A presentation explaining the role of Venture Capital in our economy. I explain how Venture Capital Funds are structured and how they make investments.

1. A Pilot Study and Analysis of the Role of
Venture Capital in Our Economy
By: Charles M. Webb, III

2. What is Venture Capital
• Money provided to privately held firms
• New entrepreneurial ventures
• Long term horizon
• Seed Capital
• High Risk / High Return

3. What is a Venture Capital Fund
• Legal entity , usually a limited
partnership
• General Partners manage the fund and
select the investments
• Limited Partners provide the money
usually more than 99 %

4. General Partners in a Venture Fund
• Manage the fund
• Select the investments
• Are liable for the debts of the fund beyond the
amount they invest in the fund
• Generally not a natural person but some sort
of limited liability entity
• Well Compensated

5. General Partner Compensation
• Two tiered
• Fixed component usually 2 to 3 percent
of the funds already invested
• Performance component approximately
20 percent of the profits of the fund.
• Performance portion commonly referred
to as the “Carried Interest”

6. Limited Partners
• Play a limited roll, mostly passive
investors
• Have some voting rights similar to
investors in a mutual fund
• Provide the bulk of the capital
• Have protection provided by the
partnership agreement

7. Partnership Agreement
• Sets the rights and responsibilities of
both general partners and limited
partners.
• Governs the activities of the fund.
• Sets the life of the fund.
• Defines the objectives and goals of the
fund.

8. Who Invests in Venture Capital
• Pension Funds
• Endowment Funds
• Other Venture Funds
• Wealthy Individuals
• Governments
• Corporations
• Must be an Accredited Investor

9. What are the Advantages
• Higher Return
• Greater Diversity
• Benefit from the inefficiency in pricing to
get a better buy in.
• Using a fund allows them to outsource
the selection and management of their
investment.

10. Corporate and Strategic Venture Funds
• Access to new products, markets, and
technology
• Speeds up time to market
• Allows the firm to aggregate all of their
R&D and Corporate Development
initiatives.

11. Governments and Community Based Funds
• CIA, NASA, and The US ARMY have all
started VC funds
• Like Corporations provides access to
technology quicker than acquiring it thru the
traditional means.
• Community based funds target blighted areas
and invest in them to revive them
• Community based funds are profit driven and
do not rely on taxes or donations
• Community based funds largest investors are
banks

12. Intermediaries
• Funds of Funds
• Consultants
• Sponsors
• Gatekeepers

13. Investment Selection and Oversight
• Due Diligence
• Where did the deal Originate
• Business Plan Review
• Is the investment inline with the goals of
the fund
• Right location
• Right product, market, technology
• Right life stage

14. Investment Selection and Oversight
• Are the GPs familiar with the industry
• Is the Management top notch
• Are there gaps than need to be filled on the
management team
• Can the VC team work with the
Entrepreneurial team on a personal level.
• Is the potential investment sound financially.
• Have all of the legal questions been
addressed satisfactorily.
• Have all of the competitive issues been
analyzed with a satisfactorily result.

15. Value Added Services
• VC firms add more than just money
• Management Advice
• Recruiting Assistance
• Board Representation
• VCs only make money if the investment
is successful so they will help in any
way to make that happen.

16. Term Sheets
• Set the structure of the deal
• How much money will the VC firm provide
• What percent of ownership will the VC get in
return
• Contain the Securities Purchase Agreement
• Covenants which both affirm and negate
actions taken by both parties.

17. Securities Purchase Agreement
• Describes the class of stock represented
• What rights are attached to owning that stock
• The amount of ownership the stock
represents
• Voting rights
• Dividend rights
• What type of Board Representation they will
receive.

18. Types of Stock used in VC Deals
• Preferred Stock
• Redeemable Preferred Stock
• Convertible Preferred Stock
• Common Stock

19. Employment Agreements
• Protect both the entrepreneur and the
VC investors
• Defines the role and responsibilities of
the Entrepreneurs who are working in
the firm
• Defines compensation
• Often includes non compete clauses

20. Stages of Venture Capital
• Seed
• Start-up
• Rapid Growth
• First Stage
• Second Stage
• Mezzanine or Bridge Stage
• Harvest $$

21. Valuation Concepts
• Asset Based Valuation
• Comparable Capital Structure, Credit
Status, Depth of management,
experience, and competitive factors
• DCF techniques
• The Venture Method

22. Primary Research - Economist and Finance
Professional Survey
 On a scale of 1 strongly agree to 5 strongly
disagree the average response was 2.8
 10 questions
 Most agreed that innovation was most helped
by VC firms
 Least amount agreed that VC firms add jobs