VC 101 : Inside the
Black Box Christine Herron First Round Capital November 2009

(AKA : Christine’s Quick &
Dirty Guide to Venture Capital)

What We’ll Cover <ul><li>What VC
is not </li></ul><ul><li>VC partnerships revealed </li></ul><ul><li>Follow the money </li></ul><ul><li>The VC investment process </li></ul><ul><li>Impact of VC trends on you </li></ul><ul><li>Feel free to ask questions during the discussion! </li></ul>

Quick Context: What VC is
Not <ul><li>Public Equity </li></ul><ul><li>Hedge Funds </li></ul><ul><li>Pension Funds </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Public Stock Trading </li></ul><ul><li>… etc. </li></ul><ul><li>Private Equity </li></ul><ul><li>Buyouts </li></ul><ul><li>Mezzanine Investments </li></ul><ul><li>Venture Capital </li></ul><ul><li>… etc </li></ul>

Quick Context: What VC is
Not <ul><li>Public Equity </li></ul><ul><li>Hedge Funds </li></ul><ul><li>Pension Funds </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Public Stock Trading </li></ul><ul><li>… etc. </li></ul><ul><li>Private Equity </li></ul><ul><li>Buyouts </li></ul><ul><li>Mezzanine Investments </li></ul><ul><li>Venture Capital </li></ul>

VC Partnerships Revealed <ul><li>Limited Partners
vs. General Partners </li></ul><ul><ul><li>Who are they and what do they do? </li></ul></ul><ul><li>Reporting </li></ul><ul><ul><li>What responsibilities do GPs have, and what rights do LPs have? </li></ul></ul><ul><li>Investment Profile </li></ul><ul><ul><li>What promises has the VC made around investing and portfolio management? </li></ul></ul>

How to Follow the Money
<ul><li>Capital Calls </li></ul><ul><ul><li>Where does the money come from? </li></ul></ul><ul><li>Management Fees </li></ul><ul><ul><li>How do the bills get paid? What does this imply for General Partner incentives? </li></ul></ul><ul><li>Profit Distributions </li></ul><ul><ul><li>What happens as investments mature? </li></ul></ul><ul><li>Staying in Business with Future Funds </li></ul><ul><ul><li>How does a partnership become sustainable and grow? </li></ul></ul>

Money Going In: Capital Contributions
1% of total 99% of total GP GP GP GP GP GP GP GP LP LP LP LP LP LP LP

Money Coming Out: Profit Sharing
20% of total 80% of total GP GP GP GP GP GP GP GP LP LP LP LP LP LP LP

Sample Fund Recap <ul><li>2.5% annual
management fee </li></ul><ul><ul><li>Pays for office space, salaries, other G&A </li></ul></ul><ul><ul><li>Incentive implications for small v. large funds </li></ul></ul><ul><li>All capital is repaid to LP before any profit is shared </li></ul><ul><ul><li>80% of profit goes to LPs </li></ul></ul><ul><ul><li>20% of profit goes to GPs </li></ul></ul><ul><li>An individual VC’s share of the total GP profit share is called “carried interest” </li></ul>

Staying in Business = Raising
More Funds Year 1 Year 3-4 Each Fund Life = 10 Years 3-4 Yrs = Seed NewCos 6-7 Yrs = Harvest & Do Followons Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it Fund III ($150M) Fund II ($125M) Fund I ($100M) After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos Year 6-7

The VC Investment Cycle <ul><li>Deal
sourcing and qualification: how good opportunities are found </li></ul><ul><li>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 </li></ul><ul><li>Term sheets: a nonbinding letter of intent </li></ul><ul><li>Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo </li></ul><ul><li>Closing: final signature and LP announcement </li></ul><ul><li>Value offered: capital, relationships, management support </li></ul>

