Venture capitalists (VCs) are professional investors who provide equity financing to young, privately-owned companies, primarily in the technology sector, with the goal of achieving substantial returns on investment. Upon receiving and analyzing investment proposals, VCs invest in a small percentage of companies, often requiring significant growth potential and a capable entrepreneurial team. Despite high risks, VCs aim for returns of at least 10 times their initial investment over a 4-5 year horizon, with portfolio strategies reflecting the expectation that many investments will fail.

1. DFJ
Understanding Venture Capital
September 2009
© 2009 Simon Olson

2. What are venture capitalists?
• Venture capitalists (also known as VCs)
are professional investors who invest
money in young, privately-owned
companies and work with them to help
them succeed

3. Important things to remember
• Venture capital is equity, not debt
• The companies are private, not public
• The companies are young, but usually
have more than just an idea*
• The companies are growing
exponentially, not arithmetically
• The companies are usually technology-
related, but not always
*An idea would normally be “seed” capital, not venture capital

4. How does it work?
• Entrepreneur has an idea
• Gets “seed” capital from friends
and family, “bootstraps” the
idea using his or her own
money, or gets money from an
“angel” investor
• Builds a proof of concept
• Approaches venture capitalist

5. How does it work?
• Venture capitalist receives a short executive
summary (1-4 pages) or Power Point
presentation (10-15 slides) describing the
opportunity
• Analyzes the materials, rejects 90%
• Talks to the remaining 10%
• Invests in 1 out of the remaining 10%

6. What does the VC look for?
Investment criteria:
• Entrepreneur
• Team
• Market size
• Timing
• Company growth characteristics
• Exit potential

7. Venture capitalist’s objective
• To earn at least 10 times the value of
the initial investment in 4-5 years
• Ex. If I invest R$1 million in a company,
I want to be able to sell my stake in it
four years later, for at least R$10 million

8. Why is such a large return
necessary?

9. Because, for every Google in
a VC’s portfolio, there were 18
companies that failed!

10. Portfolio strategy
• Invest in 20, and pray for 2
• 13 companies fail, 5 break even, 2 big
hits
• Out of 2 big hits: one returns capital
for the entire fund, the other accounts
for the return*
*In the best funds, the ratio is more like 33% succeed, 33% break even, and 33% fail.

11. Portfolio distribution
2 great
successes:
R one returns
the fund’s
e capital and
t the other
u provides the
return
r
n
A few companies
break-even
0
Majority of companies fail
= portfolio company = break-even

12. After the decision is made to
invest, what’s next?

13. Services venture capitalist’s provide
• Advice on strategy
• Help recruiting
• Introductions to key customers/partners
• Professionalization (management and
corporate governance)
• Internationalization
• Help with sale of the company or IPO
• Provide capital

14. How do VCs make money?
• Annual management fee
• Performance fee

15. Simon Olson