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VC 101 : Inside the Black Box

VC 101 : Inside the Black Box. Christine Herron First Round Capital November 2009. (AKA : Christine’s Quick & Dirty Guide to Venture Capital). What We’ll Cover. What VC is not VC partnerships revealed Follow the money The VC investment process Impact of VC trends on you

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VC 101 : Inside the Black Box

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  1. VC 101 :Inside the Black Box Christine HerronFirst Round Capital November 2009

  2. (AKA : Christine’s Quick & Dirty Guide to Venture Capital)

  3. What We’ll Cover • What VC is not • VC partnerships revealed • Follow the money • The VC investment process • Impact of VC trends on you Feel free to ask questions during the discussion!

  4. Quick Context: What VC is Not • Public Equity • Hedge Funds • Pension Funds • Mutual Funds • Public Stock Trading • …etc. • Private Equity • Buyouts • Mezzanine Investments • Venture Capital • …etc

  5. Quick Context: What VC is Not • Public Equity • Hedge Funds • Pension Funds • Mutual Funds • Public Stock Trading • …etc. • Private Equity • Buyouts • Mezzanine Investments • Venture Capital

  6. VC Partnerships Revealed • Limited Partners vs. General Partners • Who are they and what do they do? • Reporting • What responsibilities do GPs have, and what rights do LPs have? • Investment Profile • What promises has the VC made around investing and portfolio management?

  7. How to Follow the Money • Capital Calls • Where does the money come from? • Management Fees • How do the bills get paid? What does this imply for General Partner incentives? • Profit Distributions • What happens as investments mature? • Staying in Business with Future Funds • How does a partnership become sustainable and grow?

  8. Money Going In: Capital Contributions GP GP GP GP GP GP GP GP 99% of total 1% of total LP LP LP LP LP LP LP

  9. Money Coming Out: Profit Sharing GP GP GP GP GP GP GP GP 80% of total 20% of total LP LP LP LP LP LP LP

  10. Sample Fund Recap • 2.5% annual management fee • Pays for office space, salaries, other G&A • Incentive implications for small v. large funds • All capital is repaid to LP before any profit is shared • 80% of profit goes to LPs • 20% of profit goes to GPs • An individual VC’s share of the total GP profit share is called “carried interest”

  11. Staying in Business = Raising More Funds Each Fund Life = 10 Years 3-4 Yrs = Seed NewCos 6-7 Yrs = Harvest & Do Followons Fund I ($100M) Year 1 Fund II ($125M) Year 6-7 Year 3-4 Fund III ($150M) Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos

  12. The VC Investment Cycle • Deal sourcing and qualification: how good opportunities are found • Evaluation: deciding if there’s a good fit with investment parameters; company history, business characteristics, finances, business plan analysis, comparables analysis, pro forma return model • Term sheets: a nonbinding letter of intent • Due diligence: ensuring that everything we believe to be true, is true; research, references, financials, transaction summary/approval, investment memo • Closing: final signature and LP announcement • Value offered: capital, relationships, management support

  13. How VC Trends Affect You • Growing Funding Market • Minimum $ amount per investment grows • Higher VC valuations • Lower returns % on a higher base • Gold rush mentality (lower funding bar = more risky or copycat ideas/ teams) • Shrinking Funding Market • Minimum $ amount per investment shrinks • Lower VC valuations • Higher returns % on a lower base • Champions mentality (higher funding bar = the strongest or most unique ideas/teams) Whether the market is going up or going down,VC money still has to be invested

  14. For seed-stage conversations http://firstround.com twitter: @firstround info@firstround.com Josh Kopelman Chris Fralic Rob Hayes Howard Morgan Phin Barnes Kent Goldman Christine Herron

  15. VCTips: An Inside Look at the VC Landscape and Fundraising Strategy Oren Netzer Founder and CEO DoubleVerify Inc.

  16. DoubleVerify Overview 25 Employees Offices in Tel Aviv and New York Raised $3.5M Series A in May 2009 Pioneered Online Media Verification Customers include agencies, marketers and ad networks

  17. What We Do Employ tracking pixels in ads and web crawlers to track actual delivery of online ad campaigns Compare actual delivery to client’s media plan and buying guidelines Confirm full compliance between plan and actuals Real-time non-compliance remediation Screenshots provided as evidence of every non-compliance incident

  18. The Importance of Your First Customers Your Worst Mistakes – Your first customers will experience the earliest and “buggiest” version of your product Reality Check - Your first customers will teach you what the market really wants Market Demand - Your first customers will create your market demand Best or Worst References – Your first customers can make or break your next sales or fundraising

  19. 6 Step Guide to Managing First Sales Start early - Get first customer as early as possible in the development cycle Choose carefully – this customer will experience your worst screw-ups Fix problems – and release next version Then choose next two customers Go out of your way - Make these customers your biggest fans and supporters Repeat from step 3

  20. DoubleVerify Timeline at a Glance First Beta version released March 2008 with client Founded May 2008 Raised seed round June 2008 First major client September 2008 Second major client February 2009 Formal Product Launch May 2009 Currently servicing over 30 customers November 2009 first profitable month

  21. First Sales - Lessons Learned Choose your first customers carefully You never know where the sale is going to come from Be persistent but not pushy Oversell, only if you can deliver Listen to your customers Customers are partners, not ATMs Know how to ask them for money Be Lucky

  22. Thank You Oren Netzer oren@doubleverify.com

  23. VC Meeting 1.0

  24. *Spoiler Alert

  25. Its Not About the Money

  26. Many Paths(some more effective than others)

  27. Prototypical VCs

  28. Real People

  29. Know Your Audience • Read Our Blogs • Search Our Images • Follow Us on Twitter • Use Our Portfolio Cos. Products

  30. Make a Personal Connection

  31. Blow Us Away

  32. Qualifying Questions • When Did We Close Our Last Fund • What Was Our Last Investment • How Many Boards Are We On • How Does Our Process Work

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