How VC Trends Affect You
<ul><li>Growing Funding Market </li></ul><ul><li>Minimum $ amount per investment grows </li></ul><ul><li>Higher VC valuations </li></ul><ul><li>Lower returns % on a higher base </li></ul><ul><li>Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams) </li></ul><ul><li>Shrinking Funding Market </li></ul><ul><li>Minimum $ amount per investment shrinks </li></ul><ul><li>Lower VC valuations </li></ul><ul><li>Higher returns % on a lower base </li></ul><ul><li>Champions mentality (higher funding bar = the strongest or most unique ideas/teams) </li></ul>Whether the market is going up or going down, VC money still has to be invested

For seed-stage conversations Christine Herron
Kent Goldman Phin Barnes Howard Morgan Rob Hayes Chris Fralic Josh Kopelman http://firstround.com twitter: @firstround [email_address]

VCTips: An Inside Look at
the VC Landscape and Fundraising Strategy Oren Netzer Founder and CEO DoubleVerify Inc.

DoubleVerify Overview <ul><li>25 Employees </li></ul><ul><li>Offices
in Tel Aviv and New York </li></ul><ul><li>Raised $3.5M Series A in May 2009 </li></ul><ul><li>Pioneered Online Media Verification </li></ul><ul><li>Customers include agencies, marketers and ad networks </li></ul>

What We Do <ul><li>Employ tracking
pixels in ads and web crawlers to track actual delivery of online ad campaigns </li></ul><ul><li>Compare actual delivery to client’s media plan and buying guidelines </li></ul><ul><li>Confirm full compliance between plan and actuals </li></ul><ul><li>Real-time non-compliance remediation </li></ul><ul><li>Screenshots provided as evidence of every non-compliance incident </li></ul>

The Importance of Your First
Customers <ul><li>Your Worst Mistakes – Your first customers will experience the earliest and “buggiest” version of your product </li></ul><ul><li>Reality Check - Your first customers will teach you what the market really wants </li></ul><ul><li>Market Demand - Your first customers will create your market demand </li></ul><ul><li>Best or Worst References – Your first customers can make or break your next sales or fundraising </li></ul>

6 Step Guide to Managing
First Sales <ul><li>Start early - Get first customer as early as possible in the development cycle </li></ul><ul><li>Choose carefully – this customer will experience your worst screw-ups </li></ul><ul><li>Fix problems – and release next version </li></ul><ul><li>Then choose next two customers </li></ul><ul><li>Go out of your way - Make these customers your biggest fans and supporters </li></ul><ul><li>Repeat from step 3 </li></ul>

DoubleVerify Timeline at a Glance
<ul><li>First Beta version released March 2008 with client </li></ul><ul><li>Founded May 2008 </li></ul><ul><li>Raised seed round June 2008 </li></ul><ul><li>First major client September 2008 </li></ul><ul><li>Second major client February 2009 </li></ul><ul><li>Formal Product Launch May 2009 </li></ul><ul><li>Currently servicing over 30 customers </li></ul><ul><li>November 2009 first profitable month </li></ul>

First Sales - Lessons Learned
<ul><li>Choose your first customers carefully </li></ul><ul><li>You never know where the sale is going to come from </li></ul><ul><li>Be persistent but not pushy </li></ul><ul><li>Oversell, only if you can deliver </li></ul><ul><li>Listen to your customers </li></ul><ul><li>Customers are partners, not ATMs </li></ul><ul><li>Know how to ask them for money </li></ul><ul><li>Be Lucky </li></ul>

Thank You Oren Netzer [email_address]

VC Meeting 1.0

*Spoiler Alert

Its Not About the Money

Many Paths (some more effective
than others)

Prototypical VCs

Real People

Know Your Audience <ul><li>Read Our
Blogs </li></ul><ul><li>Search Our Images </li></ul><ul><li>Follow Us on Twitter </li></ul><ul><li>Use Our Portfolio Cos. Products </li></ul>

Make a Personal Connection

Blow Us Away

Qualifying Questions <ul><li>When Did We
Close Our Last Fund </li></ul><ul><li>What Was Our Last Investment </li></ul><ul><li>How Many Boards Are We On </li></ul><ul><li>How Does Our Process Work </li></ul>

Qualify Whether We’re in a
Position to Invest

Thanks [email_address] www.bryce.vc @bryce