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Venture Capital Investment Competiton®
Denmark
tirsdag 18. april 2023
Andreas B. ChristiansenBusiness RelationT: +45 26 62 62 54 E: abc@vcic.dk
Team Prep Session
What is a VC?• Professional money manager
– Private vs. public equity
– High risk/return
– Works with portfolio of investments.
What is a VC’s Job?
• Return 20-25% to LPs (limited partners).
What is Venture Capital?
• Asset class
• Subset of private equity
• High risk, high return
• Hit driven
VC’s Job Duties
1. Fundraising
2. Sourcing deals
3. Investing
4. Growing ventures
5. Exiting
VC’s Job Cycle
Fundraise
1. Close Fund
Source Deals
2. Invest
Grow Ventures
3. Exit
Fundraise…
Raising a Fund
• A VC fund is a monetary partnership made up of:– GPs (general partners) are the VCs who actively invest the fund in
startups.
– LPs:
• Financial investors with no active role
• “Institutional”: pension funds, university endowments, insurance companies, etc.
• Government.
Raising a Fund
LP2LP2
LP3LP3
LP4LP4
VC Firm(GPs)
Fund 1$$$$
LP1LP1
LPnLPn
Pledge $$
Commitments only. No actual cash changes hands.
Pledge $$
Pledge $$
Pledge $$
Pledge $
$
Raising a Fund
CalPERSCalPERS
Parish CapitalParish Capital
VC Firm(GPs)
Fund 1$$$$
UNC Endowment
UNC Endowment
AIGAIG
Pledge $$
Pledge $$
Pledge $$
Pledge $$
Pledge $$
ExampleNC Pension Fund
NC Pension Fund
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 (limited liability companies) with no end date.
– Funds are LLPs (limited liability partnerships) with 10-year lifespans.
Roizen: small and large firms.
Fund Size
• Large:
– New Enterprise XIII, $2.2B,12 GPs
– Kleiner Perkins XIII, $700M
• Local RTP, for example:
– Intersouth IV, $275M
– Southern Capitol II, $15M
New Enterprise Associates hauls in nearly $2.5B for new fund
10/19/11: BALTIMORE, MD - New Enterprise Associates has secured commitments for $2,457,680,000 for its NEA 13 fund, targeted at $2.5 billion, according to a regulatory filing. NEA, which focuses on IT and healthcare investments, currently has $8.5 billion under management in 12 funds.
Imagine you are a start-up that needs $1M in funding. Can this firm help you?...
Imagine you are a start-up that needs $1M in funding. Can this firm help you?...
Year 0 510
Fund Life: 10 Years
A) Invest and Reserve
B,C,D…) Follow-On Rounds
Harvest/Exit
“Raise” Fund
Example Successful Investment
Invest and Reserve
Follow-On Rounds
Harvest
Ser
ies
AS
erie
s A
Due Diligence
HitMilestones
HitMilestones
Ser
ies
BS
erie
s B
EX
ITE
XIT
0 2 3 5 8 10
Fin
d D
eal
Fin
d D
eal
Series A ROI is calculated on 6 yearsSeries B ROI is calculated on 3 years
A Pattern That Repeats
AA BB Exi
tE
xit
0 2 3 5 8 10
0 2 3 5 8 10
AA BB
AA BB
Portfolio of 10-25 Investments
AA BB
AA BB CC
AA BB
AA BB
Bu
stB
ust
AA
Bu
stB
ust
BBAA
Bu
stB
ust
AA
Bu
stB
ust
AA BB CC
AA
DD
BB
Exi
tE
xit
Exi
tE
xit
Big
Exi
tB
ig E
xit
Exi
tE
xit
0 5 10
0 5 10
Multiple Funds
Raise $$ Invest Follow-On Harvest
0 5 10
Raise $$$$ Invest Follow-On Harvest
Raise $$$ Invest Follow-On Harvest
Always fundraisingAlways investingAlways growing
Fund 1
Fund 3
Fund 2
Fund 3Fun
d 2Fund 1
Now
Always fundraisingAlways investingAlways growing
Multiple Deals in Multiple Funds
Fund 1
Fund 3
Fund 2
Imagine you are this entrepreneur
Raise $ Invest Follow-On Harvest
Raise $$$ Invest Follow-On Harvest
Raise $$$$ Invest Follow-On Harvest
11 Deals
16 Deals
25 Deals
Source Deals: Focus
Source Deals: Network
• Lawyers, CPAs, CFOs, bankers
• Other VCs (syndication)
• Serial entrepreneurs
• Conferences
• Universities – Technology transfer– Teach, coach, mentor, judge.
The Wall Street Organization, Inc.
Stages of Equity Funding
Friends/Family
$1,000-$50,000
Seed or Pre-Seed
$25,000-$250,000
Angel or Early Stage
$50,000 - $500,000
VC Rounds 1, 2, 3… or A, B, C…
(Institutional)
$500,000 - $50M
IPO
Typical Growth of Bootstrap Venture
Normal bootstrap businessGrows steadily (if you’re lucky)
Rounds
• An investment / stock issuance occurs in something called a “round”.
• VCs purchase preferred shares, which means they have rights over “common”.
• Most ventures need multiple rounds (Series A, Series B, etc.).
