The document summarizes the key aspects of a venture capitalist's job cycle. It involves fundraising by securing commitments from limited partners for an investment fund. Then sourcing deals, investing in startups, helping them grow through follow-on rounds of funding, and ultimately exiting via IPO or acquisition to realize returns for investors. This cycle of fundraising, investing, growing and exiting portfolio companies repeats across multiple funds to generate the targeted 20% annualized returns.

1. VCIC ® Team Prep Session VC 101 This PPT was created for organizers of internal events to help prepare student teams to compete.

2. What is a VC’s Job? Return 20-25% to LPs

3. VC’s Job Duties Fundraising Sourcing deals Investing Growing ventures Exiting

4. VC’s Job Cycle Fundraise Close Fund Source Deals Invest Grow Ventures Exit Fundraise…

5. VC’s Job Cycle Fundraise Close Fund Source Deals Invest Grow Ventures Exit Fundraise…

6. Raising a Fund VC fund is a partnership GPs (general partners) are the VCs who actively invest the fund in startups LPs (limited partners): Financial investors with no active role “ Institutional”: pension funds, university endowments, insurance companies, etc.

7. Raising a Fund LP 2 LP 3 LP 4 VC Firm (GPs) Fund 1 $$$$ LP 1 LP n Pledge $$ Commitments only. No actual cash changes hands. Pledge $$ Pledge $$ Pledge $$ Pledge $$

8. Raising a Fund CalPERS Parish Capital VC Firm (GPs) Fund 1 $$$$ UNC Endowment AIG Pledge $$ Pledge $$ Pledge $$ Pledge $$ Pledge $$ Example NC Pension Fund

9. Sources of Funds

10. Example Portfolio Diversity of LP VC is a subset of private equity.

11. VC Firm vs. VC Fund One firm manages multiple funds Firms are LLCs with no end date Funds are LLPs with 10-year lifespans Roizen: small and large firms.

12. Fund Size Large: New Enterprise XIII, $2.2B,12 GPs Kleiner Perkins XIII, $700M Local RTP, for example: Intersouth IV, $275M Southern Capitol II, $15M

13. New Enterprise Associates hauls in nearly $2.5B for new fund 10/19/09 : BALTIMORE, MD - New Enterprise Associates has secured commitments for $2,457,680,000 for its NEA 13 fund, targeted at $2.5 billion, according to a regulatory filing. NEA, which focuses on IT and healthcare investments, currently has $8.5 billion under management in 12 funds. more... Imagine you are a start-up that needs $1M in funding. Can this firm help you?

14. Fund Life: 10 Years Invest and Reserve Follow-On Rounds Harvest “ Raise” Fund Year 0 5 10

15. Example Successful Investment Invest and Reserve Follow-On Rounds Harvest Series A Due Diligence Hit Milestones Hit Milestones Series B EXIT Find Deal Series A ROI is calculated on 6 years Series B ROI is calculated on 3 years 0 2 3 5 8 10

16. A Pattern That Repeats A B Exit 0 2 3 5 8 10

17. One of Many A B Exit 0 2 3 5 8 10

18. Portfolio of 10-25 Investments A B A B A B A B C A B A B Bust A Bust B A Bust A Bust A B C A D B Exit Exit Big Exit Exit 0 2 3 5 8 10

19. Portfolio of 10-25 Investments Big Exit A B A B A B A B C A B A B Bust A Bust B A Bust A Bust A B C A D B 3 2 5 6 8 9 11 10 Exit Exit Exit 4 1 7 0 2 3 5 8 10

20. Exit Scenario A B A B A B A B C A B A B Bust A Bust B A Bust A Bust A B C A D B Exit Exit Big Exit Exit ? ? ? Bust Exit ? 0 2 3 5 8 10

21. First Fund Invest and Reserve Follow-On Rounds Harvest “ Raise” Fund Year 0 5 10

22. First Fund Raise $$ Invest Follow-On Harvest Fund 1 Year 0 5 10

23. Multiple Funds Raise $$ Invest Follow-On Harvest Raise $$$$ Invest Follow-On Harvest Raise $$$ Invest Follow-On Harvest Always fundraising Always investing Always growing Fund 1 Fund 3 Fund 2 0 5 10 0 5 10 0 5 10

