This document provides an overview of venture capital firms and investing. It discusses Impression Ventures, including their focus areas and typical deal sizes. It then covers various aspects of VC investing such as structures, business models, economics, and factors that can impact returns. Specifically, it outlines typical limited partnership agreements and general partner/management company roles. It also explains how VCs generate management fees and carried interest. Additionally, it discusses targets for venture capital returns, historical performance data, and challenges to achieving high returns given the power law distribution of outcomes. Finally, it notes some alternative VC models such as deal-by-deal funds and evergreen funds.

1. Inside Venture Capital Firms
Christian Lassonde - @classonde
Pauline Brunel - @paulinejbrunel
16th October, 2018

2. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

3. IMPRESSION VENTURES - WHO WE ARE
Fintech focused VC Firm with offices in Toronto
and Montreal
Lead late Seed / early Series A rounds
Partners and Advisors have significant
experience as entrepreneurs, software
engineers, product managers and financial
services executives.
Usual cheque size: $1.5M - $2.5M, with the
ability to follow-on. Deals size $2M - $5M
Our portfolio includes
. . .

4. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

5. VC INVESTING - VENTURE CAPITAL SPECIFICITIES
You
Idea stage Co-founder
stage
Friends &
Family stage
Seed stage Series A Series
B,C,D...
IPO
Co-founder
Accelerators
Business Angels
Venture Capital & Debt
PE funds & Debt (Banks)
Anyone
Friends & Family

6. VC INVESTING - VENTURE CAPITAL SPECIFICITIES
Risk / Return
High
Medium
Low
Pre-seed Seed Series A Series B Series C Series D

7. VC INVESTING - VENTURE CAPITAL SPECIFICITIES
Professional investor - VC’s invest other
people’s money
VC is a business of risk adjusted returns
~10% is the average return for the S&P 500
since its inception back in 1928. Adjusted
for inflation the "real return" is more like 7%
- VCs need to beat that
Who are Venture Capitalists
Product/service with evidence that there is
a big and growing market and capital will
accelerate growth
VC’s invest in hyper-growth, technology
just happens to be an excellent enabler of
hyper-growth
What do they invest in

8. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

9. STRUCTURE - SIMPLE
General Partner
Venture Capital Fund
Co #1 Co #2 Co #3 Co #4 Co #...
Limited Partners
Limited Partnership
AgreementManagement Fees ReturnFunds

10. STRUCTURE - TYPICAL
General
Partner
Venture Capital Fund
Co #1 Co #2 Co #3 Co #4 Co #...
Limited Partners
Limited Partnership
AgreementFund management
&
GP ownership
Management fees
ReturnFunds
Management
Company
Parallel Venture Capital Fund
Carried interest
Funds Return

11. STRUCTURE - ARGH!!
General
Partner #1
VC Fund #1
Co 1A Co 2A Co 3A Co #...
Limited Partners
Management Company
Parallel VC Fund #1
Co 1B Co 2B Co 3B Co #...
General
Partner #2
VC Fund #2
Limited Partners 2
Parallel VC Fund #2

12. Limited Partnership Agreement
Called “LPA”
Clearly sets out the terms of the partnership:
- investment strategy
- fees
- duration
- responsibilities of both GP and LPs
Common to all LPAs: GP’s fiduciary responsibility to act in the best interest of the LPs, which is
legally binding.
Variations across partnerships: some funds have stricter an investment mandate than others, and
specify:
- investment stages
- industry focus
Private document, but VCs tend to disclose the fund’s mandate on their website or discuss it with
founders.
As a founder, understanding a VC’s mandate can save you significant amounts of time

13. Management Company and General Partner
Management Company
- Controls the GP(s)
- Owns the fund brand and exists beyond a single fund
- Usually responsible for operating expenses such as salaries, office lease, conferences…
- Investment expenses (auditors, board meeting attendance,... ) are typically out of the
pocket of the fund
General Partner
- GPs are separate corporate entities - holds all the liability for the partnership
- Exists only for the life of the fund
- Gives full control of the fund management and investment decisions, within investment
parameters, to the management company
- The GP must manage the fund in accordance with the Limited Partnership Agreement
(LPA)
- GP can go to the Limited Partner Advisory Committee (LPAC) for decisions outside the
rules
- GP ownership is typically nominal, but the individuals who are the named partners (what
we think of as the GPs) should at a minimum have 1%

14. Limited Partners
Institutional Individual
Insurance companies
Banks
Family offices
Fund of funds
Sovereign funds
Foundations and endowments
Pension funds
Corporates
High net worth individuals
Partners of the fund
Family offices
Advisors
Limited Partner
- Investors in the fund
- Their legal liability in the funds activities are limited.
- Their return of capital is categorized as capital gains.

