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VCIC ®. Team Prep Session VC 101 This PPT was created for organizers of internal events to help prepare student teams to compete. . What is a VC’s Job?. Return 20-25% to LPs. What is a VC?. Professional money manager Private vs. public equity High risk/return
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VCIC® Team Prep Session VC 101 This PPT was created for organizers of internal events to help prepare student teams to compete.
What is a VC’s Job? • Return 20-25% to LPs
What is a VC? • Professional money manager • Private vs. public equity • High risk/return • Works with portfolio of investments
What is Venture Capital? • Asset class • Subset of private equity • High risk, high return • Hit driven
VC’s Job Duties • Fundraising • Sourcing deals • Investing • Growing ventures • Exiting
VC’s Job Cycle Fundraise • Close Fund Source Deals • Invest Grow Ventures • Exit Fundraise…
VC’s Job Cycle Fundraise • Close Fund Source Deals • Invest Grow Ventures • Exit Fundraise…
Raising a Fund • VC fund is a partnership • GPs (general partners) are the VCs who actively invest the fund in startups • LPs (limited partners): • Financial investors with no active role • “Institutional”: pension funds, university endowments, insurance companies, etc.
Raising a Fund LP1 Pledge $$ LP2 Pledge $$ VC Firm (GPs) LP3 Fund 1 $$$$ Pledge $$ LP4 Pledge $$ Commitments only. No actual cash changes hands. Pledge $$ LPn
Raising a Fund UNC Endowment Pledge $$ NC Pension Fund Example Pledge $$ VC Firm (GPs) CalPERS Fund 1 $$$$ Pledge $$ Parish Capital Pledge $$ Pledge $$ AIG
Example Portfolio Diversity of LP VC is a subset of private equity.
VC Firm vs. VC Fund • One firm manages multiple funds • Firms are LLCs with no end date • Funds are LLPs with 10-year lifespans Roizen: small and large firms.
Fund Size • Large: • New Enterprise XIV, $2.6B • Kleiner Perkins XIII, $650M, XIV $525 • Local RTP, for example: • Intersouth IV, $275M • Southern Capitol II, $15M
Fund Life: 10 Years Harvest Follow-On Rounds Invest and Reserve “Raise” Fund Year 0 5 10
Example Successful Investment EXIT Series B Series A Find Deal Due Diligence Hit Milestones Hit Milestones Series A ROI is calculated on 6 yearsSeries B ROI is calculated on 3 years Harvest Follow-On Rounds Invest and Reserve 0 2 3 5 8 10
A Pattern That Repeats Exit B A 0 2 3 5 8 10
One of Many Exit B A 0 2 3 5 8 10
Portfolio of 10-25 Investments C D B A B A A B Big Exit A Bust Bust A C Bust B A Exit Exit B B A A Exit B A B A B A Bust 0 2 3 5 8 10
Portfolio of 10-25 Investments 3 C D B A 9 B A 5 10 A B Big Exit A Bust Bust 2 6 A C Bust B A 7 4 Exit Exit B B A A 11 Exit B A 1 8 B A B A Bust 0 2 3 5 8 10
Exit Scenario Exit ? Bust C ? D B A B A ? A B Big Exit A Bust Bust A C Bust B A Exit Exit B B A A Exit B ? A B A B A Bust 0 2 3 5 8 10
First Fund Harvest Follow-On Rounds Invest and Reserve “Raise” Fund Year 0 5 10
First Fund Fund 1 Raise $$ Invest Follow-On Harvest Year 0 5 10
Multiple Funds Fund 3 Raise $$$$ Invest Follow-On Harvest 0 5 10 Fund 2 Raise $$$ Invest Follow-On Harvest 0 5 10 Fund 1 Raise $$ Invest Follow-On Harvest Always fundraising Always investing Always growing 0 5 10
Now Fund 2 Fund 1 Fund 3 Always fundraising Always investing Always growing
Multiple Deals in Multiple Funds 25 Deals Fund 3 Raise $$$$ Invest Follow-On Harvest Fund 2 16 Deals Raise $$$ Invest Follow-On Harvest Fund 1 Imagine you are this entrepreneur Raise $ Invest Follow-On Harvest 11 Deals
VC’s Job Cycle Fundraise • Close Fund Source Deals • Invest Grow Ventures • Exit Fundraise…
Source Deals: Focus • Sector • Life Sciences • IT • Cleantech • Stage • Seed/early • Later stage • Geography • Active participation requires proximity
Source Deals: Network • Lawyers, CPAs, CFOs, bankers • Other VCs (syndication) • Serial entrepreneurs • Conferences • Universities • Technology transfer • Teach, coach, mentor, judge
Stages of Equity Funding $500,000 - $50M $50,000 - $500,000 $25,000-$250,000 $1,000-$50,000 Friends/Family Seed or Pre-Seed Angel or Early Stage VC Rounds 1, 2, 3… or A, B, C…(Institutional) IPO
