Vcic Prep Session Vc 101

VCIC®

Team Prep Session

VC 101

This PPT was created for organizers of internal events to help prepare

student teams to compete.

VCIC

© 2009 UNC Kenan-Flagler

What is a VC’s Job?

• Return 20-25% to LPs

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VC’s Job Duties

1. Fundraising

2. Sourcing deals

3. Investing

4. Growing ventures

5. Exiting

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VC’s Job Cycle

Fundraise

1. Close Fund Source Deals

2. Invest Grow Ventures

3. Exit Fundraise…

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VC’s Job Cycle

Fundraise




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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.

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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 $

$

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Raising a Fund

CalPERSCalPERS

Parish CapitalParish Capital

VC Firm(GPs)

Fund 1$$$$

UNC Endowment

UNC Endowment

AIGAIG

Pledge $$

Pledge $$

Pledge $$

Pledge $$

Pledge $

$

ExampleNC Pension

FundNC Pension

Fund

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Sources of Funds

Pension Funds42%

Endow & Found21%

Individ & Fam10%

Corps (as LPs)2%

Financial &

Insurance25%

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Example Portfolio Diversity of LP

VC is a subset of private equity.

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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.

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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

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New Enterprise Associates hauls in nearly $2.5B for new fund

10/19/09: 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. more...

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?

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Year 0 510

Fund Life: 10 Years

Invest and Reserve

Follow-On Rounds

Harvest

“Raise” Fund

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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

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A Pattern That Repeats

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tE

xit

0 2 3 5 8 10

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One of Many

0 2 3 5 8 10

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0 2 3 5 8 10

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Portfolio of 10-25 InvestmentsAA BB

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Big

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Portfolio of 10-25 InvestmentsAA BB

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0 2 3 5 8 10

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Exit ScenarioAA BB

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BustBust ExitExit ??

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Year 0 510

First Fund

Invest and Reserve

Follow-On Rounds

Harvest

“Raise” Fund

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Year 0 510

First Fund

Raise $$ Invest Follow-On Harvest Fund 1

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0 510

0 510

Multiple Funds

Raise $$ Invest Follow-On Harvest

0 510

Raise $$$$ Invest Follow-On Harvest

Raise $$$ Invest Follow-On Harvest

Always fundraisingAlways investingAlways growing

Fund 1

Fund 3

Fund 2

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Multiple Deals in Multiple Funds

Fund 1

Fund 3

Fund 2

Imagine you are this entrepreneur

Raise $ Invest Follow-On Harvest



11 Deals

16 Deals

25 Deals

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VC’s Job Cycle

Fundraise

1. Close FundSource Deals



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Source Deals: Focus

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Source Deals: Network

• Lawyers, CPAs, CFOs, bankers

• Other VCs (syndication)

• Serial entrepreneurs

• Conferences

• Universities – Technology transfer– Teach, coach, mentor, judge

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The Wall Street Organization, Inc.

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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

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Typical Growth of Bootstrap Venture

Normal bootstrap businessGrows steadily (if you’re lucky)

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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)

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VC Investment Math

• Pre + Investment = Post

• % Ownership = Investment ÷ Post

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Example: $3M Post

Preferred Shares

Common Shares

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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

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VC’s Job Cycle

Fundraise




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Growing Ventures

• On the Team– “Active” participation = board seat(s)– Advisors (connections, strategy, etc.)

• Future rounds– Valuation – Milestones– Syndication

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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 should be reflected on board, majority controls

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Advisors

• Even if not on board, VCs will have strategic input

• VC network benefits– Management team additions– Customers– Partners– Competitors

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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

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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

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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

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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

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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

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Dilution

Original Shares

Added SharesNew

Share Pool

Original Shares

Same quantity of blue. Lower percentage.

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Why Dilution

is Bad

Original Pool

Every 1% you lose of a 20X Exit

is going to hurt20 times more

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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%

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Down Round

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%

1 on 11 on 1.5

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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

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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

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Option Pool

• Negotiated, but the norm is to take it out of the founders’ side (or ‘hide’)

• Result: can severely dilute founders

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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

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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

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VC’s Job Cycle

Fundraise




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VC Return

• “Top Quartile” venture firms return >20% average ROI to LPs

• Fund has life of 10 years

• Average investments are 5-7 years

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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

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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

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Examples

• 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!!

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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

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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)

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Conclusion: VC’s Job Cycle

Fundraise




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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



11 Deals

16 Deals

25 Deals

Documents

Vcic Prep Session Vc 101