vc 101

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www.intelcapital.com VC 101: Inside the Black Box Christine Herron Intel Capital July 2011

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"VC 101" talk at 500 Startups, July 21, 2011

TRANSCRIPT

Page 1: VC 101

www.intelcapital.com

VC 101:Inside the Black Box

Christine HerronIntel CapitalJuly 2011

Page 2: VC 101

www.intelcapital.com

(AKA: Christine’s Quick & Dirty Guide to Venture Capital)

Page 3: VC 101

3

What’s My Motivation?

Page 4: VC 101

4

What’s Under the Hood?

Page 5: VC 101

5

Know Your Audience

o Follow us on Twitter

o Read our blogs

o Search our images

o Look up our portfolio companies and use their products

Page 6: VC 101

6

What We’ll 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!

Page 7: VC 101

7

Quick Context: What VC is Not

Public Equityo Hedge Fundso Pension Fundso Mutual Funds

o Public Stock Trading…etc.

Private Equityo Buyouts

o Mezzanine Investments

o Venture Capital…etc

Page 8: VC 101

8

Quick Context: What VC is Not

Public Equityo Hedge Fundso Pension Fundso Mutual Funds

o Public Stock Trading…etc.

Private Equityo Buyouts

o Mezzanine Investments

o Venture Capital

Page 9: VC 101

9

Page 10: VC 101

10

Page 11: VC 101

11

VC Partnerships Revealed

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?

Page 12: VC 101

12

How to Follow the Money

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?

Page 13: VC 101

13

Money Going In: Capital Contributions

GP

GP

GP

GPGP

GPGP

GPLP LPLP

LP

1% of total

99% of total

LP

LP LP

Page 14: VC 101

14

Money Coming Out: Profit Sharing

GP

GP

GP

GPGP

GPGP

GP

20% of total

80% of total

LP

LP

LP

LP LP

LPLP

Page 15: VC 101

15

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”

Page 16: VC 101

16

Staying in Business = Raising More FundsY

ear

1

Yea

r 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

Yea

r 6-

7

Page 17: VC 101

17

The VC Investment Cycle

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

Page 18: VC 101

18

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

Page 19: VC 101

19

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 youo What is your average investment size?o How many boards are you on?o How does your process work?