Chapter 14 Venture Capital Chapter 14 Entrepreneurial Finance, Smith and Kiholm Smith Venture Capital

Historical Development of Venture Capital as an Institution

Venture Capital New Commitments

Sources of Venture Capital Funds

Organizational Structure of Venture Capital Investment Portfolio Companies –Value creation – Generate deal flow – Screen opportunities – Harvest investments – Negotiate deals – Monitor and advise General Partners Venture Capital Fund – Pension plan – Endowments – Life insurance companies – Corporations – Individuals Limited Partners Effort and 1% of capital Annual Management Fee 2-3% Carried Interest % of Gain 99% of Investment Capital Capital Appreciation 70-80% of Gain Investment Capital and Effort Financial Claims

Summary of Terms: Venture Capital Limited Partnership Agreement

Allocation of Venture Capitalist Time

The Venture Capital Investment Process Development of Fund Concept Secure Commitments from Investors Generate Deal Flow Closing of Fund First Capital Call Screen Business Plans Evaluate and Conduct Due Diligence Negotiate Deals and Staging Additional Capital Calls Invest Funds Distributing Proceeds – Cash – Public Shares – Other Harvesting Investment – IPO – Acquisition – LBO – Liquidation Value Creation and Monitoring – Board service – Performance evaluation and review – Recruitment management – Assist with external relationships – Help arrange additional financing Year years 4-5 years 2-3 years or more 7-10 years plus extensions

Key Covenant Classes of Venture Capital Limited Partnerships