(AKA: Christines Quick & Dirty Guide to Venture Capital)
What Well 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 Partners Who are they and what do they do? Reporting What responsibilities do GPs have, and what rights do LPs have? Investment Profile What are a VCs specific guidelines for investing and portfolio management?
Following the Money Capital Calls Where does the money come from? Management Fees How do the bills get paid? What does this imply for General Partner incentives? Profit Distributions What happens as investments mature? Successive Funds How does a partnership become sustainable and grow?
Capital Contributions GPGP GP LP THE FUND 1% of total 99% of total LP
A Typical VC Fund Example 2.5% annual management fee Pays for office space, salaries, other G&A Incentive implications for small v. large funds All capital is repaid to LP before any profit is shared 80% of profit goes to LPs 20% of profit goes to GPs An individual VCs share of the total GP profit share is called carried interest
Profit Sharing GPGP GP THE FUND 20% of total 80% of total LP
VC Growth = More, Larger 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 Deal sourcing and qualification: how good opportunities are found Evaluation: deciding if theres 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