vc 101 for startups
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www.intelcapital.com
(AKA: How to Avoid Wasted Time Fundraising)
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Know Your Audience
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Know Your Audience
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Know Your Audience
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Easy-to-Follow Bread Crumbs
o Follow us on Twitter
o Read our blogs
o Search our images
o Look up our portfolio companies and use their products
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Mapping Out the Venture Business
o VC: “kind of” a finance job
o How a VC partnership works (and why you care)
o What influences if/when VCs will take a risk on you
o The VC investment process and questions you should ask
o Impact of VC trends on you
Ask questions during the discussion!
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VC: Technically a Financial Industry
Public Equityo Hedge Fundso Pension Fundso Mutual Funds
o Public Stock Trading…etc.
Private Equityo Buyouts
o Mezzanine Investments
o Venture Capital
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Basic VC Business Model
o Capital Callso Where does the money come from?
o Management Feeso How do the bills get paid? What does this imply for General Partner incentives?
o Profit Distributionso What happens as investments mature?
o Staying in Business with Future Fundso How does a partnership become sustainable and grow?
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Partnership Dynamics Affect You
o Limited Partners vs. General Partnerso Who are they and what do they do?
o Reportingo What responsibilities do GPs have, and what rights do LPs have?
o Investment Profileo What promises has the VC made around investing and portfolio management?
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Money Going In: Capital Contributions
GP
GP
GP
GPGP
GPGP
GPLP LPLP
LP
1% of total
99% of total
LP
LP LP
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Money Coming Out: Profit Sharing
GP
GP
GP
GPGP
GPGP
GP
20% of total
80% of total
LP
LP
LP
LP LP
LPLP
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Sample Fund Recap
o 2.5% annual management feeo Pays for office space, salaries, other G&Ao Incentive implications for small v. large funds
o All capital is repaid to LP before any profit is sharedo 80% of profit goes to LPso 20% of profit goes to GPs
o An individual VC’s share of the total GP profit share is called “carried interest”
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Staying in Business = Raising More FundsY
ear
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Yea
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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-
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Qualifying Questions
o Understand if they’re in a position to investo When did you close your last fund?o What was your last investment?
o Understand if they’re a good fit for your companyo What is your average investment size?o How many boards are you on?o How does your process work?
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Where Are You in this Process?
o Deal sourcing and qualification: how good opportunities are found
o 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
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
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How VC Trends Affect You
Growing Funding Marketo Minimum $ amount per
investment growso Higher VC valuationso Lower returns % on a
higher baseo Gold rush mentality
(lower funding bar = more risky or copycat
ideas/ teams)
Shrinking Funding Marketo Minimum $ amount per
investment shrinkso Lower VC valuationso Higher returns % on a
lower baseo 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