VC 101: Inside the Black Box

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

What We’ll Cover

Public vs. Private Equity VC partnership structure Follow the money The VC investment process Impact of VC trends on you

Feel free to ask questions throughout the discussion!

Public vs. Private Equity Context

Public Equity Hedge Funds Pension Funds Mutual Funds Public Stock Trading

…etc.

Private Equity Buyouts Mezzanine

Investments Venture Capital

…etc

VC Partnership Structure

Limited Partners vs. General PartnersWho are they and what do they do?

ReportingWhat responsibilities do GPs have, and

what rights do LPs have?Investment Profile

What are a VC’s specific guidelines for investing and portfolio management?

VC Partnership Elements

GP

GP

GP

GP GPGP

GP

GP

“THE FUND”

LP

LP LPLP

LP

LP

Following the Money

Capital CallsWhere does the money come from?

Management FeesHow do the bills get paid? What does this imply for

General Partner incentives?

Profit DistributionsWhat happens as investments mature?

Successive FundsHow does a partnership become sustainable and

grow?

Capital Contributions

GP

GP

GP

GPGP

GPGP

GPLP LPLP

LP

“THE FUND”

1% of total

99% of total

LP

LP LP

A Typical VC Fund Example

2.5% annual management feePays for office space, salaries, other G&A Incentive implications for small v. large funds

All capital is repaid to LP before any profit is shared80% of profit goes to LPs20% of profit goes to GPs

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

Profit Sharing

GP

GP

GP

GPGP

GPGP

GP

“THE FUND”

20% of total

80% of total

LP

LP

LP

LP LP

LPLP

VC Growth = More, Larger FundsY

ear

1

Yea

r 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

Yea

r 6-

7

The VC Investment Cycle

Deal sourcing and qualification: how good opportunities are found

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

Term sheets: a nonbinding letter of intent Due diligence: ensuring that everything we believe to be

true, is true; research, references, financials, transaction summary/approval, investment memo

Closing: final signature and LP announcement Value offered: capital, relationships, management support

Impact of VC Trends on You

Growing Funding Market Minimum $ amount per

investment grows Higher VC valuations Lower returns % on a

higher base ‘Gold rush’ mentality

(lower funding bar = more mediocre ideas/ teams)

Shrinking Funding Market Minimum $ amount per

investment shrinks Lower VC valuations Higher returns % on a

lower base Champions mentality

(higher funding bar = the strongest ideas/teams)

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