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Venture capital & failure presentation by professor eli zelkha

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Venture capital & failure presentation by professor eli zelkha

  1. 1. Industry CharacteristicsHigh riskMany, many losersDifficult to discern in advance: No “rules”Massive gains concentrated in few top dealsMany ways to lose your money
  2. 2. Venture Capital Lifecycle Fund life cycle:Raisea Fund(Pension, Families,Corporations)Invest(Evaluate, duediligence, close…)Harvest(IPO, mergers,managementbuyout)CoreVentureCapitalProcess• Raise capital from institutionaland individual investors- Finance new and growing companies;- Purchase preferred equity- Add value through active participation
  3. 3. VC’s segment in a number of waysStageSector Healthcare versus IT versus clean energyGeography US, EU, China, India, IsraelIndependent vs Corporate VCSize Small fund (<$100M) to large fund (>$1B+)Specialization leads to deep expertise Source: W. Price, 3/6/07 Hummer WinbVenture Capital ModelFlavors of VCs
  4. 4. 5 Initial contact Review business plan… basic diligencebasic diligence Emergence of deal advocate Partners meeting with entrepreneur Due diligenceDue diligence Unanimous partner approvalUnanimous partner approval Term sheet Final due diligenceFinal due diligence Legal documentation FundingMulti-stage, extended process, very few selectedVenture Capital ModelInvestment Process
  5. 5. The Entire Business Model Presumes &Leverages Multiple Failures• Deal with entrepreneurs: - Gives VCs control for course change- Puts VCs first in line on pay day• Deal with limited partners: - Participate on fund upside,but not on downside• Deal with other VCs: - Home run phenomena- Broad deal sharing among VCs- Enables many bites on few home runs• Investment process: - Optimized to avoid losers- Funds participate in many big “at bats”
  6. 6. 8Reverse Vesting of Founder Stock Mandatory Minimum Employment PeriodMandatory Minimum Employment PeriodVoting rights a/k/a veto rightsa/k/a veto rightsLiquidation preference a/k/a VC gets 2-5 multiple before you see a dimea/k/a VC gets 2-5 multiple before you see a dimeOptions & vesting A/k/a you’re locked in baby.A/k/a you’re locked in baby.Redemption A/k/a in a sideways play, we’re out of here … with our money & profit of course.A/k/a in a sideways play, we’re out of here … with our money & profit of course.Anti-dilution (weighted average vs full-ratchet) …… if things go bad (under full ratchet) you can get wiped outif things go bad (under full ratchet) you can get wiped outEnables effective controlVenture Capital ModelDeal w/ Entrepreneurs
  7. 7. 9 Positive Covenants – things you will do Information rights, auditing requirements Negative Covenants – things you will not do Selling debt, raising money, hiring management Representations We’ve told you everything that is material to making your investmentdecisionVenture Capital ModelDeal w/ Entrepreneurs
  8. 8. Venture Capital ModelDeal with Limited PartnersManagement Fees (typically 2-2.5% of AUM) Charge a management fee to cover the costs of managing the committed capital. $100 M fund generates $2m per year in management fees Carried Interest (typically 20-25%) "Carried interest" is the term used to denote the profit split of proceeds to the generalpartner.Participate on fund upside, but not downsideSource: W. Price, 3/6/07 Hummer Winblad
  9. 9. Venture Capital ModelDeal with Other VCs Industry with blockbuster winners! Broad deal sharing among VCs enables many bites onfew big home runs …. multiplying effect. Portfolio effect allows for big success while absorbingmany failures. Impact of few very large numbers VC gets portfolio effect, (while entrepreneur is all ornothing)
  10. 10. Venture Capital ModelInvestment Process Multi-phase, intense, in-depth due diligence process Deep evaluation process Decision to invest requires consensus of all general partners Only invest if other VCs go in (syndication) Multi-round investment process  Short leash Seed, series A, B, C, D, Mezzanine…
  11. 11. Venture Capital ModelFundamentals of VC structure, deal terms,timing, and core processes presume andwork with “failure”But…..

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