venture capital 101

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Venture Capital 101 Brian Rothenberg

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Venture Capital 101 presentation on the basics of VC such as what venture capital is, and how it works. I delivered this presentation to a student group called InSITE that I belong to (mix of Columbia and NYU MBA and Law students). Enjoy! -Brian Rothenberg www.brianrothenberg.com

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Page 1: Venture Capital 101

Venture Capital 101Brian Rothenberg

Page 2: Venture Capital 101

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

Page 3: Venture Capital 101

Typical VC fund structure

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

Page 4: Venture Capital 101

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

Page 5: Venture Capital 101

VC firm hierarchy

General & Venture PartnersPrincipals

Sr./Associates

Analysts

Admin

Page 6: Venture Capital 101

Seed Start-up Sustained Growth

Sources of funds over lifecycle

Early Growth

Pre-Revenue Revenue/Profitable

Founder’s Savings

Friends/Family

Angels

Venture Capital

Page 7: Venture Capital 101

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+

Page 8: Venture Capital 101

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

Page 9: Venture Capital 101

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

Page 10: Venture Capital 101

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

Page 11: Venture Capital 101

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

Page 12: Venture Capital 101

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.

Page 13: Venture Capital 101

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

Page 14: Venture Capital 101

Sectors: hot or not?

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

Hot

Not• Semiconductors• Hardware• Consumer Packaged Goods

Page 15: Venture Capital 101

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%

Page 16: Venture Capital 101

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+ !!

Page 17: Venture Capital 101

InSITE VC Sponsors

Page 18: Venture Capital 101

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

Page 19: Venture Capital 101

Questions?Thanks!