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VC 101 :Inside the Black BoxChristine HerronFirst Round CapitalNovember 2009
(AKA : Christine’s Quick & Dirty Guide to Venture Capital)
What We’ll Cover
o What VC is noto VC partnerships revealedo Follow the moneyo The VC investment processo Impact of VC trends on you
Feel free to ask questions during the discussion!
Quick Context: What VC is Not
Public Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock Trading…etc.
Private Equityo Buyoutso Mezzanine
Investmentso Venture Capital…etc
Quick Context: What VC is Not
Public Equityo Hedge Fundso Pension Fundso Mutual Fundso Public Stock Trading…etc.
Private Equityo Buyoutso Mezzanine
Investmentso Venture Capital
VC Partnerships Revealed
o Limited Partners vs. General Partnerso Who are they and what do they do?
o Reportingo What responsibilities do GPs have, and what rights do
LPs have?o Investment Profile
o What promises has the VC made around investing and portfolio management?
How to Follow the Money
o Capital Callso Where does the money come from?
o Management Feeso How do the bills get paid? What does this imply for
General Partner incentives? o Profit Distributions
o What happens as investments mature?o Staying in Business with Future Funds
o How does a partnership become sustainable and grow?
Money Going In: Capital Contributions
GP
GP
GP
GPGP
GPGP
GPLP LPLP
LP
1% of total
99% of total
LP
LP LP
Money Coming Out: Profit Sharing
GP
GP
GP
GPGP
GPGP
GP
20% of total
80% of total
LP
LP
LP
LP LP
LPLP
Sample Fund Recap
o 2.5% annual management feeo Pays for office space, salaries, other G&Ao Incentive implications for small v. large funds
o All capital is repaid to LP before any profit is sharedo 80% of profit goes to LPso 20% of profit goes to GPs
o An individual VC’s share of the total GP profit share is called “carried interest”
Staying in Business = Raising More FundsY
ear
1
Yea
r 3-
4
Each Fund Life = 10 Years
3-4 Yrs = Seed NewCos
6-7 Yrs = Harvest & Do Followons
Must raise new funds to keep investing in NewCos; once new fund is raised, NewCo funding will come from it
Fund III ($150M)
Fund II ($125M)
Fund I ($100M)
After 6-7 years in business, VC will have 3+ concurrent, active funds at any one time; only one, however, will be funding NewCos
Yea
r 6-
7
The VC Investment Cycle
o Deal sourcing and qualification: how good opportunities are found
o 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
o Term sheets: a nonbinding letter of intent o Due diligence: ensuring that everything we believe to be
true, is true; research, references, financials, transaction summary/approval, investment memo
o Closing: final signature and LP announcemento Value offered: capital, relationships, management support
How VC Trends Affect You
Growing Funding Marketo Minimum $ amount per
investment growso Higher VC valuationso Lower returns % on a
higher baseo Gold rush mentality (lower
funding bar = more risky or copycat ideas/ teams)
Shrinking Funding Marketo Minimum $ amount per
investment shrinkso Lower VC valuationso Higher returns % on a
lower baseo 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
For seed-stage conversations
Christine Herron
Kent Goldman
Phin Barnes
Howard Morgan
Rob HayesChris FralicJosh Kopelman
http://firstround.comtwitter: @firstroundinfo@firstround.com
VCTips: An Inside Look at the VC Landscape and Fundraising Strategy
Oren NetzerFounder and CEODoubleVerify Inc.
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
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
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
6 Step Guide to Managing First Sales1. Start early - Get first customer as early as possible in
the development cycle2. Choose carefully – this customer will experience your
worst screw-ups 3. Fix problems – and release next version4. Then choose next two customers5. Go out of your way - Make these customers your
biggest fans and supporters6. Repeat from step 3
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
First Sales - Lessons Learned
Choose your first customers carefully You never know where the sale is going to come from Be persistent but not pushyOversell, only if you can deliver Listen to your customers Customers are partners, not ATMs Know how to ask them for money Be Lucky
Thank You
Oren Netzeroren@doubleverify.com
VC Meeting 1.0
*Spoiler Alert
Its Not About the Money
Many Paths(some more effective than
others)
Prototypical VCs
Real People
Know Your Audience
•Read Our Blogs
•Search Our Images
•Follow Us on Twitter
•Use Our Portfolio Cos. Products
Make a Personal Connection
Blow Us Away
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
Qualify Whether We’re in a Position
to Invest
Thanksbryce@oatv.com
www.bryce.vc@bryce
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