want a Leader in the field
• Promote through
conferences, blogs, etc…
• Good reputation for better
deal flow
• Raising next fund…

15. Money In à
$
$
Money Out à
$$$$$
$$$$$
What’s in it for me?
Risk Factors