Typical Growth of Bootstrap Venture Normal bootstrap business Grows steadily (if you’re lucky)
Rounds • An investment / stock issuance occurs in something called a “round” • VCs purchase preferred shares, which means they have rights over “common” • Most ventures need multiple rounds (Series A, Series B, etc.) • Each round dilutes previous shareholders • Valuation occurs at the moment of a round (other times difficult to value illiquid asset)
How Does a Round Work? Pre-Money Valuation + Investment = Post-money Valuation $ + $ = $$
Example: $3M Post Preferred Shares Common Shares
Negotiating Points • Pre-money valuation • Investment size • Option pool • Board seats • Liquidation preferences • Dividends • Anti-dilution • Closing conditions Determine % ownership Some of the “rights” of preferred shares
VC’s Job Cycle Fundraise • Close Fund Source Deals • Invest Grow Ventures • Exit Fundraise…
Growing Ventures • On the Team • “Active” participation = board seat(s) • Advisors (connections, strategy, etc.) • Future rounds • Valuation • Milestones • Syndication
Board Seats • Board of directors controls the venture (unlike board of advisors) • Small ventures have small boards that meet often (quarterly), 3-7 members • Odd number to prevent ties • % ownership of stock should be (approximately) reflected in % of board seats • E.g. own 60% of stock, control 3 of 5 seats
Advisors • Even if not on board, VCs will have strategic input • VC network benefits • Management team additions • Customers • Partners • Competitors
Future Rounds • Future rounds are the norm, not the exception (most entrepreneurs do not realize this) • VCs help find “syndicate” investors • Later rounds can be much larger • New network benefits • Up round: valuation is higher and investment is (usually) higher • Down round: valuation is lower
Future Rounds • VCs in Series A almost always join Series B • “Pro rata” means they invest to keep same % ownership • aka, “maintain position” • In a hits-driven business, not maintaining a position is as bad as no hit • “Last money in” dictates the terms
Series A and B Conflict • Series A investor, like the entrepreneur, wants a high pre-money valuation for Series B • Series B wants lower pre-money valuation • A VC who is in both rounds is trying to find middle ground • VCs are generally trying to find a “fair market price” to avoid a future conflicts
Example Up Round • Series A: “1 on 1” • $1M Pre-money valuation • $1M Investment → $2M post-money valuation • Series B: “2 on 3” • $3M Pre-money • $2M Investment → $5M post-money valuation
Up Round: 1on1, 2on3 Post = $5M 3.33M shares Ownership Series A VC Shares1M/2M = 50%Diluted to 1M/3.33M = 30% Series B VC Shares 1.33M/3.33M = 40% FoundersSame as Series A VC shares Inv = $2M 1.33M Series B shares Things go wellHit milestonesIncreased valuation Post = $2M Pre = $3M 2M total shares Inv = $1M 1M VC shares 2M Series A shares Pre = $1M 1M Founder shares Series A Series B Shares at $1 Shares now $1.5
Dilution New Share Pool Added Shares Original Shares Original Shares Same quantity of blue. Lower percentage.
Why Dilution is Bad Every 1% you lose of a 20X Exit is going to hurt 20 times more Original Pool
Up Round: 2 on 412 on 12 Post = $24M 12M shares Inv = $12M 6M Series B shares Ownership Series A VC Shares2M/6M = 33%Diluted to 2M/12M = 16.7% Series B VC Shares 6M/12M = 50% Founders4M/6M = 67%Diluted to 4M/12M=33.3% Pre = $12M Post = $6M 6M total shares 6M Series A shares Inv = $2M 2M VC shares Pre = $4M 4M founders shares Series A Series B Shares at $1 Shares at $2
Down Round 1 on 11 on 1.5 VC ownership after Series B (50% x 1.5/2.5) + 1/2.5 =1.75/2.5 = 70% OR 2.33M shares ÷ 3.33M total = 70% Post = $2.5M 3.33M shares Inv = $1M Post = $2M 2M shares 1.33 shares Inv = $1M 1M shares Remember, these are negotiated(so you start here, then do the math) Pre = $1.5M Pre = $1M 1M shares 2M shares Series A Series B Shares at $1 Shares at $0.75 The rest is math