24. Multiple Deals in Multiple Funds Fund 1 Fund 3 Fund 2 Imagine you are this entrepreneur Raise $ Invest Follow-On Harvest Raise $$$ Invest Follow-On Harvest Raise $$$$ Invest Follow-On Harvest 11 Deals 16 Deals 25 Deals

25. VC’s Job Cycle Fundraise Close Fund Source Deals Invest Grow Ventures Exit Fundraise…

26. Source Deals: Focus

27. Source Deals: Network Lawyers, CPAs, CFOs, bankers Other VCs (syndication) Serial entrepreneurs Conferences Universities Technology transfer Teach, coach, mentor, judge

28. The Wall Street Organization, Inc.

30. Stages of Equity Funding Friends/Family $1,000-$50,000 Seed or Pre-Seed $25,000-$250,000 Angel or Early Stage $50,000 - $500,000 VC Rounds 1, 2, 3… or A, B, C… (Institutional) $500,000 - $50M IPO

31. Typical Growth of Bootstrap Venture Normal bootstrap business Grows steadily (if you’re lucky)

32. Rounds An investment / stock issuance occurs in something called a “round” VCs purchase preferred shares, which means they have rights over “common” Most ventures need multiple rounds (Series A, Series B, etc.) Each round dilutes previous shareholders Valuation occurs at the moment of a round (other times difficult to value illiquid asset)

33. VC Investment Math Pre + Investment = Post % Ownership = Investment ÷ Post

34. Example: $3M Post Preferred Shares Common Shares

35. Negotiating Points Pre-money valuation Investment size Option pool Board seats Liquidation preferences Dividends Anti-dilution Closing conditions Determine % ownership Some of the “rights” of preferred shares

36. VC’s Job Cycle Fundraise Close Fund Source Deals Invest Grow Ventures Exit Fundraise …

37. Growing Ventures On the Team “ Active” participation = board seat(s) Advisors (connections, strategy, etc.) Future rounds Valuation Milestones Syndication

38. Board Seats Board of directors controls the venture (unlike board of advisors) Small ventures have small boards that meet often (quarterly), 3-7 members Odd number to prevent ties % ownership should be reflected on board, majority controls

39. Advisors Even if not on board, VCs will have strategic input VC network benefits Management team additions Customers Partners Competitors

40. Future Rounds Future rounds are the norm, not the exception (most entrepreneurs do not realize this) VCs help find “syndicate” investors Later rounds can be much larger New network benefits Up round: valuation is higher and investment is (usually) higher Down round: valuation is lower

41. Future Rounds VCs in Series A almost always join Series B “ Pro rata” means they invest to keep same % ownership aka, “maintain position” In a hits-driven business, not maintaining a position is as bad as no hit “ Last money in” dictates the terms

42. Series A and B Conflict Series A investor, like the entrepreneur, wants a high pre-money valuation for Series B Series B wants lower pre-money valuation A VC who is in both rounds is trying to find middle ground VCs are generally trying to find a “fair market price” to avoid a future conflicts

43. Example Up Round Series A: “1 on 1” $1M Pre-money valuation $1M Investment -> $2M post-money valuation Series B: “2 on 3” $3M Pre-money $2M Investment -> $5M post-money valuation

44. Up Round: 1 on 1, 2 on 3 Inv = $1M Series A Series B Post = $5M Pre = $1M Post = $2M Inv = $2M Pre = $3M Shares at $1 Shares now $1.5 1M VC shares 1M Founder shares 2M total shares 1.33M Series B shares 2M Series A shares 3.33M shares Ownership Series A VC Shares 1M/2M = 50% Diluted to 1M/3.33M = 30% Series B VC Shares 1.33M/3.33M = 40% Founders Same as Series A VC shares Things go well Hit milestones Increased valuation

