www.intelcapital.com

VC 101:Inside the Black Box

Christine HerronIntel CapitalNovember 2011

www.intelcapital.com

(AKA: Christine’s Quick &Dirty Guide to VentureCapital)

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What’s My Motivation?

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What’s Under the Hood?

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Know Your Audience

o Follow us on Twittero Read our blogso Search our imageso Look up our portfolio companies and use their

products

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What We’ll Cover

o What VC is noto VC partnerships revealedo Follow the moneyo The VC investment processo Impact of VC trends on you

Feel free to ask questions during the discussion!

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Quick Context: What VC is Not

Public Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock

Trading…etc.

Private Equityo Buyoutso Mezzanine

Investmentso Venture Capital

…etc

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Quick Context: What VC is Not

Public Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock

Trading…etc.

Private Equityo Buyoutso Mezzanine

Investmentso Venture Capital

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VC Partnerships Revealed

o Limited Partners vs. General Partnerso Who are they and what do they do?

o Reportingo What responsibilities do GPs have, and what rights do LPs have?

o Investment Profileo What promises has the VC made around investing and portfolio management?

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How to Follow the Money

o Capital Callso Where does the money come from?

o Management Feeso How do the bills get paid? What does this imply for General Partner incentives?

o Profit Distributionso What happens as investments mature?

o Staying in Business with Future Fundso How does a partnership become sustainable and grow?

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Money Going In: Capital Contributions

GP

GP

GP

GPGP

GPGP

GPLP LPLP

LP

1% of total99% oftotal

LP

LP LP

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Money Coming Out: Profit Sharing

GP

GP

GP

GPGP

GPGP

GP

20% oftotal

80% oftotal

LP

LP

LP

LP LP

LPLP

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Sample Fund Recap

o 2.5% annual management feeo Pays for office space, salaries, other G&Ao Incentive implications for small v. large funds

o All capital is repaid to LP before any profit is sharedo 80% of profit goes to LPso 20% of profit goes to GPs

o An individual VC’s share of the total GP profit shareis called “carried interest”

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Staying in Business = Raising More Funds

Year1

Year3-4

Each Fund Life = 10 Years

3-4 Yrs =Seed NewCos

6-7 Yrs = Harvest& Do Followons

Must raise new funds to keepinvesting in NewCos; oncenew fund is raised, NewCofunding will come from it

Fund III($150M)

Fund II ($125M)

Fund I ($100M)

After 6-7 years in business,VC will have 3+ concurrent,active funds at any one time;only one, however, will befunding NewCos

Year6-7

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The VC Investment Cycle

o Deal sourcing and qualification: how good opportunities are foundo Evaluation: deciding if there’s a good fit with investment parameters;

company history, business characteristics, finances, business plananalysis, comparables analysis, pro forma return model

o Term sheets: a nonbinding letter of intento 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 announcemento Value offered: capital, relationships, management support

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How VC Trends Affect You

Growing Funding Marketo Minimum $ amount per

investment growso Higher VC valuationso Lower returns % on a

higher baseo Gold rush mentality

(lower funding bar =more risky or copycatideas/ teams)

Shrinking Funding Marketo Minimum $ amount per

investment shrinkso Lower VC valuationso Higher returns % on a

lower baseo Champions mentality

(higher funding bar = thestrongest or most uniqueideas/teams)

Whether the market is going up or going down,VC money still has to be invested

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Qualifying Questions

o Understand if they’re in a position to investo When did you close your last fund?o What was your last investment?o Understand if they’re a good fit for youo What is your average investment size?o How many boards are you on?o How does your process work?