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VC 101 (Startup Edition)
Christine Herron
June 2013
christine@christine.net
@christine

www.intelcapital.com
(AKA: How to Avoid Wasted
Time Fundraising)

www.intelcapital.com
Know Your Audience

3
Know Your Audience

4
Know Your Audience

5
6
7
Easy-to-Follow Bread Crumbs

o Follow us on Twitter
o Read our blogs
o Search our images
o Look up our portfolio companies and use their
products

8
Mapping Out the Venture Business
o VC: “kind of” a finance job
o How a VC partnership works
(and why you care)
o What influences if/when VCs
will take a risk on you
o The VC investment process and
questions you should ask
o Impact of VC trends on you
Ask questions during the discussion!
9
VC: Technically a Financial Industry
Public Equity
o Hedge Funds
o Pension Funds
o Mutual Funds
o Public Stock Trading
…etc.

Private Equity
o Buyouts
o Mezzanine
Investments
o Venture Capital

10
11
12
Basic VC Business Model
o Capital Calls
o Where does the money come from?

o Management Fees
o How do the bills get paid? What does this imply for General Partner incentives?

o Profit Distributions
o What happens as investments mature?

o Staying in Business with Future Funds
o How does a partnership become sustainable and grow?

13
Partnership Dynamics Affect You

o Limited Partners vs. General Partners
o Who are they and what do they do?

o Reporting
o What responsibilities do GPs have, and what rights do LPs have?

o Investment Profile
o What promises has the VC made around investing and portfolio management?

14
Money Going In: Capital Contributions

LP
LP LP LP
LP

LP

LP

G
P

GP
GP

99% of
total

GP

GP

G
P

GP

GP

1% of
total

15
Money Coming Out: Profit Sharing
LP
LP LP LP
LP

LP

80% of
total

LP

G
P

GP

GP

GP
GP

G
P

GP

GP

20% of
total

16
Sample Fund Recap
o 2.5% annual management fee
o Pays for office space, salaries, other G&A
o Incentive implications for small v. large funds

o All capital is repaid to LP before any profit is shared
o 80% of profit goes to LPs
o 20% of profit goes to GPs

o An individual VC’s share of the total GP profit share
is called “carried interest”

17
Staying in Business = Raising More Funds
Each Fund Life = 10 Years
6-7 Yrs = Harvest
& Do Followons

Year 6-7

Year 3-4

Year 1

3-4 Yrs =
Seed NewCos

Must raise new funds to keep
investing in NewCos; once
new fund is raised, NewCo
funding will come from it

Fund I ($100M)
Fund II ($125M)
Fund III
($150M)
After 6-7 years in business,
VC will have 3+ concurrent,
active funds at any one time;
only one, however, will be
funding NewCos
18
Qualifying Questions
o Understand if they’re in a position to invest
o When did you close your last fund?
o What was your last investment?
o Understand if they’re a good fit for your company
o What is your average investment size?
o How many boards are you on?
o How does your process work?
19
Where Are You in this Process?
o Deal sourcing and qualification: how good opportunities are found
o Evaluation: deciding if there’s a good fit with investment parameters;
company history, business characteristics, finances, business plan
analysis, comparables analysis, pro forma return model
o Term sheets: a nonbinding letter of intent
o Due diligence: ensuring that everything we believe to be true, is true;
research, references, financials, transaction summary/approval,
investment memo
o Closing: final signature and LP announcement
o Value offered: capital, relationships, management support

20
How VC Trends Affect You
Growing Funding Market
o Minimum $ amount per
investment grows
o Higher VC valuations
o Lower returns % on a
higher base
o Gold rush mentality
(lower funding bar =
more risky or copycat
ideas/ teams)

Shrinking Funding Market
o Minimum $ amount per
investment shrinks
o Lower VC valuations
o Higher returns % on a
lower base
o Champions mentality
(higher funding bar = the
strongest or most unique
ideas/teams)

Whether the market is going up or going down,
VC money still has to be invested
21

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VC 101 for Startups

  • 1. VC 101 (Startup Edition) Christine Herron June 2013 christine@christine.net @christine www.intelcapital.com
  • 2. (AKA: How to Avoid Wasted Time Fundraising) www.intelcapital.com
  • 6. 6
  • 7. 7
  • 8. Easy-to-Follow Bread Crumbs o Follow us on Twitter o Read our blogs o Search our images o Look up our portfolio companies and use their products 8
  • 9. Mapping Out the Venture Business o VC: “kind of” a finance job o How a VC partnership works (and why you care) o What influences if/when VCs will take a risk on you o The VC investment process and questions you should ask o Impact of VC trends on you Ask questions during the discussion! 9
  • 10. VC: Technically a Financial Industry Public Equity o Hedge Funds o Pension Funds o Mutual Funds o Public Stock Trading …etc. Private Equity o Buyouts o Mezzanine Investments o Venture Capital 10
  • 11. 11
  • 12. 12
  • 13. Basic VC Business Model o Capital Calls o Where does the money come from? o Management Fees o How do the bills get paid? What does this imply for General Partner incentives? o Profit Distributions o What happens as investments mature? o Staying in Business with Future Funds o How does a partnership become sustainable and grow? 13
  • 14. Partnership Dynamics Affect You o Limited Partners vs. General Partners o Who are they and what do they do? o Reporting o What responsibilities do GPs have, and what rights do LPs have? o Investment Profile o What promises has the VC made around investing and portfolio management? 14
  • 15. Money Going In: Capital Contributions LP LP LP LP LP LP LP G P GP GP 99% of total GP GP G P GP GP 1% of total 15
  • 16. Money Coming Out: Profit Sharing LP LP LP LP LP LP 80% of total LP G P GP GP GP GP G P GP GP 20% of total 16
  • 17. Sample Fund Recap o 2.5% annual management fee o Pays for office space, salaries, other G&A o Incentive implications for small v. large funds o All capital is repaid to LP before any profit is shared o 80% of profit goes to LPs o 20% of profit goes to GPs o An individual VC’s share of the total GP profit share is called “carried interest” 17
  • 18. Staying in Business = Raising More Funds Each Fund Life = 10 Years 6-7 Yrs = Harvest & Do Followons Year 6-7 Year 3-4 Year 1 3-4 Yrs = Seed NewCos Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it Fund I ($100M) Fund II ($125M) Fund III ($150M) After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos 18
  • 19. Qualifying Questions o Understand if they’re in a position to invest o When did you close your last fund? o What was your last investment? o Understand if they’re a good fit for your company o What is your average investment size? o How many boards are you on? o How does your process work? 19
  • 20. Where Are You in this Process? o Deal sourcing and qualification: how good opportunities are found o Evaluation: deciding if there’s a good fit with investment parameters; company history, business characteristics, finances, business plan analysis, comparables analysis, pro forma return model o Term sheets: a nonbinding letter of intent o Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo o Closing: final signature and LP announcement o Value offered: capital, relationships, management support 20
  • 21. How VC Trends Affect You Growing Funding Market o Minimum $ amount per investment grows o Higher VC valuations o Lower returns % on a higher base o Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams) Shrinking Funding Market o Minimum $ amount per investment shrinks o Lower VC valuations o Higher returns % on a lower base o Champions mentality (higher funding bar = the strongest or most unique ideas/teams) Whether the market is going up or going down, VC money still has to be invested 21