venture capital 101

Venture Capital 101Brian Rothenberg

What is Venture Capital (VC)?

• A type of private equity typically provided for early-stage, high-potential, growth companies

• VCs generate a return through an eventual liquidity event such as an IPO or M&A sale of the company • Venture capital investments are generally made as cash in exchange for shares in the invested company

Typical VC fund structure

Source: http://en.wikipedia.org/wiki/Venture_capital

How VCs make money

1. Management fees - annual• Up to 2-3% of assets under

management

2. Carried interest – “carry”• 20%+ share of the profits from the

fund’s investments

VC firm hierarchy

General & Venture PartnersPrincipals

Sr./Associates

Analysts

Admin

Seed Start-up Sustained Growth

Sources of funds over lifecycle

Early Growth

Pre-Revenue Revenue/Profitable

Founder’s Savings

Friends/Family

Angels

Venture Capital

Seed Start-up Sustained Growth

Round series and rough sizes

Early Growth

Pre-Revenue Revenue/Profitable

Bootstrap Angel/Seed Series A Series B Series C+

$50K - $1.5M$0 - $100K+ $2M - $7M $5 - $15M $5 - $50M+

VCs primarily do five things

1. Raise $$$

2. Find companies to invest in (sourcing)

3. Close deals

4. Invest time/effort to help grow companies

5. Get firms to exit

What do VCs look for?1.People

• “A” team, right skills, previous success

2.Opportunity • Market, sustainable, business model,

competition

3.Context• Technology, M&A or IPO’able?

4.Deal• Want the deal, but don’t want to

overpay

Market size is very important

Market needs to be large ($B’s) & growing• VCs stretch goal is 10x return on $ • They give you $10M, they want

$100M back• If they own 25% stake, you need to

sell for $400M+ to hit their targets…• …this can only be achieved with a

big opportunity in a huge marketNote: While a VC’s homerun goal is 10x, most consider a 3x a pretty good exit, and anything above that is gravy

High company to funding ratio

For every 100 companies looked at…• 70 are tossed out• 30 get first call• 10 get second call / meeting• 1 gets funded

VCs look at a lot of companiesThe odds are against the

entrepreneurNote: This is based on only a couple actual VCs’ input and is intended for illustrative purposes

Terms of VC financing

• Valuation: how much equity to get/give for a given valuation?

• Negotiating deal terms: term sheets and stock purchase agreements• Liquidity preference, board seats, option

pools, cumulative dividends, full ratchet, etc.

What happens after investing?

• Value-added investing• VCs are active investors – try to make

investments worth more• Help with strategy, recruitment,

introductions through network, follow-on funding, etc.

• Exit – liquidity event to recoup investment• Mergers & Acquisitions• IPO• Liquidation

Sectors: hot or not?

• Digital Media / Internet • Cleantech• Life Sciences – Biotech / Devices• Mobile• E-commerce / Local

Hot

Not• Semiconductors• Hardware• Consumer Packaged Goods

The VC industry is contracting…U.S. VC Fundraising Slow Through 3Q’09

Commitments to Venture Capital Funds (based on multiple closings)

$53.8

$82.3

$42.7

$19.3

$10.3

$18.7

$28.0$31.3

$41.0

$27.9

$8.1

$0

$20

$40

$60

$80

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD09

Funds

Rai

sed

($B)

Source: Dow Jones VentureSource

Many VCs predict the industry will shrink by 30-50%

9th Annual Innovation Award for Computing Systems, 2009

$13.1M Series A; $2M Series B; $30M Series C

Undisclosed Series A and B; $15M Series C

$1.5M Series A

$2M Series A; $7.4M Series B

AND

Have InSITE companies received VC funding? $157M+ !!

InSITE VC Sponsors

A few VC resourcesA VCContinuationsRedeye VCSeparate PieceStartup MathTechCrunchWall Street Journal - VC DispatchVenture Made TransparentVentureBeat

Questions?Thanks!