15. Limited Partners
As a founder, understanding the LP base of a fund is key
LPs represent a substantial value add proposition for VCs as they can assist and advise their
portfolio companies. Ideally LPs have relevant:
- entrepreneurial experience
- industry specific knowledge
- broad networks
In addition, know who is on your cap table is also important as they will usually have
co-investment rights and are likely to take up the pro rata rights in later funding rounds.
GP ownership: In order to increase their exposure, Partners can either increase the 1% GP
ownership or invest their own money in the fund and be involved as LPs as well as GP.
-> Reinforces the alignment of interest and mitigates the principal-agent problem

16. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

17. BUSINESS MODEL
Management fees Carried interest Capital Gains
How do VCs make money
- Fixed compensation
- Annual % of assets under
management
- Industry average of 2%
- To cover for operational
expenses
- Variable compensation
- % of the profit of the fund
- Industry average of 20%
- It mostly ensures a strong
alignment of interests
between GP and LPs
- Variable compensation
- % of the profit at an exit
equivalent to an ownership
industry average of 1%
- It ensures a strong
alignment of interests
between GP and LPs

18. BUSINESS MODEL
Fee structure is typically kept private and described in the LPA
Founders should be aware that:
- in bigger funds, the 2% fixed fee represents a significant amount of money and could
potentially alter the GP’s behaviour toward risk and lead to a misalignment of
interest.
- on the other side, an over-reliance on the 20% upside can encourage “cherry
picking”, and cause managers to focus intensively on the one or two portfolio
companies for which big IPOs are possible.

19. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

20. UNDERSTANDING VC RETURNS
1.5 2 3 4 5 6 7 8 9 10
2 22% 41% 73% 100% 124% 145% 165% 183% 200% 216%
3 14% 26% 44% 59% 71% 82% 91% 100% 108% 115%
4 11% 19% 32% 41% 50% 57% 63% 68% 73% 78%
5 8% 15% 25% 32% 38% 43% 48% 52% 55% 58%
6 7% 12% 20% 26% 31% 35% 38% 41% 44% 47%
7 6% 10% 17% 22% 26% 29% 32% 35% 37% 39%
8 5% 9% 15% 19% 22% 25% 28% 30% 32% 33%
9 5% 8% 13% 17% 20% 22% 24% 26% 28% 29%
10 4% 7% 12% 15% 17% 20% 21% 23% 25% 26%
Exit multiple
Exit year
IRR is both a function of time and exit multiple

21. UNDERSTANDING VC RETURNS
Investment horizon
The average VC fund has a duration of 8 to 10 years. But it actually holds funds for about 6 years,
accounting for:
- Investment and divestment periods
- VC is not in the business of managing cash. LPs’ committed amounts are called gradually
- Stage investment, earlier funds will hold longer, later stage funds will hold shorter
Expected return
VC is a high risk asset class -> investors need to be fairly compensated for the risk they are taking.
The industry common average target is a min. IRR of 20%:
- For a $100 million fund -> the fund manager needs to return $300 million to its LPs -> a
multiple of 3x.
- The truth is: LPs would be happy with this target, but not euphoric, the best VCs do better –
but the majority of the funds don’t get anywhere near this target level.

22. UNDERSTANDING VC RETURNS
Historical US Venture Capital IRRs
Compiled by Cambridge Associates LLC

23. UNDERSTANDING VC RETURNS
In Venture Capital, Normal Distribution doesn’t apply to returns, the Power Law does
Let’s take the example of the $100 million fund investing in 20 companies ($5 million total investment in each):
Power Law means that a substantial part of the portfolio will fail and VCs need a home run investment to meet
return expectations.
Population Exit multiple $ Return
10 (50%) 0 -50
6 (30%) 3 +90
3 (15%) 7 +105
1 (5%) 30 +150
Total +295

24. UNDERSTANDING VC RETURNS
VCs are looking for scale-up potential in the startups - > VCs invest in growth
As a founder, you need to show the VCs that there is a path to a +30x exit:
- Probabilities may be low and that’s okay
- VC’s role, is also to help de-risk the business and increase the probabilities of success
Key point for founders: understand that VC type of returns are very difficult to obtain and may not be
achievable in some industries or businesses.
-> We’ve turned down some companies which we knew would be great businesses and generate
excellent outcomes for their founders, but would not meet our return hurdles.

25. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

26. WHAT ELSE CAN IMPACT THE MATHS
Position on the risk reward curve:
- The earlier stage the fund invests, the riskier the investment is, the more likely it will be
looking for big exits multiples
Fund concentration:
- Optionality is common in the VC world
- It can impact the ability and the willingness of the fund to follow-on
- Which can send a negative signal on your next fundraising event
Reserve % for follow ons:
- Usually varies from 30-50%
Fund size:
- Look for current fund size and number of deals left
Proactivity in exits:
- Some funds will have an hard investment horizon of 5y and look for a secondary market,
no matter what

27. ALTERNATIVE VC MODELS
Deal by Deal Funds/Angel Syndicates
- Create a GP/LP for each deal
- Raise capital for each deal
- Economics for GP are amazing
- Economics for LPs are only amazing if they better deal pickers then the GP, otherwise
worse (aka, almost always worse)
Short Duration funds
- Deploy all the capital in a short duration (1 year or so)
- Follow on investing is not a given - and which LPs follow on is not a given
- Attractive model for later stage investing
Corporate Funds
- A single LP
- Performance typical measured not in returns of the fund, but in addition to bottom line of
parent company over time
Evergreen Funds
- Funded once, only re-invests gains from initial investments
- Very long duration investment vehicle

28. AGENDA
Impression Ventures - Who we are
VC investing - Venture Capital specificities
Structure
Business model
Economics
What else can impact the maths
Q&A

29. Q&A
Questions?

30. THANK YOU