VC 101: Inside the Black Box

1. VC 101: Inside the Black Box

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

3. What We’ll Cover Public vs. Private Equity VC partnership structure Follow the money The VC investment process Impact of VC trends on you Feel free to ask questions throughout the discussion!

4. Public vs. Private Equity Context Public Equity • Hedge Funds • Pension Funds • Mutual Funds • Public Stock Trading …etc. Private Equity • Buyouts • Mezzanine Investments • Venture Capital …etc

5. VC Partnership Structure • 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 are a VC’s specific guidelines for investing and portfolio management?

6. VC Partnership Elements GP GP GP GP GP GP GP GP “THE FUND” LP LP LP LP LP LP

7. Following 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? • Successive Funds • How does a partnership become sustainable and grow?

8. Capital Contributions GP GP GP GP GP GP GP GP 99% of total 1% of total “THE FUND” LP LP LP LP LP LP LP

9. A Typical VC Fund Example • 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”

10. Profit Sharing GP GP GP GP GP GP GP GP 80% of total 20% of total “THE FUND” LP LP LP LP LP LP LP

11. VC Growth = More, Larger 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. Impact of VC Trends on 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 mediocre 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 ideas/teams) Whether the market is going up or going down,VC money still has to be invested