• Each round dilutes previous shareholders.• Valuation occurs at the moment of a round
(other times difficult to value illiquid asset).
How Does a Round Work?
Pre-Money Valuation
+
Investment
=
Post-money Valuation
$
$
$$
+
=
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
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
Inv = $1M
Series A Series B
Post = $5M
Pre = $1M
Post = $2M
Inv = $2M
Pre = $3M
Shares at $1 Shares now $1.5
1M VC shares
1M Founder shares
2M total shares
1.33M Series B shares
2M Series A shares
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
Things go well
Hit milestones
Increased valuation
Up Round: 1on1, 2on3
Dilution
Original Shares
Added SharesNew
Share Pool
Original Shares
Same quantity of orange. Lower percentage.
Why Dilution is Bad
Original Pool
Every 1% you lose of a 20X Exit
is going to hurt20 times more
Inv = $2M
Series A Series B
Post = $24M
Pre = $4M
Post = $6M
Inv = $12M
Pre = $12M
Shares at $1 Shares at $2
2M VC shares
4M founders shares
6M total shares
6M Series B shares
6M Series A shares
12M shares
Up Round: 2 on 4
12 on 12Ownership
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%
Inv = $1M
Series A Series B
Post = $2.5M
Pre = $1M
Post = $2M Inv = $1M
Pre = $1.5M
1M shares
1M shares
2M shares 1.33 shares
2M shares
3.33M shares
Shares at $1 Shares at $0.75
Remember, these are
negotiated(so you start here, then do the math)The rest is math
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%
Down Round: 1 on 1
1 on 1.5
Imagine a Scenario
• The venture needs cash
• Early round VCs cannot participate (ran out of dry powder)
• How does this affect negotiations?– Lower pre-money valuation– No ability for earlier VC to take advantage of
lower valuation.
Capitalization Table
• A table that shows the ownership structure of a venture
• Includes all shareholders and all classes of shares
• Also called “cap chart”
• Sign up at www.LearnVC.com for cap chart examples
Example Cap Chart
Option Pool
• Negotiated, but the norm is to take it out of the founders’ side (or ‘hide’)
• Result: can severely dilute founders
Inv = $1M
Series A
Pre = $1M
Post = $2M
No Option Pool
1M VC shares
1M Founder shares
2M total shares
25% Option Pool Example
Inv = $1M
Series A
Founders
Post = $2M
25% Option Pool =500K shares
1M VC shares
500K Founder shares
2M total shares
500K option shares Option PoolPre = $1M
Future Rounds Impact on ROI
• VCs want to “maintain their position”– Keep same % of ownership to exit– Requires “dry powder” for future rounds– Probably need syndication – Trying to avoid dilution
• You must estimate future funding/dilution to estimate your ROI
VC Return
• “Top Quartile” venture firms return >20% average ROI to LPs
• Fund has life of 10 years
• Average investments are 5-7 years
StartupStartup
StartupStartup
StartupStartup
StartupStartup
StartupStartup
Invest
StartupStartup
StartupStartup
StartupStartup
StartupStartup
StartupStartup
StartupStartup
Portfolio
VC Firm(GPs)
$$
$$
$$
$$
$$
$$
Fund 1$$$$
Capital Call $$
Capital Call $$
Capital Call $$
Capital Call
$$
Capital C
all
$$
LP2LP2
LP3LP3
LP4LP4
LP1LP1
LPnLPn
SingleSingle
Exits
HomeRun
HomeRun
duddud
duddud
duddud
TripleTriple
VC Firm(GPs)
Fund 1$$$$
$$
$$
$$
duddud
duddud
duddud
duddud
SingleSingle
SingleSingle
DoubleDouble
duddud
$$$$$$$$$$
$$
$$
$$$$
$
$
$$
$$
SingleSingle
LP2LP2
LP3LP3
LP4LP4
LP1LP1
LPnLPn
Example Fund
• 150M fund
• Fees: 3M/year (salaries, rent, travel)
• Carry:– 12 portfolio ventures at $10M avg. investment– To get 20% ROI, we need ~$450M
(20% of 150M = $30M x 10 years)– That’s two ventures going 20X!!
Getting to 20% ROI
• Rule of thumb: 3X on entire fund
• However, each investment is not 10 years– Money not “put to work” until a capital call– Exit could happen before end of fund
• You could reach 20% with only 1.5X
How do GPs/VCs Make Money?• Management fee (~2%/year to cover
expenses) for 10 years
• “Carry”– % of capital gain that VCs keep– 20% benchmark– Requires liquidity event(s)
Conclusion: VC’s Job Cycle
Fundraise
1. Close Fund Source Deals
2. Invest Grow Ventures
3. Exit Fundraise…
Understand the “Ecosystem”
Fund 1
Fund 3
Fund 2
The game is not “picking the right
deal.” It is laying the groundwork for
continued success.
Raise $ Invest Follow-On Harvest
Raise $$$ Invest Follow-On Harvest
Raise $$$$ Invest Follow-On Harvest
11 Deals
16 Deals
25 Deals
Key Takeaways
• Understand the lifecycle of VC job (not just picking deals)
• Expect future rounds
• Must have an eye on exit.
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