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VC 101 for Startups

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VC 101 for Startups

  1. VC 101 (Startup Edition) Christine Herron June 2013 christine@christine.net @christine www.intelcapital.com
  2. (AKA: How to Avoid Wasted Time Fundraising) www.intelcapital.com
  3. Know Your Audience 3
  4. Know Your Audience 4
  5. Know Your Audience 5
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  8. 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 8
  9. 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! 9
  10. VC: Technically a Financial Industry 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 10
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  13. Basic VC Business Model 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? 13
  14. Partnership Dynamics Affect You 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? 14
  15. Money Going In: Capital Contributions LP LP LP LP LP LP LP G P GP GP 99% of total GP GP G P GP GP 1% of total 15
  16. Money Coming Out: Profit Sharing LP LP LP LP LP LP 80% of total LP G P GP GP GP GP G P GP GP 20% of total 16
  17. 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 VC’s share of the total GP profit share is called “carried interest” 17
  18. Staying in Business = Raising More Funds Each Fund Life = 10 Years 6-7 Yrs = Harvest & Do Followons Year 6-7 Year 3-4 Year 1 3-4 Yrs = Seed NewCos Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it Fund I ($100M) Fund II ($125M) Fund III ($150M) After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos 18
  19. Qualifying Questions o Understand if they’re in a position to invest o When did you close your last fund? o What was your last investment? o Understand if they’re a good fit for your company o What is your average investment size? o How many boards are you on? o How does your process work? 19
  20. 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 20
  21. 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 21