How, What & Why VCs do What They Do (and the key things you should know as a founder)

1. © 2017, Amazon Web Services, Inc. or its Affiliates. All rights reserved.
Drew Russ, Startup Business Development
October 18, 2017
AWS Startup Day
VC 101: How, What & Why VCs Do What They Do (and
the key things you should know as a Founder)

2. Overview & Introduction

3. About Me

4. What We are Going to Discuss:
Venture Capital: The Definition, The Theory
Venture Capital Mechanics: Fund Structure, Time as a Factor, How VCs
Make Money, Roles and Responsibilities and Deal Sourcing
Venture Capital: The Deal and the Bargain
The Other Flavors of Venture Capital and Corporate VC
A Glimpse of VC 201
Thanks!

5. What is Venture Capital?

6. What is Venture Capital: The Definition
HigherRisk
Lower
Risk Lower Return Higher Return
Money Market
Funds
Corporate
Bonds
Large cap Equities
Hedge Fund
Private Equity
Investing in a
restaurant Venture
Capital
Inherit it
• Venture Capital is a form of
Private Equity
• For private ventures that
cannot raise traditional
financing (e.g. bank loan,
capital markets)
• High risk, with potential for a
high return in a relatively
short timeframe
• Non-majority ownership

7. What is Venture Capital: The Theory
I’ve said many times on this blog
that our target batting average is
“1/3, 1/3, 1/3” which means that
we expect to lose our entire
investment on 1/3 of our
investments, we expect to get our
money back (or maybe make a
small return) on 1/3 of our
investments, and we expect to
generate the bulk of our returns
on 1/3 of our investments.
- Fred Wilson, Union Square
Ventures

8. What is Venture Capital: The Theory contd.
“Venture capital is not even a home run business. It’s a grand slam
business”
-Bill Gurley, Founder of Benchmark Capital

9. Venture Capital Mechanics

10. Venture Capital Mechanics: Fund Flows

11. Venture Capital Mechanics: Time is a Factor
Commitment Period
• Typically 5 years
• Length of time for Identifying
and investing in new
companies
• Allocate reserves to each
investment that can be used in
“follow on” rounds
• This is why VCs raise a new
fund every 3-5 years
Investment Period
• The length of time a fund can
remain active
• Typically 10 years (“a 10 year
fund”)
• Extensions are allowed, but
limited
• Management of investments
goes beyond period,
secondary sales occur

12. Venture Capital Mechanics: How VCs Make $
Management Fees
• Typically between 1.5% and
2.5% annually of funds managed
• Paid quarterly and independent
of investment success
• Pays the salaries and “keeps the
lights on”
• This fee begins to decrease after
the end of the “commitment
period”
Carried Interest
• The share of the profit that a VC
keeps after returning all capital
to LPs
• Achieving “carry” is a fund-wide
hurdle, but not all members of a
firm have equal share
• Partners who perform well, can
not achieve carry due to poor
performance of fund overall

13. VC Mechanics: Roles & Responsibilities
Managing Directors / General Partners
Sr. Associates / Principals
Associates
Analysts
Other: EIRs, Venture Partners, Operating Partners…

14. VC Mechanics: Sourcing to The Wire

15. Venture Capital & Time

16. VC & Time: Why VCs invest at Different Stages
Early Stage
• Founder focused
• Ideation risk and
product market/fit
• Will own more of
the company
• Smaller
investmetns with
potential for higher
multiples
Mid Stage
• “Traditional” VC
• Team focused
• Traction and scaling
risk (sales and
marketing)
• Its about “pouring
gas on the fire”
Late Stage
• Exit risk
• How big can the
Market become
• IPO windows and
acquisition potential
• Mix of VCs, PE,
Public investors
(mutual funds)

17. FIFO Principle!
Seed – Early investment; typically common stock
Series – A, B, C, D etc
• Refers to the name of the preferred shares issued (“Series A Preferred Stock)
• Preferred stock senior to common
• Subsequent issues of preferred stock (i.e. Series B) is often (not always, i.e. Pari Passu) senior to
prior preferred stock
• Series also can be mapped to the stage of the company defined as capital needs and the planned
use of that capital
Stock issuances are tracked on a Capitalization Table (“Cap Table”)
The return is of each series of shares can be calculated using a “waterfall analysis”
Venture Capital & Time: The VC Alphabet

18. Summary, Wrapup & Tid bits

19. Venture Capital: The Bargain
INFLUENCE
VCs rarely want control
when company is
performing against plan
LIQUIDATION
PREFERENCE
Investors typically have
rights to get their money
out first
DILUTION
At exit, founders and
management will typically
own 10-20%

20. A glimpse of VC 201: The Term Sheet and Cap Table
Premoney
The Valuation of a business prior
to any additional investment of
capital
Postmoney
The valuation of the business
PLUS additional capital invested

21. What is Venture Capital: The (other) Flavors of
VC
• Today we are talked about independent, institutional Venture Capital Investors
• But there are other types of investors that a startup founder may encounter:
Angel Investors AcceleratorsIncubators Corporate VCs

22. What is Venture Capital: A bit more on Corporate
VCs
• Leverage existing businesses
• Inspire new products
• Access new technology
• Identify new markets
• (Be cool; extend the brand)
Why Challenges
• Direct investment
• Indirect investment
• Incubation / Acceleration
How
• Fluctuating internal support
• Shorter sighted
• Slower decision making
• Varying value-add
• Conflicts of interest
Corporate
Strategic Non-Strategic

23. Other Reading
Books
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
Term Sheets & Valuations: A line by line look at the Intricacies of Term Sheets and Valuations
Blogs & Newsletters
Dan Primack’s Term Sheet
Mark Suster’s Both Sides of the Table
Fred Wilson’s AVC
CB Insights
Product Hunt
The Creator’s Code by Amy Wilkinson
A16z Newsletter
Tweets
@awsstartups
@firstround – solid early stage fund, platform
@karaswisher– Re/Code, breaks a lot of news
@benedictevans – A16Z, data hound

24. @drewwruss