Venture Capital 101 // Christine Herron // blackbox connect
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www.intelcapital.com
VC 101:Inside the Black Box
Christine HerronIntel CapitalNovember 2011
www.intelcapital.com
(AKA: Christine’s Quick &Dirty Guide to VentureCapital)
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What’s My Motivation?
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What’s Under the Hood?
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Know Your Audience
o Follow us on Twittero Read our blogso Search our imageso Look up our portfolio companies and use their
products
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What We’ll Cover
o What VC is noto VC partnerships revealedo Follow the moneyo The VC investment processo Impact of VC trends on you
Feel free to ask questions during the discussion!
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Quick Context: What VC is Not
Public Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock
Trading…etc.
Private Equityo Buyoutso Mezzanine
Investmentso Venture Capital
…etc
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Quick Context: What VC is Not
Public Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock
Trading…etc.
Private Equityo Buyoutso Mezzanine
Investmentso Venture Capital
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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?
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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?
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Money Going In: Capital Contributions
GP
GP
GP
GPGP
GPGP
GPLP LPLP
LP
1% of total99% oftotal
LP
LP LP
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Money Coming Out: Profit Sharing
GP
GP
GP
GPGP
GPGP
GP
20% oftotal
80% oftotal
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 shareis called “carried interest”
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Staying in Business = Raising More Funds
Year1
Year3-4
Each Fund Life = 10 Years
3-4 Yrs =Seed NewCos
6-7 Yrs = Harvest& Do Followons
Must raise new funds to keepinvesting in NewCos; oncenew fund is raised, NewCofunding 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 befunding NewCos
Year6-7
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The VC Investment Cycle
o Deal sourcing and qualification: how good opportunities are foundo Evaluation: deciding if there’s a good fit with investment parameters;
company history, business characteristics, finances, business plananalysis, comparables analysis, pro forma return model
o Term sheets: a nonbinding letter of intento 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 announcemento 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 copycatideas/ teams)
Shrinking Funding Marketo Minimum $ amount per
investment shrinkso Lower VC valuationso Higher returns % on a
lower baseo Champions mentality
(higher funding bar = thestrongest or most uniqueideas/teams)
Whether the market is going up or going down,VC money still has to be invested
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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 youo What is your average investment size?o How many boards are you on?o How does your process work?
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