Industry CharacteristicsHigh risk

Many, many losers

Difficult to discern in advance: No “rules”

Massive gains concentrated in few top deals

Many ways to lose your money

Venture Capital Lifecycle Fund life cycle:

Raise a Fund

(Pension, Families, Corporations)

Invest (Evaluate, due

diligence, close…)

Harvest(IPO, mergers, management

buyout)

Core Venture Capital Process

• Raise capital from institutional and individual investors

- Finance new and growing companies; - Purchase preferred equity- Add value through active participation

VC’s segment in a number of waysStageSector

Healthcare versus IT versus clean energyGeography

US, EU, China, India, Israel Independent

vs Corporate VCSize

Small fund (<$100M) to large fund (>$1B+)

Specialization leads to deep expertise

Source: W. Price, 3/6/07 Hummer Winblad

Venture Capital Model

Flavors of VCs

5

Initial contact Review business plan… basic diligencebasic diligence Emergence of deal advocate Partners meeting with entrepreneur Due diligenceDue diligence Unanimous partner approval Unanimous partner approval Term sheet Final due diligenceFinal due diligence Legal documentation Funding

Multi-stage, extended process, very few selected

Venture Capital Model

Investment Process

The Entire Business Model Presumes & Leverages Multiple Failures

• Deal with entrepreneurs: - Gives VCs control for course change- Puts VCs first in line on pay day

• Deal with limited partners: - Participate on fund upside, but not on downside

• Deal with other VCs: - Home run phenomena - Broad deal sharing

among VCs - Enables many bites on few home runs

• Investment process: - Optimized to avoid losers- Funds participate in many big

“at bats”

8

Reverse Vesting of Founder Stock Mandatory Minimum Employment PeriodMandatory Minimum Employment Period

Voting rights a/k/a veto rightsa/k/a veto rights

Liquidation preference a/k/a VC gets 2-5 multiple before you see a dimea/k/a VC gets 2-5 multiple before you see a dime

Options & vesting A/k/a you’re locked in baby. A/k/a you’re locked in baby.

Redemption A/k/a in a sideways play, we’re out of here … with our money & profit of course.A/k/a in a sideways play, we’re out of here … with our money & profit of course.

Anti-dilution (weighted average vs full-ratchet) … … if things go bad (under full ratchet) you can get wiped outif things go bad (under full ratchet) you can get wiped out

Enables effective control

Venture Capital Model

Deal w/ Entrepreneurs

9

Positive Covenants – things you will do Information rights, auditing requirements

Negative Covenants – things you will not do Selling debt, raising money, hiring management

Representations We’ve told you everything that is material to making your investment

decision

Venture Capital Model

Deal w/ Entrepreneurs

Venture Capital Model

Deal with Limited PartnersManagement Fees (typically 2-2.5% of AUM)

Charge a management fee to cover the costs of managing the committed capital. $100 M fund generates $2m per year in management fees

Carried Interest (typically 20-25%) "Carried interest" is the term used to denote the profit split of proceeds to the general partner.

Participate on fund upside, but not downside

Source: W. Price, 3/6/07 Hummer Winblad

Venture Capital Model

Deal with Other VCs Industry with blockbuster winners!

Broad deal sharing among VCs enables many bites on few big home runs …. multiplying effect.

Portfolio effect allows for big success while absorbing many failures.

Impact of few very large numbers

VC gets portfolio effect, (while entrepreneur is all or nothing)

Venture Capital Model

Investment Process

Multi-phase, intense, in-depth due diligence process

Deep evaluation process

Decision to invest requires consensus of all general partners

Only invest if other VCs go in (syndication)

Multi-round investment process Short leash

Seed, series A, B, C, D, Mezzanine…

Venture Capital Model

Fundamentals of VC structure, deal terms, timing, and core processes presume and work with “failure”

But…..