45. Dilution Original Shares Added Shares New Share Pool Original Shares Same quantity of blue. Lower percentage.

46. Why Dilution is Bad Original Pool Every 1% you lose of a 20X Exit is going to hurt 20 times more

47. Up Round: 2 on 4 12 on 12 Inv = $2M Series A Series B Post = $24M Pre = $4M Post = $6M Inv = $12M Pre = $12M Shares at $1 Shares at $2 2M VC shares 4M founders shares 6M total shares 6M Series B shares 6M Series A shares 12M shares Ownership Series A VC Shares 2M/6M = 33% Diluted to 2M/12M = 16.7% Series B VC Shares 6M/12M = 50% Founders 4M/6M = 67% Diluted to 4M/12M=33.3%

48. Down Round Inv = $1M Series A Series B Post = $2.5M Pre = $1M Post = $2M Inv = $1M Pre = $1.5M 1M shares 1M shares 2M shares 1.33 shares 2M shares 3.33M shares Shares at $1 Shares at $0.75 Remember, these are negotiated (so you start here, then do the math) The rest is math VC ownership after Series B (50% x 1.5/2.5) + 1/2.5 =1.75/2.5 = 70% OR 2.33M shares ÷ 3.33M total = 70% 1 on 1 1 on 1.5

49. Imagine a Scenario The venture needs cash Early round VCs cannot participate (ran out of dry powder) How does this affect negotiations? Lower pre-money valuation No ability for earlier VC to take advantage of lower valuation

50. Capitalization Table A table that shows the ownership structure of a venture Includes all shareholders and all classes of shares Also called “cap chart” Sign up at www.LearnVC.com for cap chart examples

51. Option Pool Negotiated, but the norm is to take it out of the founders’ side (or ‘hide’) Result: can severely dilute founders

52. 25% Option Pool Example Inv = $1M Series A Pre = $1M Post = $2M No Option Pool 1M VC shares 1M Founder shares 2M total shares Inv = $1M Series A Founders Post = $2M 25% Option Pool = 500K shares 1M VC shares 500K Founder shares 2M total shares 500K option shares Option Pool Pre = $1M

53. Future Rounds Impact on ROI VCs want to “maintain their position” Keep same % of ownership to exit Requires “dry powder” for future rounds Probably need syndication Trying to avoid dilution You must estimate future funding/dilution to estimate your ROI

54. VC’s Job Cycle Fundraise Close Fund Source Deals Invest Grow Ventures Exit Fundraise…

55. VC Return “ Top Quartile” venture firms return >20% average ROI to LPs Fund has life of 10 years Average investments are 5-7 years

56. Invest Startup Startup Startup Startup Startup Startup Startup Startup Startup Startup Startup Portfolio VC Firm (GPs) $$ $$ $$ $$ $$ $$ Fund 1 $$$$ Capital Call $$ Capital Call $$ Capital Call $$ Capital Call $$ Capital Call $$ LP 2 LP 3 LP 4 LP 1 LP n

57. Exits Single Home Run dud dud dud Triple VC Firm (GPs) Fund 1 $$$$ $$ $$ $$ dud dud dud dud Single Single Double dud $$$$$$$$$$ $$ $$ $$$ $ $ $ $$ $$ Single LP 2 LP 3 LP 4 LP 1 LP n

58. Examples 150M fund Fees: 3M/year (salaries, rent, travel) Carry: 12 portfolio ventures at $10M avg. investment To get 20% ROI, we need ~$450M (20% of 150M = $30M x 10 years) That’s two ventures going 20X!!

59. Getting to 20% ROI Rule of thumb: 3X on entire fund However, each investment is not 10 years Money not “put to work” until a capital call Exit could happen before end of fund You could reach 20% with only 1.5X

60. How do GPs/VCs Make Money? Management fee (~2%/year to cover expenses) for 10 years “ Carry” % of capital gain that VCs keep 20% benchmark Requires liquidity event(s)

61. Conclusion: VC’s Job Cycle Fundraise Close Fund Source Deals Invest Grow Ventures Exit Fundraise…

62. Understand the “Ecosystem” Fund 1 Fund 3 Fund 2 The game is not “picking the right deal.” It is laying the groundwork for continued success. Raise $ Invest Follow-On Harvest Raise $$$ Invest Follow-On Harvest Raise $$$$ Invest Follow-On Harvest 11 Deals 16 Deals 25 Deals