Christine Herron's Quick & Dirty Guide to Venture Capital // blackbox connect // Nov 2011

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

2. (AKA: Christine’s Quick &
Dirty Guide to Venture
Capital)
www.intelcapital.com

3. What’s My Motivation?
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4. What’s Under the Hood?
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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
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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!
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7. Quick Context: What VC is Not
Public Equity Private Equity
o Hedge Funds o Buyouts
o Pension Funds o Mezzanine
o Mutual Funds Investments
o Public Stock o Venture Capital
Trading …etc
…etc.
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8. Quick Context: What VC is Not
Public Equity Private Equity
o Hedge Funds o Buyouts
o Pension Funds o Mezzanine
o Mutual Funds Investments
o Public Stock o Venture Capital
Trading
…etc.
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11. VC Partnerships Revealed
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?
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12. How to Follow the Money
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?
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13. Money Going In: Capital Contributions
LP GP
LP LP LP
GP
GP
GP GP
LP LP GP
LP GP
GP
99% of 1% of total
total
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14. Money Coming Out: Profit Sharing
LP GP GP
LP LP LP
GP
GP GP
LP LP GP
LP GP
GP
80% of 20% of
total total
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15. 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”
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16. Staying in Business = Raising More Funds
Each Fund Life = 10 Years
3-4 Yrs = 6-7 Yrs = Harvest
Seed NewCos & Do Followons
Y Fund I ($100M)
e Y Y
a e e
a Fund II ($125M)
r a
1 r r
3 6 Fund III
- - ($150M)
4 7
Must raise new funds to keep
investing in NewCos; once After 6-7 years in business,
new fund is raised, NewCo VC will have 3+ concurrent,
funding will come from it active funds at any one time;
only one, however, will be
funding NewCos
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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
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18. How VC Trends Affect You
Growing Funding Market Shrinking Funding Market
o Minimum $ amount per o Minimum $ amount per
investment grows investment shrinks
o Higher VC valuations o Lower VC valuations
o Lower returns % on a o Higher returns % on a
higher base lower base
o Gold rush mentality o Champions mentality
(lower funding bar = (higher funding bar = the
more risky or copycat strongest or most unique
ideas/ teams) ideas/teams)
Whether the market is going up or going down,
VC money still has to be invested
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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 you
o What is your average investment size?
o How many boards are you on?
o How does your process work?
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