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

(AKA : Christines Quick & Dirty Guide to Venture Capital)

What Well Cover o What VC is not o VC partnerships revealed o Follow the money o The VC investment process o Impact of VC trends on you Feel free to ask questions during the discussion!

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

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

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

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

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

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

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

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 o Deal sourcing and qualification: how good opportunities are found o Evaluation: deciding if theres a good fit with investment parameters; company history, business characteristics, finances, business plan analysis, comparables analysis, pro forma return model o Term sheets: a nonbinding letter of intent o Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo o Closing: final signature and LP announcement o Value offered: capital, relationships, management support

How VC Trends Affect You Growing Funding Market o Minimum $ amount per investment grows o Higher VC valuations o Lower returns % on a higher base o Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams) Shrinking Funding Market o Minimum $ amount per investment shrinks o Lower VC valuations o Higher returns % on a lower base o Champions mentality (higher funding bar = the strongest or most unique ideas/teams) 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 HayesChris FralicJosh Kopelman

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

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

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

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

6 Step Guide to Managing First Sales 1.Start early - Get first customer as early as possible in the development cycle 2.Choose carefully – this customer will experience your worst screw-ups 3.Fix problems – and release next version 4.Then choose next two customers 5.Go out of your way - Make these customers your biggest fans and supporters 6.Repeat from step 3

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

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

Thank You Oren Netzer

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 Read Our Blogs Search Our Images Follow Us on Twitter Use Our Portfolio Cos. Products

Make a Personal Connection

Blow Us Away

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

Qualify Whether Were in a Position to Invest

Thanks