Venture Capital ModelPresumes & Leverages Multiple Failures

1. Funds designed for participating in many big “at bats”

2. VC fund managers (GPs) participate on fund upside, but not on downside

3. Portfolio effect allows for success while absorbing many failures.

4. Assumes many failures & demands control over tools for course correction.

5. Fundamentals of VC structure, deal terms, timing, and core processes presume and work with “failure”

Venture Capital ModelPresumes & Leverages Multiple Failures

1. VC funds designed for participating in many big “at bats”

Industry with blockbuster winners! (Broad deal sharing among VCs enables many bites on few big home runs multiplying effect).

VC gets portfolio effect, while forcing entrepreneur into all or nothing, do-or-die scenarios.

Venture Capital ModelPresumes & Leverages Multiple Failures

Fund life cycle:

Raise a Fund

(Pension, Families, Corporations)

Invest (Evaluate, due

diligence, close…)

Harvest(IPO, mergers, management

buyout)

Core Venture Capital Process

• Raise capital from institutional and individual investors

- Finance new and growing companies; - Purchase preferred equity- Add value through active participation

Venture Capital Presumes & Leverages Multiple Failures

Venture Capital ModelPresumes & Leverages Multiple Failures

3. Portfolio effect allows for big success while absorbing many failures.

Impact of few very large numbers

A rigorous process of evaluation (multi-phase and deep), selection (100% GP consensus) and due diligence (multi-stage) tries to minimize bad deals.

Venture Capital ModelPresumes & Leverages Multiple Failures

4. Assumes portfolio failures & demands control over tools for course correction.

Key decisions (senior personnel hiring, strategy, etc.) controlled by Board of Directors

Key decisions require support of all “classes” of stock Preferred shares class largely controlled by VCs Even if VC holds minority position, often in control

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VCs & Tools for Course CorrectionCovenants and Representations

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 you in making your investment

decision

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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.

Board seatsNo shop & confidentialitySubject to due diligence & expiration dateAnti-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 out

VCs & Tools for Course CorrectionThe Term Sheet

Venture Capital ModelPresumes & Leverages Multiple Failures

5. VC firm structure, deal terms, timing, and core processes presume and work with “failure”

Process Multiple phases, deep due diligence, covenants & representations

Timing Extended, multi-phase, open-ended, patient

Firm structure / voting approach Investment requires unanimous GP approval

Deal terms Liquidation preference, redemption, anti-dilution (ratchet?)

Deal structure Preferred stock, classes of stock, mgmt stock vesting

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Venture Capital ModelEmerging Threats