Venture Capital & Beyond – Other people’s money

Student Seminar 5

Group 5 (Aditya, Sumit & Vivek)

(Venture Capitalists, through time)

“The average duration of a

relationship between a venture

capitalist and the entrepreneur is

probably longer than the average

duration of a marriage in

California, and rarely less intense.”

The Myth

Roadblocks to new businesses• Lack of business experience

• Several ways to fail with only a few roads to success

• Extreme amounts of required commitment

• Fierce competition

• Scarcity of capital

Venture Capitalism!

Terminology: Entrepreneurs

Is a person who undertakes and

operates a new enterprise or

venture and assumes some

accountability for the inherent

risks

Terminology: Venture Capital

A type of private equity capital typically

provided by professional, outside investors

to new, growth businesses. Generally made

as cash in exchange for shares in the

invested company, venture capital

investments are usually high risk, but offer

the potential for above-average returns.

Terminology: Venture Capitalist

A person who makes such investments

Terminology: Venture Capitalism

Professionally managed, equity-

like financing of young, growth-

oriented private companies.

Terminology: Angel Investor

Is an affluent individual who provides

capital for a business start-up, usually

in exchange for ownership equity.

They typically invest their own funds,

unlike venture capitalists, who

manage the pooled money of others

in a professionally-managed fund

What is Venture Capitalism?• Venture Capitalist Firms:

– Raise pools of capital

– Finance young growth-oriented companies

– Secure role in management through equity securities

– Aid in the development of companies through shared experience, guidance and networks

– Not afraid to take risks

– Long-term orientation

Differences with Alternate forms of Equity Financing• First, high level of expertise to perform

technological monitoring and to actively manage the companies they finance.

• Second, the capital infusions in the firms financed by venture capital are staged in several rounds.

• Third, VCs have extensive control rights (e.g., board rights, voting rights). This form of financing is in contrast with standard bank debt.

(banks traditionally perform accounting monitoring but no technological monitoring and, outside

default, their control is limited to assets used as collateral)

Origins of Venture Capitalism

The Participants

The Process

Our Analogy

Our Analogy

Failures

Shevchenko Ashley Cole SWP

Successes

Terry Peter Cech Lampard

Failures

Ramos Cannavaro Diarra Baptista

Successes

Beckham Casillas

Our Analogy

Our Analogy

Venture Capital in the Valley

Venture Capital in Silicon Valley

Shaped by successive waves of innovation and entrepreneurship, emergence of new

forms of financing (venture capital), and the evolving military and commercial demand for

electronic and biomedical products

1930s

2005

Evolution of Venture Capital in Silicon Valley• Venture capital in Silicon Valley grew by a process of

combination, division, and incessant networking:

Venture Capital in Silicon Valley• VC activities in Silicon Valley started much later than in

Boston

• American Research and Development (1946): First non-family VC organization

• Draper, Gaither & Anderson (1958): first west-coast VC firm

• During the 70’s and 80’s, the availability venture capital exploded mainly due to two reasons:

– emergence of the venture capital industry on Sand Hill

Road

– the successful $1.3 billion IPO of Apple Computer

Silicon Valley & Route 128

• Why are there differences between the VC industries in Silicon Valley and Route128 in Boston?

Access to venture Capital in the Valley

• Start-ups receiving VC at a younger age are more likely to go out of business, be it acquired by another firm, to go public, to attain profitability, and tend to have more employees.

• Simply More Money or More than Simply Money

• Joint investment partnership

• Concentration of well-developed innovation supporting industries

Access to Venture Capital and performance of start-ups

(Saxenian, 1994)

“When I started Convergent

[Technologies], I got commitments

for $2.5 million in 20 minutes from

three people over lunch who saw

me write the business plan on the

back of a napkin. They believed in

me. In Boston, you can’t do that.

It’s much more formal.”

Sand Hill Road

KLEINER PERKINSCAUFIELD & BYERS2750 Sand Hill Rd.,

REDPOINT

VENTURES

3000 Sand Hill Rd.,

NEW ENTERPRISE

ASSOCIATES

2490 Sand Hill Rd.,

BENCHMARK

CAPITAL

2480 Sand Hill Rd

SEQUOIA CAPITAL3000 Sand Hill Rd.,

Top-notch freeway (the scenic and relatively uncongested Highway 280), ultra-exclusive residential areas (adjacent Atherton and Woodside), a leading research institution (Stanford), a nearby cultural center (San

Francisco) and a booming industrial corridor (Silicon Valley).

HP Garage Google

Microsoft

Research

Advanced Micro

Devices

Xerox Corporation

Sand Hill Road

Future of Venture Capital

Future of Venture Capitalism

• Are there limits of to the growth?

• Success of a few well-known ventures

• Capital firms have created a large number of imitators

• New-Comers Do not Realize the subtleties in the Business

• Why should it not be possible to have venture capital funds offered to the general public through mutual fund?

Note: While it is easy to increase the amount of funds by a tenfold, the number of good coaches cannot be

increased at the same rate

So what’s the

secret to Venture

Investing?

Take some geeks to lunch.....

...and don't forget to pay!

Agenda• Roadblocks to new businesses

• Origins of Venture Capitalism

• What is Venture Capitalism?

• Participants

• The process of Venture Capitalism

• Analogy

• Venture Capital in SV

• Evolution of VC in SV

• Silicon Valley & Route 128

• Access to Venture Capital and performance of start-ups

• Future of Venture Capitalism